Fidelity European Values — Disciplined process driving outperformance

Fidelity European Trust (LN: FEV)

Last close As at 25/04/2024

303.50

0.00 (0.00%)

Market capitalisation

1,249m

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Fidelity European Values — Disciplined process driving outperformance

Fidelity European Values (FEV) is managed by Sam Morse, who selects stocks on a bottom-up basis, focusing on quality companies with strong balance sheets that are able to grow dividends over the long term. He notes that investor concerns that affected the market in 2019 are abating: central banks are very supportive; a resolution to the US-China trade war is looking more likely; and within Europe, there is the prospect of fiscal stimulus to support economic growth. While there is potential for a rotation in market leadership towards cyclical stocks, which could put the fund’s relative performance under pressure, the manager is ‘sticking to his knitting’, and remaining disciplined, rather than shifting his portfolio exposures in an effort to try to ‘time the market’.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

Fidelity European Values

Disciplined process driving outperformance

Investment trusts
European equities

16 January 2020

Price

265.0p

Market cap

£1,090m

AUM

£1,178m

NAV*

285.3p

Discount to NAV

7.1%

*Including income. As at 14 January 2020.

Yield

3.3%

Ordinary shares in issue

411.5m

Code

FEV

Primary exchange

LSE

AIC sector

Europe

Benchmark

FTSE World Europe ex-UK

Share price/discount performance

Three-year performance vs index

52-week high/low

265.0p

214.0p

285.3p

235.3p

**Including income.

Gearing

Gross market gearing*

6.5%

Net market gearing*

3.8%

*As at 30 November 2019.

Analysts

Mel Jenner

+44 (0)20 3077 5720

Sarah Godfrey

+44 (0)20 3681 2519

Fidelity European Values is a research client of Edison Investment Research Limited

Fidelity European Values (FEV) is managed by Sam Morse, who selects stocks on a bottom-up basis, focusing on quality companies with strong balance sheets that are able to grow dividends over the long term. He notes that investor concerns that affected the market in 2019 are abating: central banks are very supportive; a resolution to the US-China trade war is looking more likely; and within Europe, there is the prospect of fiscal stimulus to support economic growth. While there is potential for a rotation in market leadership towards cyclical stocks, which could put the fund’s relative performance under pressure, the manager is ‘sticking to his knitting’, and remaining disciplined, rather than shifting his portfolio exposures in an effort to try to ‘time the market’.

Long-term NAV outperformance versus the benchmark

Source: Refinitiv, Edison Investment Research

The market opportunity

While improved investor sentiment drove a re-rating of the European market in 2019, central banks remain very accommodative and there is potential for fiscal stimulus to support economic growth. These factors may lead to further upward moves in equity prices in 2020, despite above-average total returns last year.

Why consider investing in FEV?

Strong performance track record – the trust has outperformed the benchmark over the last one, three, five and 10 years.

Experienced fund manager, with a disciplined investment approach, who is able to draw on the broad resources of Fidelity’s analyst team.

Long-term record of dividend growth, supported by a focus on well-financed companies that can grow their own dividends.

Discount narrower than historical averages

FEV’s shares are currently trading at a 7.1% discount to cum-income NAV, which is narrower than the average discounts of 8.4%, 9.3%, 9.0% and 10.8% over the last one, three, five and 10 years, respectively. The trust pays dividends twice a year in November and May; the annual ordinary payment has increased in each financial year since 2010 and FEV currently offers a 3.3% yield. Gearing of up to 30% of NAV is permitted; net market gearing was 3.8% at end-November 2019.

Exhibit 1: Trust at a glance

Investment objective and fund background

Recent developments

Fidelity European Values’ investment objective is to achieve long-term growth in both capital and income from a portfolio predominantly comprising continental European securities. Up to 20% exposure to stocks listed outside continental Europe is permitted, to give the manager investment flexibility. FEV’s performance benchmark is the FTSE World Europe ex-UK Index.

11 November 2019: Appointment of Sir Ivan Rogers as a non-executive director with effect from 1 January 2020.

2 August 2019: Interim results to 30 June 2019 – NAV TR +19.9% versus benchmark TR +17.5%; share price TR +24.5%.

13 May 2019: Two-yearly continuation vote passed at the AGM.

Forthcoming

Capital structure

Fund details

AGM

May 2020

Ongoing charges

0.88%

Group

FIL Investments International

Final results

March 2020

Net market gearing*

3.8%

Manager

Sam Morse

Year end

31 December

Annual mgmt fee

Tiered: 0.85% up to £400m net assets, then 0.75%.

Address

Beech Gate, Millfield Lane,

Lower Kingswood, Tadworth,

Surrey KT20 6RP

Dividend paid

November, May

Performance fee

None

Launch date

November 1991

Trust life

Indefinite (subject to vote)

Phone

+44 (0)800 414110

Continuation vote

Two-yearly (next 2021)

Loan facilities

None – CFDs used

Website

www.fidelity.co.uk/europeanvalues

Dividend policy and history (financial years)

Share buyback policy and history (financial years)

Until FY18, FEV paid an annual dividend in May. From FY19, an interim dividend is also paid in November. FY18 distributable income rose partly due to the shift to a 75:25 allocation of fees and expenses between capital and revenue.

FEV has annually renewed authority to purchase up to 14.99% and allot up to 5% of its issued share capital.

Shareholder base (as at 31 December 2019)

Portfolio exposure by market cap (as at 30 November 2019)

Top 10 holdings (as at 30 November 2019)

Portfolio weight (%)

Benchmark weight (%)

Active weight (pp)

Company

Country of listing

Sector

30 Nov 2019

30 Nov 2018**

30 Nov 2019

30 Nov 2019

Nestlé

Switzerland

Consumer goods

6.9

7.1

4.4

2.5

Roche Holding

Switzerland

Healthcare

5.3

5.3

3.2

2.1

SAP

Germany

Technology

4.4

3.8

1.9

2.5

LVMH

France

Consumer goods

4.2

N/A

1.6

2.6

Total

France

Oil & gas

4.0

4.3

1.8

2.2

ASML Holding

Netherlands

Technology

3.5

3.2

1.6

1.9

Sanofi

France

Healthcare

3.5

4.3

1.5

2.0

L'Oréal

France

Consumer goods

3.2

3.4

1.0

2.2

EssilorLuxottica

France

Healthcare

3.0

N/A

0.7

2.3

Novo Nordisk

Denmark

Healthcare

2.9

3.1

1.3

1.6

Top 10 (% of holdings)

40.9

40.5

Source: Fidelity European Values, Edison Investment Research, Bloomberg, Morningstar. Note: *Gearing net of short positions. **N/A where not in end-November 2018 top 10.

The fund manager: Sam Morse

The manager’s view: Continued focus on individual companies

Morse comments that despite stock market volatility in 2019, FEV outperformed its benchmark during the year, which is gratifying. However, he says that there were some tricky periods, such as in Q2 and Q3, when there was short-term rotation into value stocks, where the trust is underweight (FEV has a growth bias due to its focus on investing in companies that can consistently grow their dividends). Over 2019 as a whole, the manager enjoyed a stylistic tailwind as good dividend payers outperformed and defensive stocks fared better than cyclical names. At the margin, Morse has been reducing the fund’s defensive exposure, taking profits in stocks that have performed relatively well, such as 3i Group, ASML, Dassault Systèmes, Deutsche Börse and EssilorLuxottica. He has been reallocating the proceeds into companies that have done less well, such as in the energy and industrial sectors.

At the beginning of 2019, there was concern about the outlook for European equities given an expected low level of earnings growth. However, sentiment improved as central banks moved to stimulate their respective economies: the US Federal Reserve shifted its stance from raising to reducing interest rates and the European Central Bank (ECB) restarted quantitative easing. This has proved to be a powerful feature for global markets, outweighing concerns about the dispute between the US and its trading partners and the ongoing Brexit negotiations. Improved investor sentiment led to a re-rating of equities and investors enjoyed above-average returns in 2019.

Consensus earnings growth for European equities in 2020 is currently in the mid-single digit range; however, Morse says that this is likely to be dependent on fiscal stimulus, as there is not much more the ECB can do in terms of monetary policy. The bank has been very vocal in encouraging fiscal stimulus at the national level, but the manager suggests that apart from direct tax cuts, it would very difficult to see a rapid positive impact from changing fiscal policies. He is conscious that the current bull run since the global financial crisis is prolonged and he will continue to focus on what individual companies are doing, rather than significantly repositioning FEV’s portfolio and trying to ‘time the market’.

The portfolio

At end-November 2019, FEV’s top 10 holdings made up 40.9% of the portfolio, which was broadly in line with 40.5% a year earlier; eight positions were common to both periods.

Exhibit 2: FEV’s net portfolio exposure by sector and geography at end-November 2019

Net portfolio exposure by sector

Net portfolio exposure by geography

Source: FEV, Edison Investment Research. Note: Exposures are net of short positions, adjusted for gearing and index futures.

The make-up of the fund is broadly similar to end-May 2019, which we covered in our last note published in June; FEV continues to be diversified by both sector and geography (Exhibit 2).

Portfolio activity has been relatively light, with two new holdings and no complete disposals over the last six months. Morse is not ‘super positive’ on the outlook for European equities and has not been finding many new attractive investment opportunities. He is mindful about the continued outperformance of steady growth companies, given that they have been in favour with investors, and notes that valuations are stretched, although he does not anticipate an imminent market correction. FEV’s portfolio turnover in 2019 was around 10% versus a more typical 20–30% a year. The trust has an active share of 79% (a measure of how a fund differs from an index, with 0% representing full replication and 100% no commonality).

The two new holdings are both private equity firms, operating in a sector that is enjoying positive fundamentals and investor inflows. Partners Group is listed in Switzerland. Its shares dipped in September as the company’s margins came under short-term pressure, which provided Morse with an attractive entry point. He is expecting Partners to generate double-digit dividend growth. EQT is a Swedish company that listed last September; its shares were in high demand, so FEV only received a small allocation. As the company has continued to perform well following the initial public offering, the manager will either wait for a pull back to increase the position size, or he may sell the holding as it is currently too small to make a meaningful impact on the fund’s performance.

Performance: Long-term record of outperformance

Exhibit 3: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

FTSE World Europe ex-UK (%)

MSCI Europe

(%)

MSCI World

(%)

FTSE All-Share (%)

31/12/15

9.2

6.8

5.3

3.3

5.5

1.0

31/12/16

7.6

17.6

19.7

19.5

29.0

16.8

31/12/17

26.2

20.0

17.5

15.3

12.4

13.1

31/12/18

(6.8)

(4.8)

(9.5)

(9.0)

(2.5)

(9.5)

31/12/19

30.6

23.8

20.4

19.8

23.4

19.2

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

With the exception of 2016, FEV’s NAV and share price total returns have surpassed the performance of the benchmark FTSE World Europe ex-UK Index in each of the last five years (Exhibit 3). In absolute terms, the trust has generated double-digit annual returns over the last one, three, five and 10 years, with a particularly strong performance over the last 12 months.

Exhibit 4: Investment trust performance to 31 December 2019

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

Price, NAV and benchmark total return performance (%)

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

FEV’s relative returns are shown in Exhibit 5; it has outperformed its benchmark in both NAV and share price terms over all periods shown. The fact that it has also beaten the MSCI World Index over almost all periods of three years and less is notable given the strong outperformance of the dominant US market in recent years. Morse explains that in recent months, positive contributors to performance include ASML (lithography equipment – company gaining market share); EssilorLuxottica (ophthalmic lenses, frames and sunglasses – now operating more efficiently following its major merger); and LVMH (luxury goods – results have exceeded expectations). Stocks that have performed less well include ABN AMRO (bank – facing a regulatory fine); Andritz (engineering firm – exposure to the auto sector); and Fresenius Medical Care (kidney dialysis – operational issues).

Exhibit 5: 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 FTSE World Europe ex-UK

1.3

4.5

2.3

8.4

19.9

11.8

30.6

NAV relative to FTSE World Europe ex-UK

0.9

0.6

0.8

2.8

10.4

9.9

23.8

Price relative to MSCI Europe

0.9

4.1

2.0

9.0

22.3

16.4

31.3

NAV relative to MSCI Europe

0.5

0.2

0.5

3.4

12.5

14.5

24.5

Price relative to MSCI World

1.7

4.3

(0.2)

5.8

13.6

(1.8)

(11.7)

NAV relative to MSCI World

1.3

0.4

(1.7)

0.3

4.5

(3.5)

(16.3)

Price relative to FTSE All-Share

(0.9)

1.3

(0.6)

9.6

26.0

25.7

28.8

NAV relative to FTSE All-Share

(1.3)

(2.5)

(2.0)

3.9

15.9

23.5

22.1

Source: Refinitiv, Edison Investment Research. Note: Data to end-December 2019. Geometric calculation.

Valuation: Discount at narrower end of three-year range

Having been in a narrowing trend since Q218, FEV’s shares are currently trading at a 7.1% discount to cum-income NAV. This is at the narrow end of the 5.9% to 11.0% range of discounts over the last 12 months. Over the last one, three, five and 10 years, the trust has traded at average discounts of 8.4%, 9.3%, 9.0% and 10.8%, respectively. The narrower discount may be as a result of the board’s initiatives in recent quarters, such a more competitive ongoing charge (0.88%) and the 75% allocation of management fees and finance costs to the capital account, supporting a higher dividend, along with the manager’s continuing record of outperformance.

Exhibit 6: Share price discount to NAV (including income) over three years (%)

Source: Refinitiv, Edison Investment Research

Peer group comparison

FEV is one of eight funds in the AIC Europe sector. Its NAV total returns are above average over one, three and five years – 2.4pp, 8.7pp and 7.1pp ahead of the mean returns, respectively – while lagging over the last decade. The outperformance over one year, a period of above-average market returns, is particularly notable given Morse’s focus on preserving, as well growing, capital. None of the funds in the peer group trade at a premium and the range of discounts is relatively wide; FEV’s is currently modestly above average. Its ongoing charge is in line with the mean and, in keeping with all of its peers, no performance fee is payable. The trust’s level of gearing is below average, while courtesy of a significantly higher dividend in FY18, it now offers a yield that is 0.8pp above the peer-group average.

Exhibit 7: AIC Europe sector peer group as at 15 January 2020*

% 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

Fidelity European Values

1,090.4

25.1

40.7

82.6

167.0

(7.5)

0.9

No

104

3.3

Baillie Gifford European Growth

371.1

16.2

13.0

40.6

95.5

(5.1)

0.6

No

100

3.4

BlackRock Greater Europe

348.3

32.0

47.4

96.1

183.1

(3.1)

1.1

No

100

1.2

European Opportunities Trust

966.2

24.2

53.9

97.0

336.4

(4.6)

0.9

No

108

0.6

Henderson European Focus Trust

285.9

24.1

25.2

70.1

177.2

(7.8)

0.8

No

103

2.4

Henderson EuroTrust

261.6

26.6

33.7

87.1

197.9

(8.4)

0.8

No

104

2.5

JPMorgan European Growth Pool

206.9

18.3

19.9

62.4

124.5

(11.7)

1.0

No

113

2.9

JPMorgan European Income Pool

163.4

15.2

22.4

67.9

161.4

(8.3)

1.1

No

112

3.9

Average

461.7

22.7

32.0

75.5

180.4

(7.1)

0.9

106

2.5

Rank in peer group (8 funds)

1

3

3

4

5

4

5

4

3

Source: Morningstar, Edison Investment Research. Note: *Performance to 14 January 2020 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).

General disclaimer and copyright

This report has been commissioned by Fidelity European Values and prepared and issued by Edison, in consideration of a fee payable by Fidelity European Values. Edison Investment Research standard fees are £49,500 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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General disclaimer and copyright

This report has been commissioned by Fidelity European Values and prepared and issued by Edison, in consideration of a fee payable by Fidelity European Values. Edison Investment Research standard fees are £49,500 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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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.

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.

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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

1,185 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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Research: TMT

4imprint Group — Self-promotion pays

4imprint’s pre-close update indicates trading in the later weeks of the full year continued strong, with FY19 results set to be at the higher end of the market forecast range. Revenue (+17%) was slightly above our estimate, which we raised by $10m at the November trading update. The $41.0m net cash at the year end was also a little ahead of our forecast of $39.5m. We have initiated FY21 forecasts, which show the group exceeding management’s $1bn revenue target a year earlier than originally anticipated. The large scale of the addressable market leaves plenty of opportunity for growth, with potential for further share price appreciation.

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