Marcel Stötzel, lead manager of the Fidelity European Trust (LSE: FEV), isn’t deterred by claims that Europe’s economic record and outlook are just as dismal as the UK’s.
“Europe is plagued by poor demographics, low productivity and high government debt, none of which are getting any better,” he agrees. Economic output per capita is half the level of the US. But European stocks are not proxies for their economies, as they derive only a third of their turnover from Europe. “We are more bullish than ever.”
Meanwhile, on the macro front, he sees five reasons to be positive. “Germany's fiscal brake has been lifted, Mario Draghi's report on EU competitiveness promises to cut red tape, there is a large savings rate to be mobilised, Europe is spending more on defence and European integration is tightening.” As a result, “the GDP growth gap will not continue to widen” and “we are overweight domestic Europe for the first time.”
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A disappointing year for Fidelity European Trust
Following its merger with Henderson European Trust nearly a year ago, Fidelity European Trust has become a £2.2 billion investment trust. It trades at a modest 5% discount to net asset value (NAV) and yields 2.3%. However, while performance has been excellent since its 1991 launch (13.2% per year against 9.5% for the FTSE Europe ex-UK index), it has lagged the index by 10% over one year, 13% over three, and 12% over five. This puts it 11%, 31% and 33% respectively behind JP Morgan European Growth & Income (LSE: JEGI).
In the latest annual report, Sam Morse, fellow portfolio manager, attributed last year's disappointing performance to “limited exposure to defence stocks, holdings in Novo Nordisk, chemical producer Symrise and software company SAP”. Novo Nordisk soared on the back of its weight-loss drug Wegovy, but then crashed 75% from its mid 2024 high before a slight recent recovery. SAP has suffered from concerns that AI will disrupt the businesses of established software companies. JP Morgan European Growth & Income had been more nimble, selling SAP early last year and Novo Nordisk the year before.
Still, every manager has a bad year, and Stötzel will surely get performance back on the rails again, maintaining the long-term record. He focuses on “companies with the ability to grow dividends sustainably for three-five years.” Examples include Inditex, owner of the Zara chain, which kept manufacturing at home and in North America instead of outsourcing it to China. This has enabled better quality control, less wastage, faster delivery and more flexibility.
Other top holdings include ASML, with a virtual global monopoly in the supply of machines for manufacturing semi-conductor chips, pharmaceutical company Roche, cosmetics giant L'Oréal and oil and gas producer TotalEnergies.
Should you invest in Fidelity European Trust?
Stötzel says the portfolio has a higher return on capital and better dividend growth than the market, while trading at no more than the historic valuation of 18 times earnings. Overall, European equities are no better than fair value, but if Stötzel is right and economic growth picks up, earnings growth should accelerate and investment returns continue to be strong. There would be a further boost if the historic aversion of Europeans to investing in equities abates.
Stötzel's thesis about the improving economic outlook for Europe relative to the US may prove optimistic, but it is more plausible than any thesis for the UK, to whose market investors continue to be patriotically attached. Europe is a much larger and broader market than the UK with many more growth stocks, offering managers a better choice for long-term investment. Fidelity European Trust may have tripped up last year, but it has a great long-term record, while investors in JP Morgan European Growth & Income must hope that pride doesn't come before a fall.
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