This article is part of Morningstar's Guide to Investing for Income
Emma Wall: Hello and welcome to this Morningstar 'Investing for Income’ special. I'm Emma Wall, and here with me today is Sam Cosh, manager of the European Assets Trust (EAT). Hello Sam.
Sam Cosh: Hello.
Wall: So, the trust has a target yield of 6%, what are the components that go into that income?
Cosh: Okay. Well, we pay out 6% of the year end NAV to shareholders and that's a combination of both capital and dividends from companies, which probably account for a third of that dividend payment.
Wall: I think people who perhaps hold UK equity income unit trust would be more familiar with the concept of a portfolio of different paying stocks, from which you get a yield for the fund. How exactly does that work, paying out of NAV? And is that more or less sustainable than the dividend model?
Cosh: Good question. I mean I think it allows us to have freedom of looking for whatever the companies we want. We don't just have to look for dividend paying companies although, of course, we like the, I guess the discipline that paying dividends gives management. In terms of how stable is the trust, well it depends on the stocks that we buy. And we think with our approach of taking a margin of safety approach means that actually the NAV should evolve in a stable way.
Wall: Well, you do have small or mid-bias, don't you, within the trust? Has that area that seen improvement as the macro story in Europe has improved for the last couple of years?
Cosh: Yeah, certainly. I mean we always think it's an interesting area as is a very vast, diverse place to find these companies that are not well known by the wider investment community; where you can really add value through stock picking. Certainly, since the crisis small caps have performed extremely well and actually over the last year they have done well.
And I think part of that is being, because people have now seen a recovery in Europe and of course, small caps are more domestically focused than their large cap counterparts. So, it would benefit from a recovery in Europe were it to happen.
Wall: Of course, all though things are no way near as bad as they were a couple of years ago, the European recovery is not completely played out. So, looking at that sort of medium term are you concerned about that at all or what are your concerns for the region?
Cosh: I guess we try not to get too bogged down in the economics because it's very difficult to predict and actually the predictive power on stock market returns is poor as well. So, we look at companies and we sort of think well, we're finely balanced at the moment, they are no longer as cheap as they were, but then again, there is plenty of potential if profits in Europe to catch up with relatively recent historic peaks.
You can contrast that with the U.S. where the profit levels have moved ahead of previous peaks and of course, the multiples have. And you know, Europe has plenty of potential were that to happen but it's not clear whether that's going to happen yet.
Wall: So, then still lots of opportunity in the region?
Cosh: Yeah, I mean there's always opportunity. Small caps, there's always areas which are unloved, out of favour where you can find these interesting gems that are cheap and offer attractive prospects.
Wall: Sam, thank you very much.
Cosh: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
