In 2018, picking out investment trusts that looked potentially cheap, having slipped to wider-than-usual discounts, was not hard. Emerging markets accounted for the lion’s share through the first part of the year, before Asia picked up the baton as the months went on.
After a broad-based market correction in the final three months of the year, 2019 has started much more sanguinely. Many markets have recovered their poise amid renewed hope a trade deal between the US and China can be agreed and an increasingly dovish US Federal Reserve.
As a result, many discounts on Morningstar top-rated investment trusts have narrowed in comparison to their 12-month figures. There’s still a long way to go before they become expensive, but some of the value looks to have disappeared.
Still, there’s plenty to be worried about across the globe, particularly in Europe, where a wall of worries has building for some time on the Continent.
Italy is front and centre of this, slipping into a technical recession after seeing its economy shrink for two consecutive quarters. Germany narrowly avoided the same fate, while protests in France put it on the verge, too. Add Brexit to the mix and the picture is bleak.
On the investment front, Europe has only outpaced the broader MSCI World index, in US dollar terms, twice in the past nine calendar years. It lags year-to-date, too. But that suggests European stocks are cheap.
Europe’s car sector has been weak due to new emissions tests and threats of tariffs, while its banks continue to come under pressure.
We’ve already noted significant outflows from open-end funds investing in Europe; a couple of highly rated investment companies have slid out of favour, too. We outline them below.
Jupiter European Opportunities (JEO)
Alexander Darwall’s Morningstar Gold Rated Jupiter European Opportunities Trust has been a stellar performer since its manager took over in late 2000, returning 656% – well above MSCI Europe’s 110% in sterling terms.
But shorter-term performance from the £789 million offering has been more muted. Gains of just 30% over three years puts it below the benchmark. And its 4.45% loss over one year has it on par.
That’s seen it slip to a near-3% discount, from a 12-month average 0.5% discount. Recent fraud allegations towards the trust’s largest holding, Wirecard, have not helped. The German payments specialist accounts for a huge 17% of the portfolio but shares have fallen 22% in the past week.
But Morningstar analyst Samuel Meakin rates Darwall highly and thinks the trust is “a standout choice for European equities”. Its unconstrained, high-conviction approach delivers very strong risk-adjusted returns and limit losses in down markets.
Henderson European Focus (HEFT)
Another experienced investor with a strong track record is John Bennett, who has produced gains of 133% - more than twice that of the MSCI Europe – since taking the helm of Bronze Rated Henderson European Focus in 2010.
Again, more recent performance has been somewhat pedestrian, with the five-year figure in line with the index and almost half that returned by Darwall’s mandate. In the past 12 months, it’s lost 14% - nearly three times that of the index.
There’s been movement within team members, too, with a co-manager and two analysts departing in 2017. More recently, it was confirmed Andrew McCarthy, co-manager on Janus Henderson’s European mandates including HEFT, will leave in April, less than 12 months after joining.
Unsurprisingly, these events have seen the trust slip to a discount of 8.5% - wider than the 12-month figure of 6.8%.
Despite that “element of uncertainty”, Morningstar analyst Peter Brunt says he still has conviction in HEFT and Bennett’s consistent application of his investment approach over multiple market cycles. “We consider the approach, which combines macro and micro research, to be robust and disciplined in nature,” Brunt explains.
The two other European investment trusts with Morningstar medal ratings, Fidelity European Values (FEV) and Montanaro European Smaller Companies (MTE) also trade at big discounts – 9.6% and 10.7% respectively – but both are more in line with their one-year averages.
