Ian Cowie: the Europe trusts delivering the goods

Prime Minister Sir Keir Starmer’s pledge to put “Britain at the heart of Europe” might not be enough to save his bacon but funds focused on the other side of the Channel can diversify investment portfolios.

Continental European investment trusts provide cost-effective and convenient access to many world-leading businesses, ranging from biotechnology and healthcare to digital hardware and luxury brands.

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Never mind the generalities, my holding in JPMorgan European Growth & Income Ord gives me access to a business few folk have heard of but which makes the machines that make microchips - or, more formally semiconductors - that go into almost everything these days. ASML Holding NV, a Dutch company, is the top holding in JEGI.

That exposure to artificial intelligence (AI) and all things digital helped put this fund at the top of the Association of Investment Companies (AIC) “Europe” sector over the last decade, five years and one-year periods. Total returns were 232%, 104% and 23%, respectively.

As if this impressive hat-trick wasn’t enough to make anyone go green with envy, JEGI also yields 3.5% dividend income, which has risen by an eye-stretching annual average of 35% over the five years since it opted to pay income enhanced from capital growth. Returns like that make ongoing charges of 0.66% look reasonable.

Other interesting holdings under the JEGI bonnet include Nestle SA, the biggest food company in the world, and the pharmaceutical giants Novartis AG Registered Shares and Roche Holding AG Ordinary Shares new; a triumvirate of Swissies. The German civil engineers ABB Ltd and Siemens Energy AG Ordinary Shares also feature in the top 10.

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It’s worth noting JEGI’s extraordinary dominance in terms of outperformance in this sector, with its nearest rival lagging behind with about a tenth of the leader’s returns over the last year and about half its growth over five. 

Fidelity European Trust Ord delivered total returns of 2.3% over the last year and 56% over five years but achieved a more respectable second place with 212% over the decade. Even so, there’s not much justification there for FEV holding total assets of nearly £2.4 billion compared to only £646 million in JEGI.

Nor can FEV shareholders find much comfort in costs or dividends; it charges slightly more than JEGI with annual fees of 0.73% and pays less income, yielding 2.4%. 

While both funds hold ASML and RO, a higher allocation by FEV to luxury goods - such as the French cosmetics company, L'Oreal SA, is not currently putting a pretty face on its performance.

To be fair to FEV, it has avoided the losses suffered over the last year by both the other “big beasts” of this sector. European Opportunities Trust and BlackRock Greater Europe Ord are down by 2.5% and 3.1% respectively.

Continental smaller companies seek capital growth, supplemented with rising income to pay us to be patient. The European Smaller Companies Trust has a new dividend policy of aiming to pay at least 5% of its net asset value (NAV) at the end of the previous year, although this fact is not reflected in the historic yield figures published by some websites.

As you might expect, none of the underlying holdings is a household name in Britain. However, there is reassuring exposure to new technology in top 10 holdings such as the German chipmakers, BlackRock Greater Europe Ord and SUESS MicroTec SE.

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Having absorbed the long-term underperformer European Assets Trust last year, ESCT is now by far the biggest fund in this smaller companies sector, with £955 million in assets. 

Over the last decade, five years and one-year periods, ESCT delivered total returns of 195%, 30% and 20% but the shares continue to be priced 8.7% below their NAV.

Better still, at least over the short term, JPMorgan European Discovery Ord achieved total returns of 190%, 48% and 23.5% over the usual three periods. This £691 million fund yields just over 2% and charges annual fees of 0.9%.

So, whether you regard next month’s 10th anniversary of Britain’s historic Brexit vote as a cause for celebration or commiseration, it is worth considering continental funds.

Smaller companies in this sector seek greater rewards - but beware greater risks, because not every grape pip grows into a vine.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie owns shares in European Smaller Companies Trust (ESCT) and JPMorgan European Growth and Income (JEGI) as part of a globally diversified portfolio of investment trusts and other shares.