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Questor: worried about Europe? Then buy discounted shares in this top European trust
The best time to invest is usually when you have least appetite for it, and few assets feel as unappealing right now as European shares as the eurozone banking crisis drags on.
This may be one reason for the discount that has opened up on a Europe-focused investment trust run by a very highly regarded manager.
Shares in the trust, Jupiter European Opportunities, are no higher today than they were in March last year, despite a 9pc rise in the value of its assets in that time. That contrast sums up the situation nicely: the fund’s holdings have performed well, but investor sentiment has turned against the sector, widening the discount to 5.7pc.
Over the longer term, the trust’s performance has been extremely impressive. According to a research note published in September by Morningstar, the investment analyst, the portfolio’s average annual gain since its launch in 2000 has been 13.2pc, about 8 percentage points more than its peer group’s.
Mr Darwall has been in charge of the fund from the start and his experience in European stocks goes back even further, to the 1980s.
His approach to stock-picking revolves around developing an in-depth understanding of how a company works. To this end he maintains regular direct contact with management teams, paying little attention to research produced by stockbrokers.
He prefers firms with proven track records and clear business plans, whose managers act in the interest of small shareholders. He seeks companies whose products are in universal demand and are not especially price-sensitive.
Mr Darwall tends to invest in firms whose prospects depend on their own entrepreneurial endeavour and not on factors beyond their control. While the valuation methods he uses vary according to circumstance, the key feature will be the sustainability and growth of free cashflow in the long term.
He expects all his holdings to benefit from long-term growth drivers such as changes in regulation, consumer habits and technology, rather than being reliant on economic trends. He looks to hold these stocks for the long term, and as a result the fund tends to have a low turnover.
The portfolio’s focus on firms that are expected to grow, as opposed to stocks that simply seem undervalued, is reflected in the fact that, at the time of a research note from Stifel, the stockbroker, in July, the average holding traded on a prospective price to earnings ratio of 19.8, compared with 14.8 for its benchmark index.
Stifel said: “The manager isn’t scared to invest in stocks with high multiples as he expects p/e ratios to be eroded as earnings growth eventually catches up.”
This preference for growth shares could prove a handicap if the current vogue for “value” stocks is maintained.
The portfolio is also highly concentrated, with the largest 20 holdings accounting for the vast majority of its assets, showing that Mr Darwall has high levels of conviction in each of his stock selections.
Fundcalibre, the fund rating service, summed up his strategy as follows: “The manager has developed a coherent and consistent investment process that has a record of success in different macroeconomic environments.”
Another good sign for potential investors is that Mr Darwall himself owns a large stake in the fund : filings from May 2015 said he held about 4.2m shares, worth about £21.8m at yesterday’s closing price.
Among the trust’s holdings are Grenke, the German leasing company, which has grown strongly as the mainstream banks retreat from non-core types of lending. Mr Darwall believes that economic disruption invariably produces opportunities as well as dangers for business and said Grenke had “clearly been a beneficiary of the significant challenges faced by the European banks”.
One aspect of the fund that investors should bear in mind is that it uses “leverage” – it borrows money so that it can invest more in its chosen holdings. This amplifies both gains and losses and partly explains why the fund suffered more than peers in 2008 but has outperformed them in all other years since its launch.
The annual cost (the “ongoing charge figure”) is 0.98pc, although there is a performance fee on top. Although we generally dislike these extra fees, we feel that Mr Darwall’s track record justifies them in this case.
Questor says: Buy
Ticker: JEO
Questor archive: telegraph.co.uk/questor
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