BlackRock Greater Europe Investment Trust — Long-term outperformance from high-quality fund

BlackRock Greater Europe Investment Trust (LSE: BRGE)

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BlackRock Greater Europe Investment Trust — Long-term outperformance from high-quality fund

BlackRock Greater Europe Investment Trust (BRGE) has two co-managers: Stefan Gries (since June 2017) and newly appointed Alexandra Dangoor (since September 2023). They highlight that Europe is very attractively valued and as the managers seek the best businesses that are based in Europe, investors do not need to have a positive view on the European economy to consider BRGE. The trust has outperformed the Europe ex-UK market over the last one, five and 10 years, and its NAV total returns also rank first compared with those of the other three funds with a growth mandate in the AIC Europe sector over these periods.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

BlackRock Greater Europe Investment Trust_resized

Investment Companies

BlackRock Greater Europe Investment Trust

Long-term outperformance from high-quality fund

Investment trusts
European equities

14 December 2023

Price

540.0p

Market cap

£544m

Total assets

£617m

NAV*

577.2p

Discount to NAV

6.4%

*Including income. At 12 December 2023.

Yield

1.3%

Ordinary shares in issue

100.8m

Code/ISIN

BRGE/GB00B01RDH75

Primary exchange

LSE

AIC sector

Europe

Financial year end

31 August

52-week high/low

563.0p

464.0p

NAV* high/low

585.2p

489.4p

*Including income

Net gearing (at 31 October 2023)

6.7%

Fund objective

BlackRock Greater Europe Investment Trust’s objective is to achieve capital growth, primarily through investment in a focused portfolio of large-, mid- and small-cap European companies. It aims to achieve a net asset value total return in excess of a broad index of European ex-UK equities (in sterling terms).

Bull points

Proven track record, with above-average NAV total returns in the AIC Europe sector over one, five and 10 years.

Portfolio has well diversified revenue streams from different geographies and sectors.

Very well-resourced team, backed up by strong risk-management oversight.

Bear points

Performance can struggle in a market driven by macroeconomic factors rather than company fundamentals.

Relatively concentrated portfolio.

Modest dividend yield.

Analyst

Mel Jenner

+44 (0)20 3077 5700

BlackRock Greater Europe Investment Trust is a research client of Edison Investment Research Limited

BlackRock Greater Europe Investment Trust (BRGE) has two co-managers: Stefan Gries (since June 2017) and newly appointed Alexandra Dangoor (since September 2023). They highlight that Europe is very attractively valued and as the managers seek the best businesses that are based in Europe, investors do not need to have a positive view on the European economy to consider BRGE. The trust has outperformed the Europe ex-UK market over the last one, five and 10 years, and its NAV total returns also rank first compared with those of the other three funds with a growth mandate in the AIC Europe sector over these periods.

NAV outperformance versus the Europe ex-UK market over the last decade

Source: Refinitiv, Edison Investment Research

Why consider BRGE?

The recent appointment of Dangoor as BRGE’s co-manager should be viewed positively. She has worked closely with Gries for the last seven years, understands the philosophy of running a concentrated, high-conviction, low turnover fund and has a proven track record of successful stock picking.

New names enter the portfolio following thorough fundamental research and must fulfil the following criteria: a unique aspect such as a product or service; a sustainable high return on capital and strong free cash flow conversion; the ability to deploy cash in high-return operations; and a high-quality management team. This approach has generated above-market absolute annual NAV and share price total returns of +10.3% and +9.9% respectively over the last decade.

Europe has been out of favour with global investors, which is evidenced by continued negative fund flows, and European index valuations have reached the low levels seen during the 2007–09 global financial crisis. Signs of economic improvement or a peak in the interest rate cycle are likely to lead to a change in investor sentiment, which could be very beneficial for the performance of European stock markets. With meaningful overweight exposures to the technology, consumer discretionary and industrial sectors, BRGE should be well-placed to benefit from a reduction in investor risk aversion.

Although BRGE currently has the narrowest discount in the AIC Europe sector, it is wider than its historical averages over the last one, three, five and 10 years. Given the trust’s positive performance track record a higher valuation may be warranted.

BRGE: Reaping rewards from long-term perspective

BRGE has a broad remit as Gries and Dangoor can seek opportunities across Europe in both advanced and developing economies. They invest for the long term, avoiding market ‘noise’ and acting as ‘investors in businesses’ rather than ‘traders in shares’. The managers contend that there are always uncertainties, so they look to align the fund with end markets that have strong income streams and companies with the best management teams that can generate long-term value for shareholders.

This approach has proved successful given the trust’s outperformance versus its reference index and the average of its peers in the AIC Europe sector over the last one, five and 10 years.

Upside/downside capture

Exhibit 1: BRGE’s upside/downside capture over the last 10 years

Source: Refinitiv, Edison Investment Research. Note: Cumulative upside/downside capture calculated as the geometric average NAV total return (TR) of the fund during months with positive/negative reference index TRs, divided by the geometric average reference index TR during these months. A 100% upside/downside indicates that the fund's TR was in line with the reference index’s during months with positive/negative returns. Data points for the initial 12 months have been omitted in the exhibit due to the limited number of observations used to calculate the cumulative upside/downside capture ratios.

Over the last decade, BRGE’s cumulative upside capture was 111%, illustrating that the trust is likely to outperform the market in months where European ex-UK shares rally. The downside capture was 103%, suggesting BRGE tends to underperform to a lesser extent in a falling market. However, the cumulative downside capture increased due to a period of underperformance between Q421 and Q222, so the trust is probably more defensive than these figures suggest. BRGE’s favourable risk/reward profile is likely to suit investors seeking to protect their capital, while gaining exposure to an asset class that has generated excess returns over the long term compared with other major asset classes such as bonds or cash.

The manager’s view on the current investment backdrop

Gries comments that European stock markets have performed better than was generally anticipated. In H222, there was increased discussion about the risk of a European recession, with low expectations for the Q422 and Q123 corporate earnings seasons. However, earnings estimates proved to be too pessimistic, based on the negative impact of higher energy prices, and estimates were revised upwards in H123. Throughout these periods of changing investor sentiment, the manager did not change the structure of the fund and maintained his long-term views about BRGE’s investee companies. This is evidenced by the very low 16% portfolio turnover in FY23 (ended 31 August), which is equivalent to a longer than six-year holding period.

According to Gries, Q323 earnings reports were generally okay, although the operating environment in H223 is softer than expected, and economic improvement is now pushed out to 2024. He suggests that even though the European and US economies are slowing, within the household and corporate sector, the elements are not in place for a prolonged hard downturn. The manager cites high levels of employment, robust consumer spending and business trends that have been distorted by COVID-induced supply chain disruptions. Gries comments that this has been the longest talked-about recession, and many stocks are already pricing a recession in, such as banks, which are trading at a 50% discount to the European market.

In terms of valuation, the manager says that the European Stoxx 600 Index is trading on a 10.5x forward P/E, which is the lowest since the global financial crisis, so he considers that bad news is priced in to share prices. He believes there is potential for a rally in the European market as businesses that have experienced a prolonged downturn, such as chemicals and construction, show signs of improvement. Gries comments that as the stock market is a discounting mechanism, small incremental positive changes can be received very favourably by investors. He opines that when strategists’ views turn positive it will be too late, as the market will already have moved. Gries is happy with BRGE’s portfolio’s cyclical bias and below-market defensive exposure.

The manager says that the 2024 outlook is interesting, as if inflation returns to near-target levels, there is potential for central banks to lower interest rates, which could lead to a big improvement in investor sentiment. He believes that once inventory destocking comes to an end, and purchasing manager indices turn upwards, risk appetite should improve, and stocks could rerate.

Current portfolio positioning

For a more detailed portfolio breakdown, please see our BRGE review October 2023. At the end of October 2023, BRGE’s top 10 holdings made up 50.9%, which was a lower concentration versus 52.5% a year before; seven positions were common to both periods. There is a maximum 10% position size allowed, which the managers are discussing with the board as number one holding Novo Nordisk is approaching this limit. However, as Novo’s shares have performed so well, and the company is now the largest reference index constituent, BRGE’s holding was only 5.2pp higher than Novo’s index weighting at the end of October 2023.

Exhibit 2: Top 10 holdings (at 31 October 2023)

Company

Country

Subsector

Portfolio weight %

31 Oct 2023

31 Oct 2022*

Novo Nordisk

Denmark

Pharmaceuticals & biotechnology

9.3

8.8

RELX

UK

Media

6.6

6.3

ASML Holding

Netherlands

Technology hardware & equipment

6.1

6.2

LVMH Moët Hennessy Louis Vuitton

France

Luxury goods

6.0

7.1

Hermès International 

France

Luxury goods

4.3

3.7

BE Semiconductor Industries

Netherlands

Semiconductors

4.0

N/A

Safran

France

Aerospace & defence

3.8

3.4

STMicroelectronics

Switzerland

Semiconductors

3.7

N/A

Ferrari

Italy

Automobiles & parts

3.7

N/A

DSV Panalpina

Denmark

Industrial transportation

3.4

4.4

Top 10 (% of portfolio)

50.9

52.5

Source: BRGE, Edison Investment Research. Note: *N/A where not in end-October 2022 top 10.

Gries explains why Novo Nordisk has been so successful. It produces the semaglutide molecule, a GLP-1 agonist, which is used to treat diabetes under the brand names of Ozempic (injection) and Rybelsus (oral tablet). However, the molecule has proved to be successful in the treatment of obesity and is marketed as Wegovy (injection). Obesity is a major global issue, with very few people receiving treatment, or sticking with it due to negative side effects. Wegovy has proved to be efficacious and has a favourable side-effect profile. However, Novo’s SELECT trial also showed that the use of Wegovy could reduce adverse cardiovascular outcomes by 20%. The diabetes market is essentially a duopoly between Novo Nordisk and US-based Eli Lilly and pricing has remained disciplined, allowing both companies to generate high returns, even following new product launches. This behaviour should continue as Novo and Lilly roll out more new products as the obesity opportunity is so large that it can easily accommodate both companies and currently demand is outstripping supply. Novo’s supply constraints should ease as four new production lines come online in 2024.

Commenting on the luxury goods sector, which at the end of FY23 made up c 15% of the fund, Gries highlights differences between the trust’s holdings. He says that some companies are better at growing brands and gaining new customers than others. According to the manager, LVMH has been through a transition. Between 2010 and 2020 organic sales growth was 10% per year, which grew to 25% per year between 2020 and H123; Gries expects growth to moderate to maybe 7% to 8% in 2024. Conversely, the manager says that Ferrari is showing no signs of a slowdown; demand for its products exceeds supply, thereby affording the company significant pricing power. Gries explains that companies like Hermès and Ferrari allocate available items to their preferred customers and are expanding into new markets such as the Middle East. BlackRock has a data scientist in its investment team, who can track how brands are performing. Although, Chinese economic growth has lagged expectations, high-end spending remains robust, and the country has a favourable demographic profile due to a rising middle class.

Exhibit 3: BRGE’s sector (left) and geographic (right) breakdown at 31 October 2023

Source: BRGE, Edison Investment Research. Note: Rebased for net assets/liabilities.

Exhibit 3: BRGE’s sector (left) and geographic (right) breakdown at 31 October 2023

Source: BRGE, Edison Investment Research. Note: Rebased for net assets/liabilities.

Exhibit 3, shows BRGE’s sector and geographic splits, which are an outcome of the managers’ bottom-up stock selection. Compared with the reference index, the trust maintains notable overweight positions in technology, consumer discretionary and industrials, with a large underweight allocation to financial stocks. Four sectors are not represented in BRGE’s portfolio as companies in these sectors do not meet the managers’ quality growth criteria; the energy, real estate, telecom and utilities sectors which combined make up around 13% of the reference index.

Performance: Looking good versus comparable peers

There are seven funds in the AIC Europe sector, of which BRGE is the third largest. The trust’s NAV total returns are above average over the last one, five and 10 years, ranking second, first and second respectively. BRGE’s three-year performance has been negatively affected by a period of underperformance between Q421 and Q222 when growth stocks de-rated in a period of rising interest rates.

BRGE along with three of its peers have a capital growth, rather than a total-return mandate, but each fund has different features: Baillie Gifford European Growth can invest in both private and listed companies; BRGE has a broad remit and can invest in emerging European markets, although currently all the fund is invested in developed markets; European Opportunities Trust invests taking top-down factors into consideration; and JP Morgan Growth & Income seeks capital growth and a rising share price, but also pays dividends based on its quarterly NAV. Comparing the NAV total returns of these four funds, BRGE ranks first over the last one, five and 10 years and third over the last three years.

BRGE currently has the narrowest discount in the sector. The trust’s ongoing charge is above average, its level of gearing is in line with the mean and, unsurprisingly given its capital growth rather than income objective, BRGE has a below-average dividend yield.

Exhibit 4: AIC Europe peer group at 12 December 2023*

% unless stated

Market cap (£m)

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount (cum-fair)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield

BlackRock Greater Europe

544.4

16.6

14.2

80.3

183.5

(6.4)

1.0

No

107

1.3

Baillie Gifford European Growth

320.0

5.0

(24.5)

22.0

54.3

(14.0)

0.6

No

113

0.4

European Opportunities Trust

820.4

11.6

18.3

27.5

140.1

(8.3)

1.0

No

100

0.4

Fidelity European Trust

1,436.7

15.0

35.6

75.5

189.0

(7.1)

0.8

No

113

2.2

Henderson European Focus Trust

355.3

21.1

31.3

74.5

168.4

(13.2)

0.8

No

104

2.6

Henderson EuroTrust

292.9

15.0

11.3

59.7

154.7

(13.3)

0.8

No

105

2.7

JPMorgan European Growth & Inc

410.1

14.6

35.0

59.2

136.8

(11.4)

0.7

No

105

4.4

Simple average

597.1

14.1

17.3

57.0

146.7

(10.5)

0.8

107

2.0

BRGE rank in sector (7 funds)

3

2

5

1

2

1

6

3

5

Source: Morningstar, Edison Investment Research. Note: *Performance to 12 December 2023 based on ex-par NAV. TR, total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

Exhibit 5: Investment trust performance to 30 November 2023

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.

In FY23, despite stock market volatility, BRGE’s NAV and share price total returns of +19.2% and +17.1% respectively were ahead of the reference index’s +15.8% total return.

The trust’s relative returns are shown in Exhibit 6. It has outperformed its reference index over the last five and 10 years in both NAV and share price terms. BRGE is significantly ahead of the UK market over the last five and 10 years, but has not kept up with the world market over the last decade. Global indices are dominated by the US (70% of the MSCI World Index), which has outperformed in most of the last 10 years.

Exhibit 6: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to reference index

5.8

(1.4)

(4.7)

0.4

(11.8)

14.1

20.2

NAV relative to reference index

4.5

(0.6)

(3.3)

2.5

(7.0)

16.1

24.6

Price relative to CBOE UK All Companies

9.6

0.1

(2.4)

9.1

(14.8)

36.1

57.1

NAV relative to CBOE UK All Companies

8.2

0.9

(0.9)

11.4

(10.1)

38.5

62.8

Price relative to MSCI World

7.3

(1.2)

(7.1)

3.6

(16.7)

3.7

(15.0)

NAV relative to MSCI World

5.9

(0.4)

(5.7)

5.8

(12.2)

5.6

(11.9)

Source: Refinitiv, Edison Investment Research. Note: Data to end-November 2023. Geometric calculation.

Over the last 12 months, the largest contributor to BRGE’s performance was Novo Nordisk. Although its share price has performed very strongly over a multiyear period, Gries is happy to continue owning the stock, noting that in the 18 years that he has been covering the company, its fundamentals have never been as strong. Novo has upgraded profit expectations three times this year and the manager considers that consensus out-year estimates are too conservative.

The trust’s semiconductor exposure has been beneficial over the last year. Gries highlights BRGE’s holding in BE Semiconductor, which is one of the most profitable companies in the industry. Its new hybrid-bonding technology enables semiconductors to continue getting smaller, but more powerful and energy efficient. The manager considers that BE Semiconductor is the best European play on the growth in artificial intelligence.

Other positive contributors to BRGE’s performance over the last 12 months were not owning Roche and Nestlé, which are large-cap defensive names, and the trust’s high-end luxury exposure via its holdings in Hermès and Ferrari. The managers have also been able to sell some of BRGE’s Russian exposure that had been written down to zero, crystallising some value, for example the position in Ozon Holdings, which was held via a depository receipt rather than as sanctioned direct equity; the sale proceeds added 0.6% to NAV.

On the negative side, over the last 12 months, the trust’s life sciences exposure has detracted from its performance, namely the holdings in Lonza Group, ChemoMetec and Sartorius Stedim Biotech. Gries comments that following COVID, high inventories have been worked down and there have been some areas of demand weakness, such as in early-stage biologics. The manager believes that life science business conditions have troughed, and he expects an order pickup in Q423 and into 2024, with a resumption of 10–15% annual industry growth.

BRGE’s position in low-cost payments provider Adyen has been disappointing. The company lowered its growth guidance in Q223 based on a more competitive US pricing environment. On the day of the announcement, Adyen’s share price declined by 45%. The company’s Q323 results exceeded expectations and its share price is now recovering; the managers are continuing to evaluate Adyen’s future prospects.

Exhibit 7: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

Reference index (%)

CBOE UK All Companies (%)

MSCI World
(%)

30/11/19

23.6

22.5

13.7

11.3

13.6

30/11/20

27.7

24.3

7.3

(11.2)

11.5

30/11/21

41.1

35.1

15.7

17.1

23.4

30/11/22

(30.0)

(24.5)

(2.9)

7.9

(0.5)

30/11/23

10.7

13.0

10.3

1.5

6.8

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

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This report has been commissioned by BlackRock Greater Europe Investment Trust and prepared and issued by Edison, in consideration of a fee payable by BlackRock Greater Europe Investment 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.

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This report has been commissioned by BlackRock Greater Europe Investment Trust and prepared and issued by Edison, in consideration of a fee payable by BlackRock Greater Europe Investment 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.

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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.

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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.

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Templeton Emerging Markets Investment Trust — Under-owned, undervalued & under-appreciated

Templeton Emerging Markets Investment Trust’s (TEMIT’s) co-managers Chetan Sehgal (lead manager) and Andrew Ness consider that the case for emerging markets is not well understood. Hence, they believe that the regions remain under-owned, undervalued and under-appreciated, which provides an interesting opportunity for global investors. There are several powerful trends supporting the superior economic growth prospects of emerging markets versus those in developed regions, including demographics, urbanisation, higher consumption and technological innovation. Emerging markets also remain relatively attractively valued. TEMIT’s performance versus the MSCI Emerging Markets Index troughed in April 2022 and is in a steadily improving trend. The trust’s results tend to be better when investors focus on company fundamentals, which drive equity returns over the long term, rather than considering near-term macroeconomic events.

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