Does what it says on the tin

The European Smaller Companies Trust 7 July 2022 Update
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European Smaller Companies Trust

Does what it says on the tin

Investment trusts
European smaller companies

7 July 2022

Price

133.5p

Market cap

£535m

Total assets

£705m

NAV*

158.4p

Discount to NAV

15.7%

*Including income. At 30 June 2022.

Yield

1.9%

Shares in issue

400.9m

Code Ord

ESCT/GB00BMCF8689  

Primary exchange

LSE

AIC sector

European Smaller Investment

52-week high/low

191.9p

134.0p

219.0p

160.2p

*Including income.

Gearing

Net gearing at 30 June 2022

12%

Fund objective

The European Smaller Companies Trust seeks capital growth by investing in smaller and medium sized companies that are quoted, domiciled, listed or have operations in Europe (excluding the UK). The trust invests mainly in Western Europe with the portfolio typically holding more than 120 companies with an average market cap of around £1bn and rarely above £3bn.

Bull points

True small-cap exposure.

Wide discount relative to peers and history.

Experienced management team.

Bear points

Higher levels of volatility compared with peers.

Sector especially sensitive to market sentiment.

A eurozone recession could hamper prospects.

Analyst

David Holder

+44 (0)20 3077 5700

The European Smaller Companies Trust (ESCT) (formally TR European Growth Trust – please refer to our last note for more details) is positioned further down the market capitalisation scale than its AIC peers making full use of its permanent capital base. The stylistically balanced profile incorporating growth, value and core characteristics gives it the potential to outperform over the longer term regardless of shorter-term market leadership. The experienced and long tenured fund manager, Ollie Beckett, believes that the current high levels of inflation will moderate, but will likely settle in the long term in the 3–4% range, presenting differing challenges and a divergent economic landscape for investors to navigate.

True European small-cap exposure

Source: Morningstar, Edison Investment Research. Note: PG is the Europe ex-UK small/mid-cap equity peer group category as defined by Morningstar.

Why consider European smaller companies now?

European smaller companies have proved to be a fruitful market for investors over the past 20 years, outperforming most other major markets, but in the current choppy economic environment are out of favour with investors. However, investors should not disregard the fundamental attractiveness of the asset class, with high earnings growth driven by ongoing innovation and disruption in secular growth sectors.

The analyst’s view

ESCT can provide genuine small-cap exposure to investors via an established and efficacious process managed by an experienced team of small-cap specialists. While a niche area, it has diversification benefits and so could appeal to those investors wishing to diversify their large-cap Europe ex-UK exposure or those wishing to access the higher-growth potential of European smaller companies. The combination of an experienced and well-resourced management team, a proven and repeatable investment process and a balanced portfolio not beholden to any one style gives this trust the potential to outperform through a variety of market conditions. It is also arguably the purest small-cap fund in the AIC category with a lower average market cap of its portfolio holdings than that of its peers, which we feel plays appropriately to the strengths of the closed ended structure.

The European Smaller Companies Trust is a research client of Edison Investment Research Limited

Historically an outperforming asset class

European smaller companies have outperformed their large-cap brethren in 16 of the last 21 calendar years (underperforming in 2007, 2008, 2011 and 2018 – source Janus Henderson Investors (JHI) – in local currency returns) and have delivered significant outperformance of European large companies and global markets over the past 22 years (Exhibit 1). They are riskier in terms of volatility, but investors have historically been rewarded for accepting higher levels of risk when compared to European large caps and global equities (Exhibit 2).

Exhibit 1: Long-term outperformance of the European small caps vs European large caps and global equities

Exhibit 2: Risk adjusted returns have generally been higher in small caps than for European large caps

Source: Morningstar. Note: Percentage total returns in pounds sterling.

Source: Morningstar. Note: Risk-adjusted returns are represented by the Sharpe ratio. Five year rolling numbers. Total returns in pounds sterling.

Exhibit 1: Long-term outperformance of the European small caps vs European large caps and global equities

Source: Morningstar. Note: Percentage total returns in pounds sterling.

Exhibit 2: Risk adjusted returns have generally been higher in small caps than for European large caps

Source: Morningstar. Note: Risk-adjusted returns are represented by the Sharpe ratio. Five year rolling numbers. Total returns in pounds sterling.

Small caps may not be generally associated with robust balance sheets, but JHI points out that 37.8% of European ex UK small- and mid-cap companies have net cash on their balance sheets compared with 19.7% for large caps. European small caps have also historically grown their earnings faster most of the time (c 80% of occasions) when compared with large caps. Currently small- and mid-cap valuations are broadly in line with large caps on a trailing P/E and price to book basis and are much cheaper relative to their own history over recent years.

The opportunity set for mid and small caps (£100m to £5bn) is some 2,500 companies, which compares with 475 for those with a market cap of £5bn or above. M&A has been a historically supportive tailwind for mid and small caps with 2,187 takeovers in the £500m to £5bn market cap range versus 213 for £5bn and above (JHI: 2008–21). In addition, the opportunity set is not staid, with on average 190 companies per year listing in western Europe with an average market cap of €780m. There are also niche, underrepresented and attractive industries in the cohort such as warehouse automation, e-commerce, fintech and the circular economy. In addition, the opportunity set is not well covered by the sell-side analyst community. Of the c 2,500 companies with market caps between £100m and £5bn, the average analyst coverage is six versus 19 for the much smaller universe of 475 companies with market caps exceeding £5bn. This should be an area where good active managers are able to add value, uncovering under researched and possibly misunderstood and mispriced companies.

A current discount opportunity

European smaller companies are arguably a niche area for investment and will not appeal to all investors. However, the combination of faster growing companies and an under researched and large opportunity set makes it a potentially attractive area for good long-term active investor returns. On the other hand, there appear to be more risks than usual facing investors and historically small caps are an area that can fall out of favour with investors in a risk-off environment. We can see that in the current pessimistic investor environment, the exiting of the sector by many investors (Exhibit 4) has resulted in discounts within the AIC peer group moving out wider. Within this context ESCT trades on a wider discount relative to its long-term average and to its AIC category peers (Exhibit 3). However, we think its more stylistically balanced, diversified portfolio (Exhibit 9) gives ESCT a good opportunity to perform well in what are likely to be choppy markets.

Exhibit 3: ESCT offering value versus its own history and that of the peer group

Exhibit 4: Demand for European small caps has been weak in 2022 to date

Source: Morningstar

Source: Morningstar. Note: Estimated monthly fund flows into open-ended European ex-UK small and mid-cap funds.

Exhibit 3: ESCT offering value versus its own history and that of the peer group

Source: Morningstar

Exhibit 4: Demand for European small caps has been weak in 2022 to date

Source: Morningstar. Note: Estimated monthly fund flows into open-ended European ex-UK small and mid-cap funds.

All change: Inflation is here to stay

Beckett contends that the investment environment for the next 10 years will look completely different than the last 10–15 years post the global financial crisis. He believes that inflation will moderate from the current high levels but remain in the 3-4% range in the longer term. The effects of pandemic lockdown easing – still to come in China (and the associated release in pent-up consumer demand) – and loose monetary policy (eg true helicopter money in the US) around the world will likely lead to higher and more persistent inflation than has been the case since the global financial crisis. Other more structural trends will also be tailwinds for rising costs. Here he identifies the trend to onshoring to bring distant supply lines closer to home markets for security reasons and the move for companies to incorporate more ESG factors into their operations, including more expensive forms of alternative energy (in the medium term). In addition, there is wage price inflation, which is particularly sticky. All of these factors will, he believes, combine to keep prices higher for longer. It is somewhat of an alien environment for many investors used to very low levels of inflation and interest rates over the past 15 years, but those companies able to pass through increased input costs to customers, while retaining margins via economic moats, should continue to be resilient and cash flow positive. As ever, the trick is to identify those companies with attractive fundamentals while avoiding overpaying. ESCT aims to square this circle by looking in areas that are under researched or neglected by other investors and to maintain market exposure through a variety of stylistic characteristics.

Positioning overview and process recap

The portfolio has intentional weightings to a range of stylistic buckets, with the manager seeking to hold exposure to a number of drivers of return within the portfolio. These buckets are classified as Early Cycle, which is currently 9% of the portfolio, Quality Growth (38%), Mature (28%) and Turnarounds (34%).

Exhibit 5: Top 10 portfolio positions versus index (% unless stated)

Portfolio end-May
2022

Portfolio end-May
2021

Change
(pp)

Index weight

Active weight vs index (pp)

Van Lanschot Kempen

2.8

2.2

0.6

0.1

2.7

TKH Group

2.4

1.9

0.5

0.1

2.3

DFDS

1.6

2.0

(0.4)

0.1

1.5

eDreams ODIGEO

1.6

N/A

N/A

0.1

1.5

BFF Bank

1.5

1.4

0.1

0.1

1.4

FLEX LNG

1.5

N/A

N/A

0.1

1.4

Manz

1.3

1.4

(0.1)

0.0

1.2

Grenergy Renovables

1.3

N/A

N/A

0.1

1.2

Quadient

1.3

N/A

N/A

0.0

1.3

Nexans

1.3

1.4

(0.1)

0.3

1.0X

16.6

10.3

Source: ESCT, Edison Investment Research. Note: N/A denotes not in the top 10 at 31 May 2021.

Early Cycle companies are in the foothills of accelerating growth with a recent record of, or where the managers expect to see, improving return on invested capital (ROIC) and strong increases in sales growth. They will have a clear strategy to grow and have operating leverage. The preferred valuation method is EV/sales with a reappraisal triggered by disappointing growth, narrative drift, management sale of shares or a lack of operational leverage.

Quality Growth companies have a ROIC above the weighted average cost of capital (WACC) and above average levels of growth when compared to competitors. Their margins are typically sustainable and there are barriers to competitor entry. The manager uses P/E, EV/EBIT and EV/invested capital (EV/IC) as their preferred valuation metrics. Positions will be sold if margins are compressed, there is unjustified M&A or the balance sheet weakens.

Mature companies are operationally solid, generating consistent cash flow with many years of steadily compounding their ROIC at or above their WACC. The manager looks at EV/IC, EV/EBIT and free cash flow (FCF) yield in terms of valuation measures. Positions will be reappraised if the value becomes overly expensive, if the competitive environment increases eroding margins and cash flows or if the business is fundamentally damaged as a result of new entrants or disruptive technology.

Turnaround opportunities are in recovery, with depressed earnings, and below peers in terms of ROIC. Here the manager expects a reversal in the company’s operational performance and profit margins via cost cutting and disposals, which should lead to a share price re-rating. Again, the managers will use EV/IC, EV/EBIT and FCF yield to value the company where appropriate. A trigger for selling the holding may arise from a lack of improvement in margins or rapidly falling sales.

Taking a closer look at these buckets, HelloFresh is an example of an early cycle stock. The meal kit company, which operates in 13 countries, has, the managers believe, significant potential to gain market share, especially in the US where it currently is used by only 1.9% of households generating around €1bn in revenues. The potential market is up to 40% of US households and there is also scope for the roll out of further product offerings catering for different price points and diets.

TKH is an example of a quality growth company with what was previously a relatively mature fibre optic cable operator and tire manufacturer, but from the turn of the 21st century its strategy was tilted towards smart vision, connectivity and manufacturing, which propelled it into a high technology security leader in many end markets.

An example of a turnaround stock is Quadient, which specialises in communication equipment and software including online and physical mail and parcels. The increase of online purchases supports the strong cash flow from the traditional mailing business as the business focuses harder on SME services to help it communicate with its customers and there is a growing parcel lockers business. Revenues have fallen from a peak of €1.2bn in 2016 to c €1bn in 2021. The manager believes that revenues are set to increase and on a consensus P/E ratio for 2023 of 7x, there is a margin of safety.

Finally in the mature camp, Danish shipping and logistics business DFDS is an example of an established (founded in 1866) company. It carries both freight and passenger traffic in the North Sea and English Channel as well as routes further afield such as Turkey. The company is transitioning to a greener footprint, initiating green ‘corridors’ between Denmark and the UK.

ESG considerations are an important and fully incorporated factor when Beckett and his colleagues determine the opportunities and risks of an investment. In 2015 the UN established 17 sustainability development goals that are designed to be a ‘blueprint to achieve a better and more sustainable future for all’. As at March 2022, JHI directly mapped all 131 holdings within the portfolio into 13 of these goals with the most (30) stocks in ‘industry, innovation and infrastructure’ followed by 23 holdings that directly address ‘affordable and clean energy’. There was also significant exposure to ‘quality education’ and ‘sustainable cities and communities’.

In aggregate the investment process results in a portfolio that has a higher dividend yield forecast compared to the index, which might be expected given the more balanced weighting to value and growth characteristics. The portfolio’s historical return on equity (ROE; proxy for quality) is a little lower than the index, but Beckett is looking for inflection points in a company’s trajectory, so he will be hoping that ROE picks up over and above historical levels. Both historical and forecast portfolio earnings growth is higher than the index, and in aggregate the portfolio is at a discount in terms of P/E when compared to the index and has less debt overall via lower net debt/EBITDA than the index. This frames the portfolio’s balance between growth, value, yield and quality factors.

Portfolio activity in 2022

In CY21 there were 35 new additions to the portfolio throughout the four buckets, with the majority in Quality Growth (14) and Turnaround (10), which illustrates the balanced approach to investment here. In a generally robust equity market through CY21 (following on from the strong returns seen in CY19 and CY20), there were a number of bids (7) within the portfolio, but the majority (20) of the 30 positions that were sold were driven via realising profits. Thus far in CY22 (to 25 May) in materially less benign market conditions there have been 12 purchases with four each in the Quality Growth and Mature buckets and two in Turnaround and Early Cycle respectively. There have been no bids in the portfolio and a modest number of sales from profit taking (2) with the remaining 10 disposals a combination of opportunity cost or where the investment thesis has not played out. This sounds like quite a high level of turnover, but historically the portfolio has had an annualised turnover figure of c 67% over the past three years, which is around average within its four-constituent AIC category. On this measure, it ranks seconds lowest within the cohort with ranges of between 31% and 131% observed. In general terms there is often less emphasis given to the sell discipline within an investment process description, but in smaller companies investment arguably it has even greater importance than in other markets, given the speed with which deteriorating fundamentals or operational performance can have an impact on share prices and capital structures. While frustrating, it is better to cut underperformers quickly.

Exhibit 6: Portfolio sector exposure versus index (% unless stated)

Portfolio end-May
2022

Portfolio end-May
2021

Change
(pp)

Index weight

Active weight vs index (pp)

Industrials

35.6

30.8

4.8

23.7

11.9

Financials

14.2

14.8

(0.6)

13.6

0.6

Consumer

24.43

20.8

3.6

14.4

10.0

Technology

10.4

14.8

(4.4)

8.8

1.6

Basic materials

5.3

8.0

(2.7)

6.4

(1.1)

Energy

3.9

4.3

(0.4)

3.7

0.2

Health care

2.2

2.9

(0.7)

8.8

6.6

Utilities

1.7

1.9

(0.2)X

4.1

(2.4)

Others

2.3

1.7

16.5

100.0

100.0

100.0

Source: ESCT, Edison Investment Research. Note: Index: EMIX Smaller European Companies ex UK (£)

New positions in CY22 include Detection Technology within the Early Cycle bucket; it is an airport X-ray facility supplier. There are significant untapped markets outside Europe (where X-ray detection is more sophisticated), particularly in the United States. Within Quality Growth, Dermapharm was added; it is a German pharmacy and drug retailer that is in high-margin businesses such as vitamins as well as manufacturing COVID-19 jabs for BioNTech. Other new additions in Quality Growth included Inficon (semiconductors), Technoprobe (a semiconductor firm which recently listed) and Thule, which is in a growing segment of the consumer discretionary market and a beneficiary of the trend to more outdoor recreation. It is also a play on electric bikes and has transport storage facilities specifically to cater for such consumer needs. Within the Mature bucket, Andritz, Aurelius and Ipsos were all added in 2022. Ipsos has a strong position within many industry sectors in market research and data analytics and is increasingly using the data it collects to help clients navigate macro trends such as ageing demographics, fake news, rising inflation and ESG trends. In the Turnaround bucket, Glanbia (nutrition) and Unicaja Banco, a Spanish bank, were added. Beckett believes that Unicaja Banco is an improving governance story and should benefit from the tailwind of better economic conditions in the region post the end of lockdowns, especially with tourism returning.

The portfolio is built from the bottom up and as such there are not many identifiable trends at play, but one that is evident is around energy transmission. The recent events in Ukraine have brought front and centre the need for energy security. The is much investment required to meet these objectives and the portfolio has three holdings in Flex LNG, GTT and Boskalis that in one way or another play into the increased demand for alternative sources of energy. This is a growth area, but one perhaps not regarded traditionally as such (unlike software/technology for example). While LNG is not clean energy, it is far better than coal and oil and as such will be a stepping stone within the transitioning process. LNG Flex manages a flotilla of boats that store LNG, GTT has the technology for the membranes within the tanks for storage and Boskalis is a dredging company whose services are in demand to create docking, terminals and logistics hubs at new port facilities for the shipping of this form of energy.

Exhibit 7: Portfolio geographic exposure versus index (% unless stated)

Portfolio
end-May 2022

Portfolio
end-May 2021

Change
(pp)

Index weight

Active weight vs index (pp)

Germany

16.2

21.5

(5.3)

13.7

2.5

France

14.3

12.5

1.8

12.7

1.6

Sweden

9.5

10.2

(0.7)

14.6

(5.1)

Netherlands

9.4

8.0

1.4

5.8

3.6

Italy

8.5

8.3

0.2

9.6

(1.1)

Spain

7.4

4.7

2.7

5.2

2.2

Switzerland

5.6

7.5

(1.9)

11.0

(5.4)

Ireland

5.2

4.1

1.1

1.1

4.1

Belgium

4.7

5.1

(0.4)

4.5

0.2

Finland

4.3

3.7

0.6

4.2

0.1

Others

14.9

14.4

17.6

(2.7)

100.0

100.0

100.0

Source: ESCT, Edison Investment Research. Note: Index: EMIX Smaller European Companies ex UK (£)

Performance: Long-term outperformance

Over 12 months to the end of May 2022, the fund returned -10.8%, which compares with the Morningstar category average return of -7.7% and the MSCI Europe ex UK Small Cap Index return of -5.8%. Within the AIC peer group, the average decline in NAV over this period was 13.5%. Over 12 months to 28 June, growth stocks sold off by around a quarter with the index and value stocks outperforming on a relative basis (Exhibit 8). the use of gearing in weak markets will likely be a contributor to underperformance. At the start of the calendar year the AIC cohort were on average 4.1% geared, which peaked at c 6% in February of this year. ESCT has been the most highly geared of the four trusts in its AIC category with an average of a little over 11% year to date (end of May 2022).

Specifically in sector terms, the overweight position to consumer discretionary stocks (average portfolio weight 26.1% vs 14.9% for the EMIX Smaller European Companies ex UK Index) was the largest detractor, with financials being the best performing sector within the portfolio on a relative basis. Within consumer discretionary, retailers were especially weak, with leisure and household goods also detracting. Specifically, holdings such as Westwing Group (homeware), Stillfront Group (gaming) and Bonava (northern European residential development) detracted. Within financials, the top 10 position in Van Lanschot (wealth manager/private banking) was the biggest contributor to performance. Overall sector allocation detracted more from relative performance than stock selection.

Exhibit 8: Investment company performance to 30 June 2022

Price, NAV and index total return performance, one-year rebased

Price, NAV and index total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three, five and 10-year performance figures annualised.

Performance over three, five and 10 years is stronger thanks in part to a bumper year to the end of May 2021 (Exhibit 10 and 11), but there has been a strong showing at times from the more growth orientated funds in the AIC peer group, most notably Montanaro, although this strategy has been especially weak in CY22 given the selloff in growth stocks as outlined in Exhibit 10.

One year is quite a short time frame in which to judge performance of a fund, so it is pleasing to see that over three and five years, while stylistic or sector positioning has varied in its contribution to returns, stock selection has been overwhelmingly the primary driver of returns for ESCT. This is what we would hope to be the case given the strong pillars of process and team at play within an under researched and arguably less efficient market.

Exhibit 9: ESCT stylistically diversified

Exhibit 10: Growth underperforming

Source: Morningstar. Note: Denotes weightings to stylistic factors (as defined by Morningstar) over time within the ESCT portfolio.

Source: Morningstar, 28 June 2022. Note: Performance of the MSCI Europe ex-UK Small-Cap Index and the Value and Growth variants year to date.

Exhibit 9: ESCT stylistically diversified

Source: Morningstar. Note: Denotes weightings to stylistic factors (as defined by Morningstar) over time within the ESCT portfolio.

Exhibit 10: Growth underperforming

Source: Morningstar, 28 June 2022. Note: Performance of the MSCI Europe ex-UK Small-Cap Index and the Value and Growth variants year to date.

Exhibit 11: Five-year discrete performance data

12 months ending

Total share price return (%)

Total NAV return (%)

MSCI Europe ex UK Small (%)

MSCI Eur ex-UK (%)

CBOE UK All Companies (%)

31/05/18

0.7

2.5

8.5

1.0

6.6

31/05/19

(16.1)

(14.4)

(7.0)

2.0

(3.4)

31/05/20

(2.7)

3.4

3.9

1.9

(12.0)

31/05/21

90.8

73.6

41.0

26.4

23.4

31/05/22

(15.7)

(10.8)

(5.2)

(1.2)

8.5

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

ESCT within the context of the AIC category

Exhibit 12: ESCT portfolio characteristics within the context of the AIC category

% unless stated

Average market cap (m)

No. of holdings

Standard deviation

Sharpe ratio

Value
(%)

Core
(%)

Growth
(%)

Small-cap (%)

Micro-cap (%)

The European Smaller Cos Trust

1,069

128

18.5

0.92

32.5

43.6

23.8

63.0

15.6

JPMorgan European Discovery

3,195

106

17.7

0.85

18.5

51.9

29.5

22.8

0.8

European Assets

2,624

53

16.0

0.80

13.5

36.0

50.6

38.2

2.2

Montanaro European Smaller

1,737

54

16.9

0.87

0.0

24.3

75.7

35.5

14.0

Europe ex-UK Small/Mid-Cap Equity

3,476

15.5

0.83

14.3

35.7

49.9

27.6

7.8

MSCI Europe ex UK Small Cap

2,736

14.9

0.94

26.5

45.2

28.3

36.6

3.1

AIC category average

2,156

88

17.3

0.86

16.1

39.0

44.9

40

8

ESCT rank in sector

1

1

4

1

1

2

4

1

1

Source: Morningstar. Note: All pounds sterling. Standard deviation and Sharpe are over the last 10 years. Definitions of core/value/growth/micro and small cap are from Morningstar. Portfolios as at the following dates: ESCT – October 2021, EAT – April 2022, MTE – May 2022, JEDT – March 2022.

Unusually ESCT exhibits very little commonality with the Janus Henderson European smaller companies open-ended vehicle (October 2021: 60% commonality). We think that it is advantageous for the manager to play to the strengths of the investment trust structure to invest in slightly less liquid, potentially higher growth names versus those that are prudently able to be help within a daily dealing vehicle. As is evident in Exhibit 12, ESCT has the lowest average market cap within the AIC European Smaller Companies category, which makes it the purest small-cap play in the sector. As previously mentioned, it is also more balanced in its weightings to growth, value and core investment styles. We feel that this could give the strategy a more ‘all court’ game versus some of its peers who tend to be willing to invest in higher-rated growth companies. Given the focus on the smallest companies within the investment universe, we think is prudent that the fund has a long list of companies and at 128 (at October 2021) it has the most investments in the AIC peer group. The focus on the smallest companies would also explain higher levels of portfolio volatility, however it is pleasing to see that historically investors have been rewarded for accepting this higher risk with higher risk-adjusted returns.

Exhibit 13: European Smaller Companies AIC peer group*

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Ongoing
charge

Perf.
fee

Discount
(cum-fair)

Net
gearing

Dividend
yield

European Smaller Companies Trust

579

-18.5

37.4

28.0

351.6

0.71

Yes

-13.5

112

1.9

European Assets

342

-26.7

2.7

8.0

202.1

0.89

N/A

-3.3

99

9.3

JPMorgan European Discovery

602

-17.8

14.9

21.8

275.7

0.93

N/A

-17.3

96

1.8

Montanaro European Smaller

231

-20.3

27.7

63.0

271.0

1.09

N/A

-12.3

104

0.8

Average

439

-17.9

19.5

27.2

255.6

0.90

-11.6

103

3.4

ESCT rank in sector

2

3

1

2

1

1

3

1

3

MSCI Europe Ex UK Small Cap

-13.3

18.8

25.4

246.4

Source: Morningstar, Edison Investment Research. Note: *Performance to 30 June 2022 based on ex-par NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared).


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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by The European Smaller Companies Trust and prepared and issued by Edison, in consideration of a fee payable by The European Smaller Companies Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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