Fund spotlight: TR European Growth Trust

interactive investor's analysts give an update and view on the TR European Growth Trust.

Despite general political turmoil and concerns over economic growth in Europe, the region remains a source of outstanding companies and a very attractive hunting ground for investors seeking out exciting investment opportunities.

There are more than 2,000 listed companies in Europe that have a market capitalisation of under €4 billion, spread across various countries and industry sectors.

As investors have become more risk averse in recent years, European smaller companies began to underperform larger companies that are perceived to be safer.

However, over the longer term, European smaller companies have significantly outperformed their larger counterparts, but they remain under-researched and under-owned by investors. 

The fund

TR European Growth Trust (LSE:TRG) was launched in 1990 and invests for long-term capital growth through a diversified portfolio of smaller European companies with exceptional growth potential. 

Ollie Beckett has managed the fund since 2011 and is supported by Rory Stokes and Julia Scheufler, who joined the Janus Henderson's European equity team in 2013 and 2018, respectively.

Managers split companies in their investable universe based on their stage of life cycle and, depending on it, look for different attributes, valuation metrics and sell signals. Through their fundamental research and regular meetings with company management, the fund managers analyse the durability of a firms' business model, quality of management, drivers of growth and catalysts for revaluation. Their emphasis is on seeking to identify situations where, in their view, the market perception is wrong, and the company is undervalued. 

What's in it?

The managers have an unconstrained, bottom-up (analysis of individual company stocks) approach to portfolio construction. The portfolio is well diversified at country and sector level with between 120 and 150 stocks. It has a bias towards smaller and medium sized companies, with about 85% of funds invested in stocks with a market capitalisation of below £1 billion. Position sizes are based on the managers' degree of conviction, although they rarely exceed 2%.

The fund remains significantly overweight in Netherlands, Germany and Finland, where they continue to find attractively valued growth opportunities. The sector exposure of the portfolio is heavily overweight in the technology sector, a position that they have consistently held for the last few years. The portfolio is also overweight industrials and underweight in the real estate sector and the food, beverage and tobacco sector.

Among its top holdings are Dutch wealth manager Van Lanschot (EURONEXT:VLK), French cable manufacturer Nexans (EURONEXT:NEX) as well as Danish shipping and logistics company DFDS. 

How does it perform?

The fund has delivered strong returns, outperforming both the market and its peers over the longer term. However, its bias to smaller companies along with its value style being out of favour has held back performance over recent years. As a result, it is currently trading on a much wider discount to net asset value than its peers, at -14%.

Although the trust's objective is to grow capital, it also pays dividends with a current yield of 2.5%.

Gearing is extensively used by the managers to buy stocks at attractive valuations and it is currently at 13%.

Source: Morningstar as at 31st October 2019

ii view

TR European Growth Trust features on the ii Super 60 list of high-conviction active and passive funds as a European Small Cap Equities recommendation. 

The fund's bias to small and mid-cap stocks makes it one of the higher-risk options for European equity exposure, but patient investors should be rewarded over the longer term. 

In addition, a decent dividend yield should provide support for total returns in periods of market volatility. The unique, value driven process is likely to result in a portfolio that is quite different to peers and, therefore, the fund could complement a core European large cap equities fund or tracker, providing potential diversification benefits within a broadly spread portfolio.

• Find out why this fund is on the ii Super 60 investments list

• Click here for more information on this fund, including price, yield and charges

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