The European Smaller Companies Trust – does what it says on the tin
Ollie Beckett, Portfolio Manager of The European Smaller Companies Trust (formerly TR European Growth Trust), provides an update on the Trust highlighting the changes announced by the Board and what they mean for investors. Ollie also touches on why investors should look at European smaller companies for exciting growth opportunities.
If the last two years have taught us anything, it is that change is not only inevitable but has become increasingly unpredictable. The arrival of the coronavirus changed our way of life, from how we work to the way we conduct business and leisure. Though vaccines have restored some semblance of normal life – dubbed the “new normal” – the fallout has left behind a market riddled with uncertainty.
Variants continue to threaten global growth, global supply chains are faltering, inflation keeps grinding higher, central banks have begun to withdraw monetary support, and some have already started raising interest rates. Amidst all this, investors have been trying to determine how each factor affects their portfolios and how they can best navigate this testing market environment. With noise and uncertainty now part of the new normal – we believe clarity is more important than ever.
Does what it says on the tin
At The European Smaller Companies Trust (ESCT), our purpose is to deliver long-term sustainable returns to our shareholders from investing in smaller and medium-sized European companies. In seeking to achieve this mandate, sometimes we have to adapt and evolve to the changing market environment. In 2021, the Board conducted a strategic review of the Trust’s investment objective, operations, and positioning. Whilst the investment policy and objective remain fit for purpose, the review highlighted that more could be done to improve the Trust’s positioning within the market. As a result, several recommendations were made to make the Trusts position clearer to investors.
We changed the Trust’s name from TR European Growth Trust to The European Smaller Companies Trust. We believe this name change will solve two issues. First, the new name explicitly mentions “smaller companies”, thus making our investment focus very clear. This also allows the Trust to do precisely what it says on the tin – invest in European small-cap companies with the potential to be the market leaders of tomorrow. The Trust is the purest small-cap play in its sector, where most peers are skewed more towards mid-caps. Two-thirds of the portfolio is invested in companies with under £1 billion in free float. Our solid long-term performance track record validates our quest to find growing companies across all four life-cycle segments (early, quality growth, mature, turnaround).
Source: TR European Growth Trust 2021 Annual report
1 NAV – Net asset value (‘NAV’) total return per ordinary share with income reinvested
2 Benchmark – Euromoney Smaller European Companies (ex UK) Index total return and expressed in Sterling
4 Share price – Share price total return including dividends reinvested and using mid-market closing price
Second, the name omits ‘growth’, an investment style that has become associated with a particular type of investing that does not accurately represent our approach. Yes, we invest in growth companies; however, at our core, we are value-aware investors and therefore retain a “growth-at-a-reasonable-price” mantra. Buying stocks at an attractive price should be every investor’s slogan. However, looking back over the last two years, in particular, market sentiment and activity has not reflected this. Valuations in certain segments of the market, notably technology, are extremely stretched, and it is clear that some investors are following a “growth-at-any-price” approach. We believe that valuations still matter and will continue to invest in undervalued companies where we think the market perceptions are wrong.
In addition to the name change, we also announced an 8:1 share split. Improving the liquidity of the Company’s shares enhances the ability of a broader range of investors – particularly those within the retail market – to make more efficient regular monthly investments on share dealing platforms. This could also be an important lever in narrowing the Trust’s discount, thus benefitting all shareholders. Finally, we will also change the Trust’s benchmark from the Euromoney Smaller European Companies (ex UK) Index to the MSCI Europe ex UK Small Cap Index. The change will improve the quality of the benchmark data available to us daily and will also bring us in line with the majority of our peers in the marketplace. The change will become effective from 1 July 2022, the start of the next financial year.
So why invest in European small caps now?
Europe – particularly the small-cap arena – is seen as a geared play on the global economy, with many young innovative companies helping to provide solutions in manufacturing, health care and technology (including e-commerce). Europe is a stock pickers market, and with a global recovery hopefully slowly underway, this presents an excellent opportunity for us to find businesses with sound businesses models and a plan to grow their business within the next 3-5 years.
European small caps are also at the forefront of sustainability, and therefore, it’s no surprise that our portfolio consists of companies with strong environmental, social and governance (‘ESG’) characteristics. However, smaller companies are often less focused on presenting what they do in these areas and more focused on their business operations. Many of our holdings align with the United Nations Sustainable Development Goal (SDG) of ‘affordable and clean energy’ – as well as other SGDs such as good health and well-being and sustainable cities and communities. Therefore, we have considerable exposure to companies that could benefit from the premium attached to ESG once companies improve the presentation of their activities and more generally exposed to the direction the world is moving.
Though the arrival of the omicron variant has renewed lockdown concerns in the short term, and inflation remains the wild card (which makes reasonable valuations more relevant) – there is still pent-up global recovery potential to help drive demand for European goods and services. As a result, we believe there are tremendous opportunities with this market and will continue to look for businesses that we believe are undervalued but have the potential to deliver superior returns.
Environmental Social and Governance (ESG) – Environmental, social and governance are three key criteria used to evaluate a company’s ethical impact and sustainable practices.
Free float – Free float, also known as public float, refers to the shares of a company that can be publicly traded and are not restricted (i.e., held by insiders). In other words, the term is used to describe the number of shares that is available to the public for trading in the secondary market.
Growth stock – A growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends. This is because the issuers of growth stocks are usually companies that want to reinvest any earnings they accrue in order to accelerate growth in the short term.
Liquidity – The ability to buy or sell a particular security or asset in the market. Assets that can be easily traded in the market (without causing a major price move) are referred to as ‘liquid’.
Net Asset Value (NAV) – The total value of a fund’s assets less its liabilities.
Share split – A stock split is when a company divides the existing shares of its stock into multiple new shares to boost the stock’s liquidity. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any real value.
Growth at a reasonable price – Growth at a reasonable price (GARP) is an equity investment strategy that seeks to combine tenets of both growth investing and value investing to select individual stocks.
Valuation – Metrics used to gauge a company’s performance, financial health, and expectations for future earnings eg, price to earnings (P/E) ratio and return on equity (ROE).
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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