European Opportunities (EOT ) fund manager Alexander Darwall has agreed to a small fee cut as the investment trust’s board looks to keep shareholders sweet ahead of a potentially dicey continuation vote in November.

Devon Equity Management, the boutique Darwall set up after leaving Jupiter Asset Management four years ago, will see its tiered annual fee trimmed to 0.8% of net assets up to £1bn, 0.7% between £1bn and £1.25bn, and 0.6% above that. Previously, it earned 0.9% to £1bn and 0.8% over that.

The triennial shareholder vote taking place at the £778m trust’s annual general meeting comes at an awkward time with the slump in returns caused by the collapse three years ago of Wirecard, the German payments processor that was its biggest holding, now affecting the former top performer’s five-year figures.

Annual results last week showed EOT’s underlying net asset value rose (NAV) 3.3% in the year to 31 May, less than half the 6.9% total return from its benchmark, the MSCI Europe index.

The former sector leader now trails the index over one, three, and five years, with the latest five-year NAV return of 6.8% comparing poorly with the 29.7% rise in the benchmark at 22 September. Even with the annual dividend included, shareholders have seen their stakes drop nearly 5%, the worst performance of its large-cap peer group where the average shareholder return has been 30.9%.

Matthew Dobbs, the former Schroders Asia fund manager who chairs the trust, said the underperformance over five years should be ‘set in the context of the longer-term outperformance’ over 10 years, in which NAV has grown 124% versus the benchmark’s 90.9%, and since launch in 2000.

Nevertheless, the slide in returns could put Darwall’s flagship in a precarious position. The derating of its shares has drawn in leading discount hunters at 1607 Capital, Allspring and City of London Investment Management, which own 31% of the shares.

More worryingly for the manager and the board, Saba Capital, an activist hedge fund that has made waves challenging Blackrock-managed closed-end funds in the US, has taken a 5% position.

Dobbs said he had been ‘encouraged’ by discussions with the trust’s largest shareholders and urged them to vote for continuation.

The board has been active in buying back the trust’s shares as part of its single percent discount target, which may mollify the value investors. That’s left the London-listed fund on a 10% discount, an improvement on its 13% average of the past year, although the narrowing may have as much to do with Saba’s presence as anything else. A vote against continuation would see the trust wind up with its discount evaporating as its holdings were sold and returned in cash at asset value. 

The dividend represents another sweetener with the annual payout hiked by 40% to 3.5p from 2.5p per share, reflecting a surge in investment income topped up with some of the trust’s capital reserves.

Novo’s fat returns

Darwall (pictured) blamed his trust’s lagging performance on ‘relatively low exposure to some of the better performing sectors’ such as defence and luxury goods.

The biggest contributor to returns was Danish pharmaceutical giant Novo Nordisk, which is also the top position making up 13% of the portfolio. It has seen demand for its new diabetes and obesity drug soar, with Darwall calling the anti-obesity area of the business ‘extraordinary’.

‘It is a huge, growing global market with only one serious competitor presently,’ he said.

Novo Nordisk’s gains were offset by Grifols, a Spanish manufacturer and marketer of blood plasma derivatives, which was his worst performer after over-extending itself and taking on too much debt. The manager has held on following the appointment of a new chief executive and the announcement of a ‘significant restructuring plan’.

Darwall was active in the period, generating £153m from portfolio sales, including the disposal of the entire stake in Swiss-listed Barry Callebaut, the world’s leading manufacturer of chocolate and cocoa products, after the manager became concerned by the impact of higher chocolate prices on demand.

He recycled the proceeds into several stocks, including former holding Ryanair, with the budget airline becoming the biggest new addition. Despite its vulnerability to a consumer downturn, Darwall believed it was in a strong position.  

‘Its network of flight routes has expanded as competitors have retreated. Its cost advantage is such that we believe it can weather a recession well not least because it should gain more market share as passengers seek better value flights.’

He also added Danish biotech firm Genmab to the portfolio thanks to its place in complex antibody production and opportunity to ‘develop into other therapeutic areas’.

‘Its potential addressable market is huge although it will take time for this to develop,’ said Darwall.

Although the board and manager is hoping investors stand by the trust at the AGM, Darwall admitted that Europe has seen structurally lower growth than North America and Asia and ‘this pattern is unlikely to change soon’.

However, despite facing further energy shocks, Darwall said Europe is proving ‘surprisingly resilient’ and the companies he holds are benefiting from ‘lots of intellectual property’ and ‘innovate extensively’.