Ian Cowie: why I’ve sold this investment trust and bought its rival

New investment trust holdings, following a reshuffle in my “forever fund” and an event beyond my control, are a bit like London buses. Nothing happens for ages and then, all of a sudden, three come along at once.

Now it’s happened again. Last week I told you about my new high-yield stake in the infrastructure giant International Public Partnerships Ord (LSE:INPP), whose 7.1% dividend payout aims to make the most of ISA’s ability to deliver tax-free income.

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This week, it is a double reshuffle of my continental European funds, focused on big blue-chip businesses and smaller companies. Both are a bit embarrassing because the changes effectively admit that I chose the wrong European investment trusts in the first place.

That might seem slightly harsh but the fact remains that I have sold all my shares in Fidelity European Trust Ord (LSE:FEV) and used the money to establish a new position in JPMorgan European Growth & Income Ord (LSE:JEGI). To be fair to FEV, it’s a good fund with impressive and widely diversified underlying assets led by ASML Holding NV (EURONEXT:ASML), the Dutch firm that makes machines that make microchips; followed by Roche Holding AG (SIX:ROG), the Swiss pharmaceutical company; and TotalEnergies SE (EURONEXT:TTE), the French energy group.

Other high-quality top 10 holdings in this £1.9 billion fund include Nestle SA (SIX:NESN), the Swiss food and drinks giant; Novo Nordisk AS Class B (XETRA:NOV), the Danish weight-loss wonder-drug maker; and Assa Abloy AB Class B (OMX:ASSA B), the Swedish locks and security group. Not much to dislike there.

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I have nothing to grumble about, having paid £3.53 per FEV share in April 2023, for stock I sold at £4.07 earlier this month. But this individual investor’s needs have changed over time. I would like to receive more dividend income to pay for an enjoyable life after work.

So, I paid £1.28 per JEGI share before they went ex-dividend on 18 September, largely because their dividend yield of 3.8% paid four times a year is more attractive than FEV’s yield of just over 2% paid twice a year. Better still, JEGI’s dividends have increased by an eye-stretching annual average of 17% over the past five years, compared to FEV’s more modest 7% rate of ascent.

It’s important to beware that JEGI pays enhanced dividends by topping up income with capital returns, which I know some investors prefer to avoid because they fear it can amount to eating next year’s seed corn. FEV takes a more traditional approach and does not mix capital and income.

That’s one reason for me to worry that I might be making a mistake here, but I draw comfort from JEGI’s underlying holdings, which are led by the German software giant SAP SE (XETRA:SAP); another Swiss “big pharma” business Novartis AG Registered Shares (SIX:NOVN), which is particularly strong in cancer treatments; and - once again - Roche and ASML. The German electrification and automation conglomerate Siemens AG (XETRA:SIE) also features in the top 10 assets.

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But JEGI also beats FEV in terms of total returns over the short and medium term. According to independent statisticians Morningstar, JEGI delivered 31% over the past year, following 134% over five years and 213% over the decade. By contrast, FEV achieved 10%, 79% and 225% over the same periods. So, FEV only leads over the longer term which, a decade later, might be regarded as a bit historic.

Bargain-hunters won’t find much to distinguish between these funds with FEV shares priced 1.5% below their net asset value (NAV) and JEGI trading at a 2% discount to NAV. Cost-conscious investors might note that FEV’s yearly ongoing costs are 0.76% compared to JEGI’s 0.66%, but FEV’s fees are expected to fall after its merger with Henderson European Trust Ord (LSE:HET).

Turning to corporate tiddlers on the Continent, the smaller companies specialist European Assets Ord (LSE:EAT) has been a value trap for more than a decade. Even after a proposed combination with its better-performing rival The European Smaller Companies Trust PLC (LSE:ESCT) helped lift EAT shares, its performance remains relatively poor with total returns of 18%, 30% and 77% over the short, medium and long term. By contrast, ESCT delivered 29%, 111% and 283% over the usual three periods.

Sad to say, I paid the equivalent of £1.04 per EAT share in February 2015, allowing for a subsequent 10-for-one share split, for stock that fetched just 93p on Thursday.

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Inflation-busting income of 5.9%, taken tax-free in my ISA, helps ease that decade of disappointment, but even EAT’s dividends have been shrinking by an annual average of 4.7% over the past five years. To add insult to injury, the ongoing charges are on the high side at just over 1%.

So, this small shareholder intends to support the proposed combination with ESCT, which yields 2.2% soaring by 11.8% per annum over the past five years, when this is put to a vote on 3 October. Even ESCT’s charges are more attractive at 0.67%.

As you might expect with continental tiddlers, none of these trusts’ underlying holdings is a household name in Britain, although EAT’s top asset is Heidelberg Materials AG (XETRA:HEI). The cement and concrete-maker should not be short of work when the time comes to make good the damage done by Europe’s worst war since 1945. Let’s hope there is better news to come soon.

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

Ian Cowie is a shareholder in European Assets Trust (EAT), International Public Partnerships (INPP) JPMorgan European Growth & Income (JEGI), Nestlé and Novo-Nordisk as part of a globally diversified portfolio of investment trusts and other shares.