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A geared trust for the euro bulls
James Carthew looks at TR European Growth, an investment trust that has done well from the rally in small and mid cap stocks.
This week I thought I would look at TR European Growth (TRG ) trust, which focuses on small and mid cap European stocks with a market value of less than €3 billion (£2.1 billion).
It concentrates on developed markets and has no exposure to emerging Europe. This is an area that has been doing well for a while and TRG is has reached an all-time high. Is it time to take profits or has the bull run in smaller European stocks got further to go?
TRG was launched in 1990, so it has just celebrated its 25th birthday. With a market value of £325 million, it is a decent size. It is reasonably liquid and the charges are about average at 0.77%.
TRG had a phenomenal run during the tech boom but was well and truly skewered by the bust that followed. Its share price lost all of the gains it had made and more. It did well to survive this period and clawed its way back, surpassing its 2000 peak during the heady days of easy credit in 2007.
The fund suffered as the credit bubble burst and pressure mounted on the European periphery countries. However, the effect on the fund was more muted and it hit a new peak close to 660p in May this year.
Today, the shares stand at 651p and trade at a 6% discount below net asset value, toward the upper end of their recent range. Those investment companies that focus on large cap stocks trade on an average discount of 1%.
Of the three funds that compete with TRG, European Assets Trust (EAT ) trades at a small premium, reflecting its high dividend yield and decent long-term record. JPMorgan European Smaller Companies (JESC ) Trust, which I wrote about last year and today trades on a 5% discount, and Montanaro European Smaller Companies Trust (MTE ) which trades on a discount of 8%.
TRG’s yield is close to 1%, at the bottom end of the peer group but then, apart from European Assets, none of the immediate peer group offers much of a yield.
TRG’s focus is on capital growth. Over the past year, its net asset value performance ranks second in the peer group behind JESC. Over the longer term, though, it ranks third; the same goes for its share price returns. Relative to its benchmark, the Euromoney Smaller European Companies ex UK Index, its performance looks pretty respectable.
One reason why TRG has done so well is that it uses more gearing, or borrowing, than competing funds. At the end of September 2015, net gearing stood at 15% (at the maximum end of the range currently permitted by the board). This works two ways though. During the summer, when markets had their China-related wobble, the fund underperformed.
TRG has been managed by Ollie Beckett at Henderson since 2011 so all of the decent returns of the past few years have come under his stewardship. He manages the fund with quite a long list of investments – 148 at the end of September.
Beckett feels happier with a diversified portfolio but, on the face of it, that number might be a bit excessive. He says this reflects the relatively small size of the companies he is investing in. More than 80% is in companies with market valuations of less than €1 billion.
All the allocations to industry sectors and geographies are driven by his bottom-up stock selection. He is a stock picker and emphasises meeting companies face to face (he reckons that he and Rory Stokes, who assists with the management of the fund, met about 600 companies last year).
The largest investment in the fund at the end of September, accounting for 2.7% of the portfolio, was Brainlab, a German medical devices company. This unquoted company has been the largest investment for a while and in the portfolio for more than a decade.
They have a couple of other unquoted investments but collectively these add up to less than 4% of the fund and TRG has said there is no intention to add any other unquoted investments to the portfolio.
Collectively, the other nine companies in the top 10 add up to just 13.5% of the fund, emphasising the diversified nature of this portfolio. The largest geographic weights are to Germany, France and Switzerland.
By industry sector, more than a quarter of the fund was in industrial stocks at the end of September but with a very low weighting to natural resources companies so I doubt these would ever feature much.
Beckett thinks small company valuations still look attractive relative to large caps and that the end of the bull market is some way off yet. This probably is not the fund you want to be holding, though, when sentiment turns against Europe. The gearing caused problems in the past and could do so again.
If you agree with Beckett that the European recovery story has further to run, then TRG’s geared exposure to a hand-picked selection of growth companies and smaller cap stocks could work in your favour.
James Carthew is a director at Marten & Co
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by David Kempton on May 24, 2016 at 17:15