In net asset value (NAV) terms at least, the best performing European, large cap investment company so far this year is European Investment Trust (EIT), a fund managed by Edinburgh Partners.
It caught my eye because EIT also trades on the widest discount of any of the European large cap investment companies. Over the year to date, EIT’s NAV is up 4.7% versus an average of 2.4% for its peers and 0.9% for MSCI Europe and it trades on a discount of 11.3% versus an average of 6.4% for the peer group.
EIT is a decent size with a market cap of £313 million and gross assets of £353 million. The management fee is 0.55% and, thanks to its size, its ongoing charges ratio is 0.59%. Edinburgh Partners has had the management contract for the fund for four years now (since 1 February 2010).
Over that period they have done OK; ahead of their benchmark (the FTSE All World ex UK Index) but behind some of the other funds in the peer group, notably Jupiter European Opportunities (JEO). In the past year however, there has been a marked improvement and they rank second only to Henderson European Focus and are more than 5% ahead of JEO.
Doing well in this sector is a major achievement. By and large, the closed-end funds operating in this sector trounce the performance of open-ended funds investing in the same area.
For the year ended 31 December 2013, the average Europe ex UK large cap investment company returned 28.5% and the equivalent average open ended fund returned 26.1% (according to the data supplied by Lipper to the IMA), over five years the figures were 97.9% versus 65% and over 10 years they were 210.1% versus 138.2%.
JEO skews the closed-end fund numbers a bit and, strictly speaking, is closer to a Europe inc UK fund, so for fairness’ sake, it might be worth pointing out the equivalent one, five and 10-year performance numbers for the average Europe inc UK open-ended fund are 25.8%, 77.5% and 126.6%. For EIT, whose long-term numbers are let down by the previous manager, the figures are 39.5%, 81.3% and 118.7%.
EIT used to be managed by F&C but its performance disappointed for quite a while.
At the end of 2009, when EIT’s board was wondering who might turn the company around, Edinburgh Partners caught their eye. It had what was then a £200 million open-ended fund investing in European large caps, which had built up a decent track record over the five years since its 2004 launch.
EIT’s new manager was Dale Robertson, Edinburgh Partners’ founding partners in 2003. Previously he worked at Scottish Widows and Edinburgh Fund Managers. In 2011, Edinburgh Partners launched a pan-European open-ended fund for Robertson, and the two open-ended funds now have assets of circa-£800 million, the bulk of which is in the pan-European fund.
Edinburgh Partners’ approach is based on selecting stocks it believes will appreciate considerably in value over the long term (it tries to forecast for the next five years), then holding those stocks until the market comes round to their way of thinking.
This means turnover on the fund can be quite low. In the year ended 30 September 2013 it sold 25% of the portfolio, driven by a mixture of stocks hitting their valuation targets and stocks disappointing to such an extent that Edinburgh Partners decided they no longer fitted its investment criteria.
EIT invests in Continental European stocks (no more than 10% can be invested in countries not represented in the FTSE All World Europe Index). The portfolio is fairly evenly spread across 40-50 holdings so each is large enough to make an impact on fund performance but small enough not to blow the track record out of the water if it goes wrong.
Edinburgh Partners does not worry about benchmark weightings when constructing portfolios. The largest holding at the end of January 2014, Post NL, was 3.4% of the portfolio. The fund is pretty well diversified by geography and sector with the largest biases at the end of January to France, the Netherlands and Switzerland and industrials, telecoms and automobiles.
As an example of its long-term thinking, the latter sector includes a holding in Volkswagen, which it bought partly for the carmaker’s Chinese exposure at a time when many investors have been cursing their emerging markets exposure.
The board says gearing should not exceed 20% of net assets. There is a €30 million facility with Scotiabank but in practice, since Edinburgh Partners was appointed, gearing has not really been a feature of the fund’s structure and at the end of January 2014 it had net cash of 1.2%.
Edinburgh Partners upped EIT’s exposure to peripheral Europe and cyclical stocks during 2012 and 2013 and was rewarded as investors became a bit more confident about the outlook for the European economy. It sounded a note of caution towards the end of 2013 and markets have had a little wobble since. The question, though, is whether Edinburgh’s style of investing will continue to be rewarded in 2014.