Buy hidden growth before the brokers with Montanaro European Smaller

So if private investors want to invest in a good trust at a reasonable price they should look to get in before its assets hit £100m. Fund information company Morningstar reports that investment trusts with assets approaching £100m include Montanaro European Smaller Companies Trust (MTE).

This trust has net assets of just over £93m and has beaten its benchmark, MSCI Europe ex UK Small Cap index, by a considerable margin over three and five years. It is also well ahead of its sector peers over those periods.

Montanaro believes that smaller companies in Europe provide more opportunities than those in the UK as markets there can be even less efficient as a result of language and cultural and geographical barriers. There are many more companies to choose from and they are less well researched, giving stockpickers with the resources and time an advantage.

Montanaro European Smaller Companies' portfolio also has negligible exposure to the troubled parts of Europe, while Germany, Sweden, Finland and Switzerland account for two-thirds of assets.

The trust is run by an experienced management house, which looks for well-managed companies, typically with dominant positions in growing niche markets.

It tries to assess a company's growth potential and determine a price that represents good value, concentrating on intrinsic value. "We take a Warren Buffett approach and apply it to investing in quoted European small companies - value investing in growth companies; low-priced growth at a reasonable price (Garp)," explains Montanaro. "This is done by calculating the net present value of future free cash flows and seeking to invest at a significant discount."

Cash is the most important consideration, so the investment team focuses on return on capital employed, seeking companies where it is high and sustainable. They like robust balance sheets with low gearing, and high interest and dividend cover. They only invest in profitable companies.

Other important attributes include competent management that cares about employees and shareholders.

The trust invests for the long term, so its turnover rate is low - typically 20 to 30 per cent.

Montanaro European Smaller Companies invests in an area that is more volatile and potentially higher risk than large-caps. Analysts at Morningstar say this trust is also more volatile than its category peers and index, so rate it 'above average' for risk. This is apparent from the trust's annual returns, which are mostly positive double-digit figures, but in tougher years such as 2008 and 2011 losses were also double-digit, for example more than 31 per cent in 2008.

The trust levies a performance fee of 15 per cent of the amount by which the increase in the NAV per share in any accounting period exceeds the total return on the trust's benchmark index, plus 2 per cent. The ongoing charge is 1.92 per cent, but this is not untypical for a fund investing in a specialist area, and this one is making strong returns.

The trust is on a discount of around 9 per cent, but if wealth managers pile in this could tighten. So now might be a good time to tap into potential high growth from unappreciated bargains before others do, via Montanaro European Smaller Companies Trust. Buy.

Source: Morningstar, *Montanaro.

Performance

Source: Morningstar as at 15 April 2013

Top 10 holdings as at March 2013

Geographic breakdown (%)