Solid, is the best way to describe the Fidelity European Trust Plc [LON:FEV], the FTSE250-listed closed-ended investment fund, which has offered a share price annualised growth of 13.4% since inception in November 1991.
Today the fund has net assets of GBP1.5bn and is managed by a team led by Sam Morse, who took the reins in January 2021. Morse joined Fidelity as a fresh-faced research analyst a year before the Fidelity European Trust was established.
To say that 2022 was an eventful year in Europe would be an understatement, a fact attested to by the Trust’s chair, Vivian Bazalgette, who said in the Trust’s Annual Financial review last week: “The year under review was one of the most extraordinary in recent memory, rivalling the one in which Covid-19 first erupted. It is barely a year since Russia invaded Ukraine, devastating an entire country and sending shockwaves around the globe.”
Extraordinary year
He continued: “Everything from grain to oil prices, energy and commodity costs and spending on defence, were impacted. The UK had three prime ministers in the space of a few months, while Continental Europe saw a new ruling coalition in Italy and a tightly contested election in France. Meanwhile, central banks raised interest rates significantly and moved from quantitative easing to quantitative tightening. The European Central Bank was somewhat later than others to embark on this important change of policy.”
Obviously the turmoil impacted the fund’s returns, with a net asset value total return of -3.6% and a share price total return of -3.8%. However, Morse and his team did beat the benchmark, the FTSE World Europe ex-UK Total Return (GBP) Index which offered -7%, its peers and the UK indices, which given volatile and downward-trending markets was solid, even commendable. Both the NAV and share price total performance returns over three, five and ten years remain well ahead of the benchmark index.
Bottom-up
The fund aims to achieve long-term growth in both capital and income by predominantly investing in equities (and their related securities) of continental European companies. Morse and his team are bottom-up stock pickers, zeroing in on a company’s fundamentals. Solid, if not exciting, the Trust looks for companies that can consistently grow dividends over three-year and five-year timeframes. With a value bias – meaning that the fund managers seek out attractive valuations that the market may have discounted – the managers try to build their portfolio from good quality names and when they find a candidate they stick with it, meaning that the Trust as a whole has low transaction costs and low turnover.
Cautious, but pragmatic, Morse and his team tries to manage downside risk potential and stay as fully-invested as possible. This is reflected in the Trust’s holdings, which is a stable of solid names.
As at the end of February 2023, the fund’s top five holdings were:
Nestle [SWX:NESN] | 6.7% | Switzerland | Consumer Staples |
ASML Holding [AMS:ASML] | 5.9% | Netherlands | Technology |
LVMH [EPA:MC] | 5.6% | France | Consumer Staples |
Novo Nordisk [NYSE:NOVO] | 5.1% | Denmark | Pharmaceuticals |
Roche [SWX:ROG] | 4.7% | Switzerland | Health Care |
As all boats rise in an incoming tide, so they fall when the tide recedes and during 2022 the Trust was buffeted by the waves, as events on a global scale played out. Early on in April, the fund’s share price was down over 11%, performing unfavourably against the index which had fallen 8.7% and as the year played out the fund continued to underperform year-to-date. By September, the Fidelity European Trust was 1.4% behind the benchmark, which itself had fallen by 17%. However, in the last quarter the fund picked itself up off the ma and had a mini-rally, closing the year 3.2% ahead of its benchmark which was -6.4%. Morse remained ‘cautiously pessimistic’ as the year closed out, saying: “The outlook for European equities remains uncertain and conventional wisdom suggests that corporate earnings could be the next to fall,” but on the bright side: “…much of this is already priced into markets, which often look six months in advance and can sometimes start to recover before earnings reach the bottom or the economy starts to recover.”
Resilience
Predicting a slow market, he hoped that the companies in the Trust’s portfolio: “…should be resilient, and able to grow their dividends, in a more difficult economic environment.” With 32 years to build a portfolio, the Trust has become very diversified both geographically and on a sectoral basis. Financials was the Trust’s biggest overweight, 4.4% above the benchmark as at the end of February, which might sting given the shenanigans following the fall of Credit Suisse earlier this month, ditto the fund’s 4.5% overweight position on Switzerland. France, where the Trust has a 9.5% overweight holding versus the benchmark has also looking a bit ropey in the past week, and these exposures might impact the fund in the short-term.
However, given all the upside action was in Energy stocks last year, and the fund was underweight the benchmark, but still managed to outperform it, the diversity of its 44 holdings gives deep – and solid – exposure to all market sectors. It might not capture all the upside, but the fund should be insulated from the downsides equally.
Morse said: “Our portfolio remains balanced in terms of sector positioning and our focus is on finding attractively valued companies with good prospects for cash generation and dividend growth over the longer term. Our positioning is driven by opportunities at the individual stock level rather than by macro developments, as we believe that calling the bottom of the market is a difficult and often impossible task.”
Bargain shopping
Given the fund’s hardwired value bias, 2023 might see the Fidelity European Trust shopping in a bargain basement. Stocks across the European market have been dragged down by the market beta in the last 12 months, and some companies that performed poorly last year are starting to look attractive once again, and can be snapped up at a discount. Morse said: “This includes some companies in the financials and industrials sectors that have the potential to do well in a cyclical recovery but have the balance sheet strength and pricing power to weather any macroeconomic uncertainty.”
But the blinkered approach that central bankers are takin towards inflation and interest rates could spell trouble for companies that are leveraged and there will be winners and losers, which is where the stock-picking skills of every fund manager comes into play – after all, that’s what they are getting paid for.The company closed trading yesterday (27th March) at 332.5p. The Trust has offered a year-to-date return of 3.76%, a one-year return of 11.24% with its shares ranging between 258.5p and 351p over a 52-week period.
The fund has been here before, weathering the recession that hit Europe following the adoption of the Euro, inflamed by the financial crisis of the dotcom bubble. It navigated itself through the 2008 Global Financial Crisis, soldiered on through Covid and although it took a hit last year, did better in comparison to it peers.
In all that time it has only been managed by four people, and has shown to be stable and solid. The current incumbent, Morse, knows the market well and has outperformed his benchmark 10 times out of the 12 years he’s been running the fund. Though the Fidelity European Trust will never set pulses racing in a good way, or a bad way, it is well-positioned to continue to solidly outperform in years to come.