Novo Nordisk’s fat returns drive Darwall fund higher and could keep Boaz at bay

Half-year results show the £599m European Opportunities Trust that recently underwent a 25% tender offer beat its benchmark, but has work to do with activist Saba holding 4%.

Fat returns from Novo Nordisk’s weight-loss wonder drugs drove European Opportunities Trust (EOT ) performance ahead of its benchmark over the six months to 30 November, but fund manager Alex Darwall and big shareholder faces continued pressure as US activist Saba Capital waits in the wings.

The Danish pharmaceutical giant Novo contributed 2.7% to performance as weight-loss drugs Wegovy and Ozempic proved hugely successful, while the US Food and Drug Administration (FDA) also approved Ozempic as a drug reducing the risk of heart attacks, helping to send the shares up 25% over the period.

Darwall trimmed £32.9m from the Novo holding, bringing the weighting back down to 12.8%, a significant portion of the portfolio and almost four times that of the benchmark, reflecting his confidence over the company’s outlook.

The £599m trust delivered underlying returns of 4.3% including dividends over the six-month period, while the shares gained 7.7%, ‘modestly’ beating its MSCI Europe index benchmark’s 3.5%, half-year results show.

While it shows short-term outperformance, Darwall, who left Jupiter to set up his own firm Devon Equity Management in 2019, faces continued pressure to improve longer-term performance after an oversubscribed 25% tender last month following a continuation vote. Another continuation vote and performance-related tender are in the diary for three years’ time.

Over five years to 31 January, underlying returns of 22.1% and shareholder returns of 31.6% significantly trail the benchmark’s 53.9%, according to the most recent factsheet.

The board spent £17.2m on buybacks over the period, and a further £30m since the end of November, which has narrowed the discount to net asset value from 10.9% at the end of May to 4.5% this morning, within the board’s 8% guidelines.

Saba’s activist chief Boaz Weinstein recently told students at a London conference that he was prepared to ‘kill the chicken to scare the monkey’, indicating he could push harder for change through his 3.9% stake.  

‘The portfolio’s outperformance can be attributed to stock selection. Looking ahead, our investment manager anticipates that the earnings growth of the portfolio in 2024 will be superior to that of the benchmark, providing a solid foundation for continued relative outperformance,’ chair Matthew Dobbs said.

Strong earnings

Darwall said that while several investee companies are yet to report their 2023 results, he expected them to have delivered significantly better earnings growth in 2023 compared to the benchmark, with JP Morgan estimating that earnings for the MSCI Europe index contracted by 2% over the year.

EOT’s portfolio will report approximately 10% earnings growth in 2023, he said, while he expects the portfolio to deliver 14% earnings growth in 2024 versus 6% for the benchmark.

‘We expect our companies’ earnings to benefit both from secular, as opposed to cyclical, drivers, and from their global reach. Positive news flow, not simply results, from our companies was another factor helping performance and providing some confidence for the future,’ Darwall said.

Analytics company Relx (REL) was another strong performer, with the shares gaining 21.9%, after upgrades to long-term growth expectations of the company, which is seen as an artificial intelligence winner.

German life sciences conglomerate Bayer was the worst performer, with the share price fall of 39.4% detracting 1.9% from performance, as the company faced legal difficulties in the US.

French specific-purpose payment solutions company Edenred detracted 1.1% over the threat of new regulations in France and Brazil which could clip returns. Darwall does not believe the proposals are likely to be implemented and has therefore decided to maintain a 5.6% weighting.

The period saw a reduction in the number of holdings from 33 to 29, with three new investments and seven complete sales. Darwall bought Swedish biotech company Camarus, French aerospace and security manufacturer Thales, and UK defence company BAE Systems (BA).

He sold out of Bayer, Norwegian companies, Borregaard and Elkem, while private equity firms bought UK financial services company Network International, German space tech company OHB and Luxembroughish software company SUSE. 

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