Fidelity European suffers from 'lacklustre' stock picking ahead of merger

Fidelity European Trust (FEV ) says it was held back in the first half of 2025 by an underweight in defence and what managers admitted was ‘lacklustre’ stockpicking, leaving returns lagging behind its benchmark weeks before its merger with Henderson European (HET ).

Over the six months to 30 June, the £1.6bn trust delivered a net asset value (NAV) total return of 9.6%, compared with 14.3% from the FTSE World Europe ex UK index. The share price return was stronger at 16.7% as the discount narrowed.

Managers Marcel Stotzel and Sam Morse said the lack of exposure to the ‘meteoric rise’ in defence names, including German arms maker Rheinmetall, was a major drag. ‘Although these companies are likely to see strong turnover growth in the years ahead, we expect margins to be more restrained,’ they added, noting political pressure would limit profiteering at a time of stretched public spending.

The trust remains only ‘lightly invested’ in the sector, with its biggest holding, MTU, focused on civil rather than military aerospace.

Elsewhere, a lower weighting to German equities hurt performance as the DAX rallied on fiscal loosening and infrastructure spending plans.

Novo Nordisk was the biggest single detractor, suffering a sharp de-rating on weaker-than-expected US prescription growth in obesity drugs, competition from copycat manufacturers and the abrupt departure of its chief executive.

Stotzel and Morse now argue the Danish pharmaceutical company looks ‘very cheap’, with strong dividend prospects.

By contrast, financials were the strongest positive contributors over the period, as European banks continued to be reappraised by investors on the back of better-than-expected earnings. Spanish lender Bankinter was the top performer, benefitting from market share gains as other banks in the country continued to consolidate and merge.

Looking forward, the managers believe the stimulation of the European economy, initiated by Germany’s fiscal stimulus package in March, could have further positive impact on the region, adding it is encouraging to see Europe ‘putting some self-help measures in place’ since the full impact of US tariffs remains uncertain.

The pair highlighted that the rally in European stock year-to-date has meant that valuation multiples are no longer at historic lows, however they still trade on a discount relative to US counterparts.

‘Whilst there are positive signs, we acknowledge that Europe’s economic growth remains under pressure and therefore cautiously await a cyclical upswing in the region. Falling inflation and lower interest rates could additionally boost corporate capital expenditure and lift consumer confidence,’ they said.

FEV has increased its interim dividend by 8.3% year-on-year.

The board bought back £1.83m of shares over the period, helping to reign the discount in to about 3% versus a 12-month average of 5.6%. Post-merger, it aims to maintain the discount in the mid-single digits under normal market conditions.

Over three years, FEV has outperformed the AIC Europe sector, though one-year returns of 8.2% trail the peer group average of 13%. The merger with HET is due to complete on 26 September.