When meeting with investors in EuroTrust, there tend to be a few questions that often come up in conversation. With this short article I will try to address three of these questions; How much concentration is appropriate? How do I intend to utilise the Trust’s borrowing facility (gearing)? And, what is my approach to trading? I will take each of these in turn.
How much concentration is appropriate?
Over the last few years, coinciding with my increasing involvement in EuroTrust alongside my predecessor Tim Stevenson, the number of holdings in EuroTrust has decreased from 55-60 to the current level of around 40 positions. For a number of reasons, my preference is for a relatively concentrated list of holdings and I see our current position count as being entirely appropriate.
I favour a relatively concentrated list because of the nature of our fundamental, research-led approach. We conduct detailed analysis on each company that we invest in or are considering investing in. Sometimes we can research an idea for weeks or even months before investing. This approach lends itself to investing in a relatively small number of positions; simply put, we always strive to know our investments better than anyone else and we could not do this if we had 60 companies in EuroTrust and another 40 on our watch-list. However, with, 40 companies in EuroTrust and another ~5 on the watch-list, my analyst and I feel able to understand each of these businesses in the detail that our process requires.
How do I intend to utilise gearing?
I do not and will not try to ‘time markets’ by the utilisation of differing levels of gearing (borrowing). Over time and on average, I see this activity as a futile task. However, the ability to use leverage is an attractive and valuable feature of closed-ended Investment Trusts and overtime I intend to employ an average level of gearing somewhere in the low to mid-single digit % range. Thus I refer to a 3-6% level of gearing as being a ‘neutral’ level of gearing.
Leverage may increase if we find a compelling opportunity that we do not already own. In most cases, this will be a company that we have already analysed and is sitting on our watch-list. If we cannot find an investment that we want to sell to make way for this new idea, then we will initiate a position without selling anything, thus causing our leverage to increase. Leverage may also increase if we find attractive price levels to increase our exposure to one or more of our existing positions; this tends to be counter-cyclical because more opportunities tend to emerge in periods of market weakness.
When considering the conditions under which leverage may decrease, you should simply envisage the opposite to the two rationales outlined above.
What is my approach to trading?
I do not target a specific level of turnover and nor am I hugely focused on what that number ends up being over any given time period. However, I appreciate the costs of dealing and I try to be as disciplined as possible with my trading activity. Our ‘Ranking Framework’ provides a means for us to rank each investment and potential investment against each other. This framework enables us to take objective views on position sizing and also enables us to buy or sell holdings or to adapt the weighting of a specific position in a standardised way. Specifically, we will trade where our Investment Thesis on a particular company has been challenged or our conviction in the Investment Thesis has been increased. This means that we don’t tend to trade often, but when we do trade, we trade decisively and sometimes in meaningful size. You will tend not to find us doing lots of small trims/additions to positions on account of small movements in the share price, immaterial pieces of news flow or following a ‘good/bad meeting’ with management.