Buy strong management in Europe at a discount

Three years on and the change of manager and investment approach seems to be coming good, with European Investment Trust one of the better performers in the Association of Investment Companies (AIC) Europe sector over one year, in terms of net asset value (NAV) and share price. Despite this, the trust is still on one of the widest discounts in its sector at 9.94 per cent.

The trust also has a very reasonable ongoing charge of 0.63 per cent, one of the lowest in its sector.

Its managers aim for long-term capital growth by identifying undervalued shares via disciplined and intensive research, and they believe undervaluation arises because the stock market's investment horizon is too short. Its managers aim for an absolute return and don't include stocks by reference to an index weighting.

"We believe that a stock price is driven by the company's future profits and so for every potential holding we forecast profits, cash flow and balance sheet over the next five years," says Edinburgh. "We then apply our own valuation basis to these forecasts to produce an estimate of what the price should be. Only if this intrinsic price is well above the current share price would we consider buying the stock. As we are long-term investors we stress the need for patience in investing."

This approach can lead to lower turnover of portfolios in the long-term, which means lower trading costs.

Their risk controls focus on the potential for an investment to lose money.

The trust's lead manager is Dale Robertson, but all investments have to be approved by Edinburgh Partners' investment committee, chaired by chief investment officer Sandy Nairn.

The trust has a relatively concentrated portfolio of only around 40 shares which in theory is riskier, but on the other hand means it is less vulnerable to overall market sentiment.

European Investment Trust's long-term value approach could involve periods of underperformance when the market moves against its style. "But on a longer view it has the potential to deliver outperformance while improvement in confidence towards Europe could deliver stronger performance," says Andrew Mitchell, analyst at Edison Investment Research.

Although the trust is on one of the widest discounts in its sector, this is considerably tighter than its 12-month average of 13.83 per cent, and at the low end of its three-year range of between 8 and 19 per cent. However, the NAV and share price could still continue to do well, and analysts at Investec say that as the discount is still one of the widest in its sector it could narrow further, potentially boosting shareholder returns.

Sentiment towards European markets is also improving, and although this trust's managers pick shares according to their individual merits rather than for economic reasons, swings in market sentiment could affect valuations and the trust's near-term performance.

So if you want to take advantage of what has been a successful investment approach and benefit from any European turnaround at an attractive discount, then consider European Investment Trust. Buy.

Source: Morningstar

Source: Morningstar as at 15 November 2013

TOP 10 HOLDINGS as at 31 October 2013

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