Time for Europe

Ian Cowie reveals his European gems.

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About 450 million people across the European Union’s 27 member countries are eligible to vote this month for more than 700 members of the European Parliament, the world’s only directly elected transnational assembly, governing its biggest free trade zone. So this political event will have significant economic effects. 

However, while the short-term political impact remains uncertain, the medium to long-term economic case for British investors to consider some professionally managed exposure to continental European businesses remains strong. Food and drink, healthcare and luxury goods are among the areas where large and small continental European companies can offer valuable diversification from American and British rivals.

“Whatever the political uncertainty at home and on the continent, investment trusts offer an effective way to gain access to economic opportunities for income and growth, wherever they may arise.”

Ian Cowie

ian cowie

As a shareholder in European Assets Trust (EAT), Fidelity European Trust (FEV) and Tritax Eurobox (EBOX), I know how this can smooth out some of the shocks of the stock market and generate returns in the form of both capital growth and income. However, it is only fair to add that events can overtake our plans – for good or ill – and diversification to diminish risk by investing internationally remains an effective way to cope with the volatility inherent in stock markets.

For example, the EBOX share price jumped by more than 11% in one day this week after a Canadian fund manager, Brookfield Asset Management, said it was considering making a cash offer. However, at the time of writing, EBOX’s £434 million stock market capitalisation remains 25% below this investment trust’s net asset value (NAV), in line with the average share price discount for its sector. So there might be more room to recover for EBOX and other undervalued commercial property investment trusts.

Either way, shareholders are being paid to be patient with a dividend income of 7.1%. Not that we should have to wait too long before news, one way or another, because Brookfield is now required by takeover rules to either announce a firm intention to make an offer for EBOX or announce that it does not intend to make an offer before close of business on 1 July.

Online commerce shows no sign of diminution – quite the opposite – so demand for warehouses to store all the stuff we buy on the internet seems set to rise. Similarly, FEV gives me more diversified exposure to several commercial sectors where continental businesses are enjoying rising demand.

For example, ASML Holdings (ASML) is a Dutch company that makes machines that make the semi-conductor microchips that are vital to artificial intelligence (AI) and it is FEV’s most valuable underlying holding. America’s NVIDIA (NVDA) and Asia’s Taiwan Semiconductor Manufacturing (TSM) are both better-known beneficiaries of the AI revolution, but ASML offers an alternative ‘picks and shovels’ way into this booming sector.

FEV’s £1.97 billion total assets also include Novo-Nordisk (NOVO), the Danish maker of the weight-loss wonder drugs Wegovy and Ozempic, which is its second most valuable holding. Nestlé (NESN), the biggest food company in the world, whose brands include Kit-Kat chocolate and Nescafé coffee, is FEV’s third most valuable holding.

Without wishing to make light of serious issues, it is difficult to imagine a future in which the demand for chocolate and weight-loss drugs both fall at the same time. Similarly, LVMH Moet Hennessy Louis Vuitton (MC) – FEV’s fourth most valuable holding – benefits from high quality brand values in goods ranging from Champagne to luxury handbags. Yes, you could drink cider and keep your belongings in a carrier bag but it wouldn’t be quite the same, would it?

Coming down from the clouds of consumer psychology and macroeconomics, FEV – like EAT and EBOX – provides practical solutions to the problem of foreign withholding taxes. These deductions from dividends paid by continental shares are very difficult for individual British investors to reclaim but investment trusts do the paperwork for us.

For FEV shareholders, that means the 2% dividend income comes through cleanly and has increased by an annual average of 5.6% over the last five years, according to independent statisticians Morningstar. EAT’s higher initial income of 6.5% has been achieved at the cost of lower total returns, and this smaller companies specialist lacks a five-year record of sustained dividend increases.

So, to return to where we began, whatever the political uncertainty at home and on the continent, investment trusts offer an effective way to gain access to economic opportunities for income and growth, wherever they may arise.

Ian Cowie is a shareholder in European Assets Trust (EAT), Fidelity European (FEV), Nestlé (NESN), Novo-Nordisk (NOVO) and Tritax Eurobox (EBOX) as part of a globally-diversified portfolio of investment trusts and other shares.