Interactive Investor

Ian Cowie: the trust I have bought to increase exposure to Europe

16th September 2021 09:13

Ian Cowie from interactive investor

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British investors tend to overlook Europe, but a dividend yield of 5.4% caught the eye of our columnist.

Europe’s biggest economy will soon be under new management, but I bet it will continue to offer opportunities for investors seeking income and growth. That’s why I recently bought shares in European Assets Trust (LSE: EAT) at £1.45 each, popping them in my ISA to make the most of their 5.4% dividend yield.

Just over a quarter - or 25.7% - of this £579 million investment trust is allocated to Germany, where Angela Merkel will retire after 16 years as chancellor at the Bundestag elections on Sunday week; September 26. Widespread change looks likely, with the Social Democratic Party recently overtaking Merkel’s conservative Christian democratic alliance in a major poll for the first time in 15 years.

Coming down from the clouds, Merkel - or ‘Mutti’ to her fans - has been good for investors. The Dax Index of German shares has more than trebled since she replaced Gerhard Schroder as chancellor in September 2005, while the FTSE 100 of British blue chips increased by 30% over the same period.

It’s a similar story over more conventional timescales for comparison. The DAX is up by 53% over the last five years, compared to the FTSE 100’s very disappointing 5.2%. More recently, the DAX has surged 15% skyward since the start of 2021, while the FTSE 100 edged forward by 7.5%.

Those figures constitute a powerful case for international diversification - especially now that investment platforms (like interactive investor) make it convenient and cost-effective for investors of all sizes to allocate assets overseas. For example, two of my top 10 shares by value are global businesses that happen to be based in Europe.

They are the German sports goods-maker, Adidas (XETRA:ADS), and the Swiss food and drink group - that is also the biggest in the world - Nestlé (SIX:NESN). I paid €61 for ADS shares in July 2014, which are now worth €293.For Nestlé I purchased at 65 Swiss francs in March 2014, which now cost 115 Swiss francs.

If only all my British shares had done so well. But both my continental winners are corporate giants and, perhaps surprisingly, bigger returns tend to be generated by smaller companies. That was a major theme of last week’s Association of Investment Companies (AIC) analysis of 42 ‘ten-baggers’ - or trusts that turned £1,000 into £10,000 or more over the last two decades.

While many investors have had some luck with British smaller companies - may I mention Fevertree (LSE: FEVR) - it is much more difficult to replicate that overseas where we are unlikely to be customers of corporate tiddlers. So this is a sector where it is well worth paying for professional stock selection.

For example, Baillie Gifford Shin Nippon (LSE: BGS) and JPMorgan Japan Small Cap Growth & Income (LSE: JSGI) give me exposure to the smaller end of the world’s third-biggest economy where most company names are unfamiliar.

JPMorgan US Smaller Companies (LSE: JUSC) does the same job for me and many others in America.

Now I hope EAT will fulfil a similar role in Europe. In addition to the inflation-busting income mentioned earlier, it aims for capital growth through investment in quoted small and medium-sized companies in Europe, excluding the United Kingdom.

I confess I am indifferent to EAT’s biggest holding, the Danish bank, Ringkjoebing Landbobank, but glad to see it has survived since 1886. EAT’s second and third biggest stakes are more exciting; the French and Norwegian technology firms, Lectra (EURONEXT:LSS) and Nordic Semiconductor. The former has clients in several sectors from fashion to furniture, while the latter focuses on wireless communications such as bluetooth.

Other top 10 holdings that I would never have found for myself include the Spanish glass-maker Vidrala (XMAD:VID); the German biomedical group Stratec (XETRA:SBS); and the higher-profile Hungarian low-cost airline, Wizz Air Holdings (LSE:WIZZ). What it all boils down to is total returns of 54% over the last year; 88% over the last five years and 395% over the last decade, according to Morningstar via the AIC. Despite that, EAT’s shares continue to trade at a modest 3.6% discount to their net asset value (NAV).

To be candid, I fret that I might have been influenced too much by EAT’s above-average yield but the cash came from my ISA, where I do like to generate tax-efficient income.

More adventurous souls might favour Montanaro European Smaller Companies (LSE: MTE), the top-performer in this sector over one, five and 10-year periods, with total returns of 56%, 261% and 516% respectively but barely visible dividend income of 0.4% and trading at a premium to NAV of 1.3%.

Bargain-seekers might be tempted by TR European Growth (LSE: TRG), which trades at a 12% discount to NAV, despite total returns of 55%, 133% and 495% over the three standard periods. TRG is also the cheapest of these three, with annual charges of 0.72% compared to MTE’s 1.19% and EAT’s 0.95%.

When it comes to asset allocation, British investors tend to overlook and undervalue the rest of Europe, perhaps because of continental clichés or America’s outperformance during the last decade. But while the latter’s funds and shares are trading at or near all-time highs, it is worth giving Europe another look.

Merkel’s motto is “In der Ruhe liegt die Kraft” - or “In quiet there is power” - and the same can be said for several Continental companies.

Ian Cowie is a shareholder in Adidas (ADS), Baillie Gifford Shin Nippon (BGS), European Assets Trust (EAT), Fevertree Drinks (FEVR), JPMorgan Japan Small Cap Growth & Income (JSGI), JP Morgan US Smaller Companies (JUSC) and Nestle (NESN) as part of diversified global portfolio of investment trusts and other 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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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