Buy European quality at a discount

IC TIP RATING

Tip style: GROWTH

Risk rating: HIGH

Timescale: LONG TERM

This has mostly traded at a premium to net asset value (NAV) since the second half of 2012 but in recent months has moved to a discount, and is currently on a discount of 2.41 per cent as opposed to its 12-month average, a premium of 1.17 per cent. A reason for this has been a decline in the trust's performance over one year, when it has lagged its benchmark, FTSE Europe ex UK and also the Association of Investment Companies (AIC) Europe sector average. A reason for the underperformance is the trust's focus on quality shares at a time when cyclicals have been doing well.

However, the trust has an outstanding long-term performance record and beat its sector average and its benchmark over three and five years - by a considerable margin over the latter period.

"For those who like the euro area and view the current sell-off as an opportunity, or equally for those who have to maintain European exposure, then this is an ideal opportunity to gain access to the manager [Alex Darwall] at a discount," says Fin Bodman, from the closed-end fund team at Investec.

If the trust's performance returns to form it might not stay at a discount.

"Mr Darwall has managed the fund since 2000 and also has a significant amount of personal capital invested in Jupiter European Opportunities, making him an excellent steward of the trust," adds Mr Bodman.

Mr Darwall owns more than 4 million shares in the trust.

When selecting shares, Mr Darwall seeks companies of which he thinks the ownership and management structures are conducive to generating superior long-term earnings growth. He favours companies with features such as:

• a strong management record and team, with demonstrable ability to explain and account for its actions;

• technological or other factors which indicate a sustainable competitive advantage;

• a reasonable expectation that demand for their products or services will enjoy long-term growth; and

• a foundation whereby any structural changes are more liable to benefit rather than negatively impact its prospects.

His main valuation techniques are sustainability and growth of free cash flow over the long term.

However, even though the trust focuses on quality companies its share price can be volatile. For example, while it made a double digit return in 2010 and 2012, in 2011 it made a double-digit loss. Jupiter European Opportunities tends to do well in rising markets.

The trust also has a performance fee so if there is an improvement in performance the ongoing charge could rise.

While the manager has a very strong historical record, there is no guarantee performance will turn up. The trust's NAV return also underperformed its benchmark over its financial year to the 31 May 2013, albeit by a small amount and still making a double digit positive return.

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However, the trust has had difficult periods in the past after which performance has bounced back, adding up to strong long-term returns. So while on a discount, Jupiter European Opportunities looks like a good price for high quality exposure to Europe and a manager with a good long-term record. Buy.

Source: Morningstar

Source: Winterflood, as at 2 September 2014

Top 10 holdings, as at 31 May 2014 (%)

Geographic allocation