Interactive Investor

Ian Cowie: why it took me a long time to buy this investment trust

4th May 2023 09:44

by Ian Cowie from interactive investor

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Our columnist runs through the reasons why it is better late than never to gain exposure to this top performer.

Ian Cowie 600

Cost-of-living crisis? What cost-of-living crisis? While it’s food banks for the many, it’s luxury handbags and fine wines for a few as Paris - not London or Frankfurt - provides a stock market home for Europe’s first $500 billion (£400 billion) business.

As if to demonstrate how very unfair life is, LVMH Moet Hennessy Louis Vuitton (EURONEXT:MC) breached the half-trillion barrier on the back of booming demand for luxury goods of all descriptions. Popping champagne corks, despite all the bad news elsewhere, prompts the €54,000 question: is it too late for investors to join the party?

I certainly hope not because my new investment trust shareholding provides a practical way to fudge the answer. It enables me to follow the fashion crowd, while also gaining exposure to a diversified range of more down-to-earth businesses.

Back to the catwalk, even after the owner of haute couture brands Christian Dior and Givenchy had fallen back from its peak of €905 to trade nearer €883 this week, MC looks too rich for me. A price/earnings ratio of 31 and a dividend yield of 1.4% before French withholding taxes brings the emperor’s new clothes to mind.

By contrast, Fidelity European Trust (LSE:FEV) lists MC as its third-most valuable underlying holding but shares in the £1.8 billion investment trust continue to trade at a modest 5.6% discount to their net asset value (NAV). Ongoing annual charges of 0.78% seem reasonable for professional stock selection plus the bureaucratic chore of reclaiming European withholding taxes, which is a task too far for me.

Better still, this enables FEV to pay 2.2% dividend income that increased by an annual average of 12.1% over the last five years, according to independent statisticians Morningstar. If that rate of ascent is sustained, which is not guaranteed, FEV shareholders’ dividend income would double in just six years.

While the past is not necessarily a guide to the future, it does tend to allay fears that FEV might be a value trap where the real price of strongly rising dividends is weak total returns. During the last decade, five-year and one-year periods, FEV delivered total returns of 210%, 85% and 22%. That placed it at the top of the Association of Investment Companies (AIC) ‘Europe’ sectors over all three periods; a remarkable hat-trick.

Why has it taken me so long to fall for FEV’s charms? The explanation shows how ‘personal finance’ is ‘personal’ first and ‘financial’ second. I have been a shareholder in the Swiss food giant Nestle (SIX:NESN), for many years and, more recently, the Danish insulin-maker Novo Nordisk (NYSE:NVO).

Both NESN and NOVO rank among my top 10 shareholdings by value - and the same goes for FEV.

The investment trust’s top 10 also includes the Franco-Italian maker of a third of the world’s spectacle lenses Essilorluxottica (EURONEXT:EL), which ranks among its top 10. I also own EL, but it is just a bit further down my batting order.

So, with three substantial shareholdings in common, I felt there would be too much duplication and foolishly failed to invest in FEV. But its recent resilience and the surprisingly defensive qualities of luxury brands businesses such as MC, plus the French cosmetics giant L'Oreal (EURONEXT:OR), which also ranks among FEV’s top 10, made me think again and look in the mirror more carefully.

I realised that I would never have the nerve to buy direct shareholdings in those businesses. But the fact remains they generate rising revenues and profits, so should earn a place in a diversified portfolio of potentially uncorrelated commercial activities.

That creates the opportunity to benefit from unexpected and unintended consequences of economic events far beyond the Continent. For example, consider ASML Holding (EURONEXT:ASML), the Dutch maker of extreme ultraviolet (EUV) lithography machines that are needed to make top-grade semiconductor chips.

This is another major FEV holding which is well-placed to be a winner from rising tensions in the South China Sea, raising doubts about its bigger rival, Taiwan Semiconductor Manufacturing (NYSE:TSM). An ill wind for TSM might blow more business the way of ASML. Once again, I wouldn’t dare buy direct exposure to ASML but am glad to own some, as part of a professionally managed and diversified investment trust portfolio.

Returning to the more frivolous - but also more financially significant - worlds of luxury leather goods and lipstick, both MC and OR are benefiting from the reappearance of middle-class Chinese consumers. Many millions are emerging from lockdowns too drastic to be contemplated in the West, eager to spend their cash savings from the dreary Covid period on a touch of glamour.

So FEV’s businesses that own iconic brands for what some cynics might regard as over-priced tat remain surprisingly strong with defensive qualities during periods of weak demand and difficult markets elsewhere.

I doubt the managers - Marcel Stotzel and Sam Morse - would put it so brutally, but MC and OR offer ways of betting that the world continues to be unfair.

Closer to home, as the Cockneys used to sing: “It's the same the whole world over. It's the rich wot gets the pleasure. It's the poor that gets the blame. Ain’t it all a bleedin’ shame?”

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

Ian Cowie is a shareholder in EssilorLuxottica (EL), Fidelity European Values (FEV), Nestlé (NESN) and Novo-Nordisk (NOVO, as part of a diversified 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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