We’ve found a highly regarded trust that has moved from a small premium to an 8 per cent discount since the start of 2018.
For the last couple of years, the general consensus among professional investors has been that there are two areas of the world that value investors should be targeting: Europe and Japan.
Cheaper valuations compared to other markets have whetted the appetite, while the economic picture has also been seen to be favourable.
Justin Onuekwusi, a multi-asset fund manager at Legal & General, favours both regions. He points out that ‘Japan is geared into the economic cycle’, having posted eight consecutive quarters of economic growth. He adds that having quantitative easing still in place is another positive, in addition to improving corporate governance.
In the case of Europe, Onuekwusi expects a weaker euro to boost share prices across the continent. If this catalyst plays out it will be warmly welcomed by investors, as Europe has produced pedestrian returns so far in 2018, despite being widely tipped to outperform other regions.
For fans of investment trusts searching for a bargain, though, Europe is the more obvious value play of the two regions, as all 12 European investment trusts are trading on discounts to net asset value (NAV). In contrast, three of the nine investment trusts that invest in Japanese equities are trading on a premium.
One trust that catches the eye is Henderson European Focus (HEFT), managed by the respected investor John Bennett. Its share price discount to NAV stands at 7.6 per cent (at the time of writing on 7 June), offering investors a much cheaper entry point compared to the start of the year when HEFT was trading on a small premium. According to Winterflood, the broker, over the past year the trust has traded on a discount of 0.7 per cent.
The widening discount has been driven by two factors, the first being that performance has come off the boil over the past couple of years. Bennett is a ‘value’ investor, so therefore looks to invest in bombed-out areas of the market. Some positions, though, have failed to pay off, while in general Bennett has been finding bargain stocks hard to come by. This led the portfolio to move to an ungeared position last month.
The second driver has been sentiment towards European markets, which has taken a knock on the back of various data points showing a weakening of economic momentum. In addition, the political climate has become more challenging, with last week’s Italian upheaval a case in point.
Gavin Haynes of wealth manager Whitechurch Securities thinks Bennett is sensible to take risk off the table at a time when political worries have come to the fore and the macroeconomic backdrop for Europe has become more troubling.
Haynes adds, however, that despite Europe’s problems there are still plenty of attractive businesses that operate on a global scale. He says: ‘For European exposure I like this trust managed by the highly regarded John Bennett, who has produced strong long-term outperformance.
‘The trust has suffered from a short-term period of underperformance as a more challanging economic and political climate has seen investor enthusiasm for European stocks cool off. As a result the trust is now trading on a historically wide discount.
‘The manager has reduced gearing recently to make it more defensive given a more uncertain backdrop, and the recent sell-off and widening discount could prove to be a good time to buy if looking for exposure to European equities.’
Ben Yearsley, of Shore Financial Planning, agrees that now could present a good buying opportunity. He adds that Bennett looks to profit from ‘mean reversion’, so in other words he’s looking for companies where the fundamentals will eventually reassert themselves.
He adds: ‘Bennett expects value to rise and growth to fall back from the heady heights. The question is when! Its poor performance has turned investors off this trust and it has slipped to a reasonable discount; if you believe in mean reversion this could be a good buying opportunity. The end of quantitative easing, or more accurately the end of new money being printed in Europe later this year, could be the catalyst.’
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