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EAT sticks to balanced diet as feast follows famine

EAT sticks to balanced diet as feast follows famine

European Assets Trust (EAT) has bounced back strongly after a torrid 2016 and manager Sam Cosh believes the brighter outlook for the European smaller companies in which he invests will persist, as a broader recovery in the eurozone economy takes hold.

Shares in the trust raced 30.3% higher in the first six months of this year, with a 17.3% rise in net asset value (NAV), just ahead of the 16.2% benchmark return, amplified by a narrowing of the discount. The shares currently trade at a 0.3% premium to NAV, having traded at around an 8% discount at the start of the year.

That marks a big recovery from 2016's 2.7% fall in the shares, as a 7.4% NAV return was transformed into a loss thanks to the shares' premium evaporating over the course of the year.

Cosh attributed last year's poor performance, which saw the trust lag a 23.3% return from the index, to rotating into 'deep value' and 'recovery' stocks to early, and the impact of the Brexit vote, which took a particular toll on the trust's Irish stocks.

After the trust's strong showing this year, Cosh is encouraged by the prospects for smaller European companies in particular, although he still believes the high valuations of 'quality' stocks that encouraged his early move into value companies last year could bite investors.

He highlighted the recovery of eurozone economies, adding this was now being shown in company profits. 'Both the full-year and first quarter results seasons have seen meaningful improvements in expectations of profit growth,' he said.

'That profit growth is of course potentially only the start of a recovery in the health of the listed corporate sector in the region. The principal beneficiaries of this recovery are smaller companies which are more likely to be domestically orientated than their larger counterparts.'

Balanced portfolio

While Cosh's (pictured) portfolio does feature 'quality' stocks with more predictable earnings, he said it was becoming harder to find more of these for the portfolio given their relative expense.

'It is becoming increasingly challenging for stock pickers to justify new investments in this area unless you believe valuations do not matter, which we of course do not,' he said.

'That is why we believe that a portfolio that balances quality and valuation makes sense to us particularly as market leadership can move to areas of the market that have lagged the recovery thus far, namely attractively valued domestically orientated businesses.'

The catalyst for that switch could be the European Central Bank's (ECB) well-trailed 'tapering' of its bond-buying quantitative easing programme. Quantitative easing has produced a rally in bond markets which has also led more defensive companies, known as 'bond proxies' due to their reliable earnings and coupon-like dividends, higher.

'We do not predict the ECB's actions, but such levels of economic growth mean they are unlikely to resist the pressure to start tapering their quantitative easing programme much longer, particularly as interest rates are becoming increasingly inappropriate for Germany,' Cosh said. 'The markets could look very different under this scenario.'

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