European Opportunities Trust (EOT) has released its interim results for the six months to 30 November 2024. During the period, EOT provided NAV and share price total returns of -8.4% and -10.6% respectively, compared with a total return of -3.3% for its benchmark, the MSCI Europe Total Return Index (all in sterling terms). EOT’s chair, Matthew Dobbs, highlights that EOT’s manager follows a differentiated, high conviction approach and that the Board and manager “are fully committed to returning the Company to its former ranking at the head of its peer group”. EOT’s discount to NAV was 12.3% at the period end and the board is proposing an additional tender offer, for up to 25% of EOT’s issued share capital, which is expected to take place in the second quarter of 2025.

25% tender priced at 2% discount less costs

EOT’s board says that, while it continues to place confidence in the people, process and philosophy of its investment manager, it is mindful of the persistence of the double-digit discount and the recently disappointing performance of EOT’s portfolio. Therefore, to supplement the ongoing share buybacks, EOT’s board is proposing an additional tender offer in 2025 for up to 25% of EOT’s issued share capital which will be priced at a 2% discount to the prevailing net asset value at the time of repurchase, less the costs of implementing the tender offer. The tender offer will be subject to shareholder approval and a circular setting out the full details will be sent to shareholders in due course.

Investment manager’s review

“Our positioning of the portfolio during the period under review recognises the broad spectrum of challenges in Europe: slow growth, high costs and political turmoil and is well positioned for a range of economic eventualities. It also recognises the tremendous growth opportunities available to be exploited by the best companies. Our investee companies are typically high margin, intellectual property and technology based (as distinct from energy or capital-intensive) service businesses that have significant revenues in the US and elsewhere in the world,

“There are identifiable themes in our portfolio: Artificial Intelligence (AI) winners, technology leaders, electrification and disruptive business models.

“As regards AI, we deem RELX, Experian and Deutsche Boerse to be beneficiaries, irrespective of which AI technologies prevail. In all cases, owning the data and flow of business is key. These companies enhance the quality of existing services with the use of AI in a way that competitors which lack the data and flows cannot. Our technology leaders span healthcare, with companies like Camurus, payments companies like Edenred, and information technology companies like Dassault Systèmes. As for electrification, we invest in Prysmian, which is the world’s leading cable company and an obvious beneficiary of the electrification trend, and GTT which is a prime winner from the increasing use of liquified natural gas, which is needed to satisfy growing electricity demand, itself driven by demand from energy intensive data centres and AI. Ryanair, Wise, and Genus are also strong examples of disruptive business models in their respective sectors. Novo Nordisk, our biggest holding, is also a disruptor, expanding into the prediabetic space, and blazing a trail with new therapies to tackle obesity.”

Investment manager’s comments on contributors and detractors

“The biggest positive contributor to our performance in the period under review was Deutsche Boerse. The combination of leading technology capabilities, the increase in exchange traded financial instruments and volatile energy and interest rates, has driven the strong performance.

“The next biggest contributors to our performance were RELX and Experian. Both companies have strong proprietary data assets and have improved their offers with the use of AI. RELX’s legal information business is a clear beneficiary in this respect. Indeed, the company raised its growth expectations on the back of AI. Experian’s core credit and analytics businesses have, too, leveraged AI to buoy their offer. Whereas AI can be a disruption, we believe that our companies, where relevant, gain from the use of this technology both in improving their internal operations and in improving the quality of their offerings.

“GTT also performed well. It provides services to Liquified Natural Gas (LNG) carriers. As a ‘transition’ fuel, LNG is an important element in the move to more renewables in the energy mix.

“Whereas we believe the direction of politics in America is generally favourable for our companies, this is not necessarily the case for a couple of our holdings, notably Novo Nordisk, our biggest holding, and Genus. Both detracted from our performance in the period under review. The nomination of Robert F Kennedy Jr to be the next US health secretary has alarmed investors. The nominee is deemed to have eccentric views which could disturb current practices in healthcare and, in the case of Genus, animal husbandry.

“The share price of Edenred, which offers specific-purpose payment solutions, fell sharply. Notwithstanding the record of excellent results, investors worried that politicians in France and Italy will seek to restrict returns through new regulations. We recognise these regulatory threats. However, we believe that Edenred can operate successfully even as regulations change.

“Another detractor was Dassault Systèmes. The company has an excellent long-term record. However, the shares performed badly over the last six months as the rate of growth slowed. The main explanation is that European car manufacturers are grappling with high costs, especially the costs of producing electrical vehicles, and weak demand for those same electric vehicles. Their competitive position versus the Asian players has deteriorated. Nevertheless, we remain confident that Dassault Systèmes is an excellent company which will again capitalise on its strong technology platforms.

“Even if individual stocks explain much, we also acknowledge the impact of our ‘style bias’. The best performing sector in the index was Financials, notably the mainstream banks, a sector to which we have never had significant exposure. Our rationale is that we find better long-term value from innovative, world-leading companies in other sectors. However, in recent times the European-based banks have delivered better returns thanks to high-interest rate spreads, low loan losses and regulatory protection which keeps out new entrants. Central banks’ money printing policies (‘quantitative easing’) has had the effect of extending the normal business cycle, supporting the banks’ asset quality. In due course, we are confident that the cycle will turn down, vindicating our strategy.

“Our strategy has also suffered from outflows from European equities. Private sector savings have been squeezed by higher taxes, levied to help straitened public finances. In addition, global asset allocators have avoided Europe, disproportionately hurting big (as distinct from mega-sized) and mid-sized stocks, parts of the market to which our portfolio has a greater than average exposure.”

Investment manager’s comments on portfolio activity

“Portfolio turnover in the six months was 22.7% annualised (defined as purchases as a percentage of net assets). Sales in the period totalled £76.5m, almost half of which was the sale of Darktrace, following an agreed offer for the company by a private equity firm. The next biggest sale was that of Soitec, as better opportunities were found elsewhere. The silicon carbide ‘story’ Soitec has stalled in line with the slowing growth in sales of Electric Vehicles (EVs). We also exited the position in Grenke. Having started selling on the back of good results earlier in the year as asset quality deteriorated, we accelerated selling. The lightening of holdings in Novo Nordisk and RELX was because of the size of the weightings, rather than any concern about the quality of the respective businesses.

“Significant new investments included Universal Music Group (UMG), the world’s leading music company. It is the owner of a huge catalogue of recorded music. Digital technology allows UMG to develop new services, platforms and business models and thereby better monetise their catalogue. We also established positions in BE Semiconductor Industries (Besi) and Yubico. Besi is a Dutch technology company, a world leader in packaging processes and hybrid bonding for the semi- conductor industry. Swedish-listed Yubico, is a world leader in multi-factor authentication, a hardware solution widely regarded as being the best way to foil cyber-attacks. Other smaller purchases included the French company, Exosens, which is the world leader in the manufacture of image intensifier tubes, the key component of night vision goggles. Finally, we bought shares in Wise, a London based global payments technology company.”