A purchase made by our columnist last summer has suffered more than most in the wake of Russia’s invasion of Ukraine.
War in Europe has pushed most investment trusts on the Continent to trade at double-digit discounts to their net asset value (NAV), prompting brave contrarian investors to ask: is it time to buy on the bullets?
As you might expect, valuations in the Association of Investment Companies (AIC) ‘European Smaller Companies’ sector have been hit hardest, with the average share price sitting 12% below NAV, having fallen 15% in the last 12 months.
European trusts focused on bigger businesses in the ‘Europe’ sector also look bombed-out, trading 11% below NAV after a similar fall over the last year.
This would be a good time to ‘fess up that your humble correspondent’s exposure to continental tiddlers, via European Assets Trust, has suffered more than most in the wake of Russia’s invasion of Ukraine. Shares I saw as a relatively low-risk way to obtain a high yield when I paid 145p in August last year, currently cost just 101p. Ouch!
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On a brighter note, they continue to yield dividend income of 8.76%, according to independent statisticians Morningstar, and they are held tax-efficiently in my ISA, with no further deductions from this eye-stretching income. So, even if I fail to muster the cash or the courage to buy more EAT, these dividends might get me back to evens within a typical investment span of five years or more - and, in the meantime, they will pay me to be patient.
No such comfort is available to shareholders in Baillie Gifford European Growth where a nugatory dividend yield of 0.39% doesn’t even equal the ongoing annual charge of 0.67%. The trust has had a shocking 38% slump in its share price over the last year. Looking under the bonnet reveals top holdings are focused on ‘jam tomorrow’ stocks including the online retailer Zalando and the music streaming service Spotify (NYSE:SPOT), among other former high-flyers that have fallen to earth.
Followers of fashion who disregarded the importance of dividend income and, instead, swallowed the go-go growth story hook, line and sinker have been harshly punished here. Baillie Gifford European Growth is bottom of its sector over the last year and, over more meaningful periods, delivered total returns of 9.5% over the last five years and 145% during the last decade.
On the same basis and over the same periods, EAT shrank by 19% after delivering positive returns of 8.5% and 239%.
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More positively, more conservatively managed portfolios on the Continent are coping with the carnage more successfully. Step forward Fidelity European, by far the biggest fund in its sector with total assets of nearly £1.5 billion. Impressively, it is also the sector’s top performer over all three standard periods; with total returns of 270% over the last decade, 53% over five years and a modest but positive 1.2% over the last dismal year.
Fidelity European achieved this with assets led by Nestle, the most valuable food company in the world. FEV’s other top 10 holding include Novo-Nordisk, the pharmaceutical specialist in diabetes care and weight-loss pills, plus EssilorLuxottica, which makes a third of the world’s spectacle lenses, as well as sunglass brands including Oakley and Ray-Ban.
Most folk might reasonably regard Fidelity European’s underlying assets as a distinct advantage in a world where people are unlikely to stop eating or becoming overweight and many of us spend much of our lives staring at screens, boosting demand for eye-care. Awkwardly for me, I already own substantial positions in Nestle and Novo-Nordisk - which are both among my ‘forever fund’ top 10 holdings - and also EssilorLuxottica. So, merely to avoid duplication, it’s no Fidelity European for me.
Truth is often said to be the first casualty in war and investor confidence also frequently features among collateral casualties. But buying low can be the first step towards making a profit.
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That is why this investor insists on reporting the rough, as well as the smooth, of stock market investment. It would be easy - but pointless - to report only winners and ignore losers because shares that are temporarily depressed might offer the most reasons to be cheerful in future.
To return to where we began, it was during another bloody conflict on the Continent that Nathan Meyer Rothschild is said to have recommended: “Buy to the sound of cannons, sell to the sound of trumpets.”
The Napoleonic Wars were more than 200 years ago and modern revisionist historians now question whether Rothschild ever really uttered these words. But I believe they remain as good advice for investors today as they were back then.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
Ian Cowie is a shareholder in European Assets Trust (EAT), EssilorLuxottica (EL), Nestle (NESN) and Novo-Nordisk (NOVO) among a globally diversified portfolio of investment trusts and other companies’ shares.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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