Ollie Beckett, manager of the £583 million investment trust focused on European small companies, oversaw a 54% increase in net asset value (NAV), including dividends, in the year to 30 June as the weak pound and the strengthening eurozone economy boosted the portfolio.
But shareholders enjoyed a 75.5% total return as investor enthusiasm for TRG's geared exposure to the European recovery saw its shares re-rate, with the discount – or gap to NAV – narrow to a low 2.7% compared to the 12-month average of 10.7%.
This put the trust way ahead of its benchmark, the Euromoney European Smaller Companies ex-UK index, which gained 35.8%.
German drug discovery company Evotec (EVTG.DE) was the best-performing stock, returning a staggering 290% after investors grew excited by its pipeline of new products and saw that it was undervalued compared to US rivals.
Dutch wealth manager Van Lanschot Kempen (VLAN.AS) continued to do well and is currently the fund's largest holding at 2.3% of assets.
‘Despite delivering a share price return of 50% last year, the stock remains cheap and we are hopeful of further strong returns from our holding,’ said Beckett.
The manager reduced exposure to Germany but remains overweight to the country, having invested in a number of ‘fast growing companies such as Va-Q-Tec that is the technology leader in advanced thermal insulation products’.
Beckett has also found several cheap stocks in Finland that were benefiting from economic recovery.
‘We invested in Alma Media, an online classifieds business under-rated as a regional newspaper company by the stock market; electronic invoicing market leader Basware and leading retailer and eye surgery company Silmaasema,’ he said.
In terms of sector, the fund is overweight consumer discretionary but Beckett said it was ‘heavily underweight in real estate where we struggle to find compelling value’ and in consumer staples ‘where elevated valuation multiples are matched with pedestrian earnings growth’.
TRG shares may have dived from €4.68 to €3.34 after the Brexit vote as fears of anti-EU contagion spread but Beckett (pictured) said the idea that Europe is ‘a crisis creation engine’ has been shaken off and the mantle taken on by the US and UK.
This has led to a revival in European markets which he said ‘has even begun to extend as far as European mid-cap equities’.
‘Multiples in the low volatility sectors that are rightly or – we believe – wrongly perceived as "quality companies" in the consumer staples and healthcare sectors have not attracted us,’ he said.
‘We have continued to search out and find undervalued companies across Europe. The stock market remains very focused on earnings momentum and while we are not blind to this factor, we continue to make value a key consideration in every decision.’
Although there is plenty to worry markets at the moment, with Brexit, the threat of war from North Korea, the sustainability of the Chinese economy, and what US president Donald Trump’s next tweet will be, Beckett said the global macroeconomic environment was ‘pretty benign’.
‘The deep pessimism surrounding European equities has clearly seen quite a reversal in the last year, but despite strong performance in our markets, valuations look anything but stretched, especially given the comparatively poor economic performance of Europe compared to the US and UK in recent years,’ he said.
He added that there was an ‘economic gap’ to close in Europe that should ‘show itself in the form of decent earnings growth in the coming years’.
Numis Securities analyst Charles Cade said TRG was ‘an attractive vehicle for investors’ looking for exposure to Europe. In terms of its underlying NAV total returns the trust was the best performer in its peer group over one, three and five years, beating European Assets (EAT), JPMorgan European Smaller Companies (JESC) and Montanaro European Smaller Companies (MTE) with gains of 37%, 121% and 225% respectively.