Ian Cowie: two investment trusts giving me hope

Hopes for an imminent end to Europe’s worst war since 1945 suffered a setback this week, when the American and Russian presidents cancelled talks which had been planned for next month.

However, full-year results from two investment trusts focused on the Continent give grounds for optimism about the macroeconomic outlook, even if geopolitics continue to disappoint.

• Invest with ii: Invest in Investment Trusts | Top UK Shares| Interactive investor Offers

Both are worth considering by investors seeking capital growth or income, who might fear it is time to diversify away from the boom in US technology giants before it ends with an almighty bust.

On some measures of value, European blue-chip shares are nearly a third cheaper than their American counterparts and smaller companies on the Continent might be even bigger bargains.

First up, Seraphim Space Investment Trust Ord (LSE:SSIT) delivered stratospheric total returns of 74% over the past year, according to independent statisticians Morningstar. Sad to say, I only buckled up for the ride when I paid 53p per share last March, as reported here at that time, but now they are priced at 84p, I really mustn’t grumble.

This £196 million fund has a global remit, although its three biggest holdings are all European businesses which have benefited from increased spending on extraterrestrial defence.

ICEYE is a Finnish/Polish manufacturer of micro-satellites that is SSIT’s biggest holding and, according to the fund manager, Mark Boggett, doubled in value last year.

ICEYE claims to be the world leader in a specialist form of radar; “synthetic aperture imaging”. This enables anywhere on the surface of our planet to be scrutinised in detail at night as well as day, in fog and rain as well as fair weather.

• Is Scottish Mortgage too reliant on the AI boom?
• Britain’s biggest IPO of 2025: what you need to know

D-Orbit is an Italian maker of space tugs, more formally known as “orbital transfer vehicles”. These can move stuff around in the skies and could also disable unfriendly satellites.

ALL.SPACE is based in Reading, Berkshire, where it makes military-grade communication systems, which cannot be turned off by an enemy or former ally.

Unfortunately, there are no dividends and 89% of the underlying assets are not listed on any stock exchange. However, bargain-hunters might note that the shares remain priced an eye-stretching 30% below their net asset value (NAV). So, don’t say I only tell you about opportunities after they are fully reflected in the share price.

Looking forward, this fund, founded in 2021, might continue to gain from growing awareness that European countries must pay more for our own defence, now our American friends are proving less reliable.

Reassuringly, SSIT raised £12.5 million from disposals during the past year and is currently sitting on £21.5 million in cash. Boggett said: “Two-thirds of the portfolio has a robust cash runway, with 58% fully funded and 8% funded for 12 months or more.”

Meanwhile, The European Smaller Companies Trust PLC (LSE:ESCT) is much bigger with assets of £866 million and, as its name suggests, offers more diversified exposure to corporate tiddlers and medium-sized companies on the Continent. That strategy translated into a total return of 24% over the past year, following 87% over five years and an outstanding 266% over the past decade, according to Morningstar.

• The Autumn Budget 2025: just how painful could it be?
• Three rules for picking sensible stocks

Looking forward, Ollie Beckett, who has been ESCT’s fund manager since 2011, said: “Our market remains good value compared to other equity markets and there are a wide variety of exciting investment opportunities. European small caps include undiscovered champions on the forefront of new technology, offering structural growth.”

He pointed out that the S&P 500 index - a broad measure of American shares - is currently priced at 23 times corporate earnings, while the MSCI Europe ex-UK benchmark trades on a price/earnings ratio of less than 16 and the MSCI Europe Small Cap index is nearer 13 times.

ESCT’s biggest underlying holdings include the German-listed speciality chemical producer Alzchem Group AG Akt. nach Kapitalherabsetzung (XETRA:ACT). This was the fund’s top performer last year, aided by rapidly rising demand for the high explosive, nitroguanidine.

That helped ESCT deliver a 2.3% dividend income, which has risen by an impressive annual average of 12% over the past five years. It’s important to be aware that dividends are not guaranteed and can be cut or cancelled without notice.

However, if this fund’s current rate of increasing distributions could be sustained, it would double shareholders’ income in just six years.

• The bond funds the pros are buying as interest rates fall
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

More immediately, following its recent merger with European Assets trust - for which this long-suffering European Assets shareholder remains profoundly grateful - the combined fund now aims to pay dividends equal to 5% of NAV. These should be delivered via quarterly distributions of 1.25% of NAV each, funded from a mixture of capital growth and underlying income.

That “enhanced dividends” approach will worry some folk but might appeal to those seeking income to pay for an enjoyable retirement, rather than pinning everything on hopes of capital growth.

Either way, ESCT seems to be succeeding so far - having beaten its benchmark over the past decade, five-year and one-year periods - but remains priced 9.8% below its NAV.

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

Ian Cowie is a shareholder in European Smaller Companies Trust (ESCT) and Seraphim Space Investment Trust (SSIT) as part of a globally diversified portfolio of investment trusts and other shares.