European Assets (EAT ) fund manager Sam Cosh re-introduced gearing after sharp market falls in October, enabling the £313m smaller companies investment trust to benefit from a rally in the last two months of the year.

Gearing, or borrowing, rose from 0.1% to 6.3% in November, according to the company’s fact sheets, after the high-yielding trust tumbled around 7% in October, worse than its benchmark which fell 4.6%.

Deploying £22m of extra firepower after share prices traded on lows worked for Columbia Threadneedle’s Cosh as the market rallied strongly in November. Falling US inflation raised hopes of a ‘soft landing’ for the economy and that the influential Federal Reserve would cut interest rates in 2024 and prompt other central banks to do the same.

The trust’s net asset value (NAV) recovered 8.1% in the month, with the shares advancing 6.9% compared to the MSCI Europe ex-UK SMID Cap index’s 7.2% gain.

Data from Morningstar shows Cosh added three new companies with the money: Swiss software developer Inficon and Belgian semiconductor solutions company Melexis, which both have 1.4% weightings; and FTSE 100-listed packaging business Smurfit Kappa (SKG), which makes up 0.9% of assets.

December also looks to have been good for the trust, which pays out 6% of asset value in dividends a year. Winterflood data showed the portfolio of 49 stocks generated an 8% and 9% rise in NAV and share price for the fourth quarter.

That lifted the trust into positive territory for 2023 with an stock exchange update last week showing it generated an 8.2% total underlying investment return in sterling, although the shares returned just 4.9% due to the stock trading around 8% below net asset value. However, both lagged the MSCI benchmark which rose 9.8%.

Cosh said the portfolio did not have sufficient exposure to artificial intelligence and weight-loss drugs through its holdings of semi-conductor and pharmaceutical packaging comapanies to beat the index.

The trust’s consumer staple stocks continued to struggle, he said, with drinks companies Royal Unibrew, Davide Campari and Remy Cointreau all proving less resilient than the manager had hoped, suffering from over-stocking in the supply chain and weak consumer confidence and poor weather impacting demand.

Cosh sold a £2.8m position in German meal kit company HelloFresh, which had a poor November owing to falling consumer spending and manufacturing problems.

Industrials make up the bulk of the portfolio at 28% of assets, while consumer discretionary and financial stocks constitute 14% and 13% respectively.

Swiss laboratory automation product supplier Tecan is the largest individual position with a 3.6% weighting, followed by Danish life insurance company Ringkjoebing Landbobank and Italian hydraulics company Interpump, which make up 3.2% and 3% respectively. 

More positively, Dutch specialist chemical distributor, IMCD, and Swiss intralogistics solutions Kardex boosted returns with their shares rallying 37% and 26% since October, while Dutch-listed BE Semiconductor rose 42%.

Nevertheless, EAT’s underperformance stretches over three and five years with the latest fact sheet showing NAV up a total 15.4% over five years to 30 November, less than half the 33.2% of its benchmark.

However, there was better news on the dividend. With NAV per share rising to 98.3p from 96.5p last year, the board declared it would pay out 5.9p per share up from 5.8p, a rise of 1.9%.  The first dividend of 1.475p will be paid on 31 January. It puts EAT on a yield of 6.8%.

After a year that saw export-focused Europe weighed down by China’s economic problems, Cosh struck a bullish tone.

‘We believe the portfolio is now well positioned for the future as we seek to build on the more recent relative and absolute outperformance,’ he said.