IC Top 100 Funds update: Jupiter European Opportunities

JEO reports that over its last financial year to 31 May its net asset value (NAV) grew 38.7 per cent, less than its benchmark, the FTSE World Europe ex-UK Index, which returned 43.3 per cent. However, the this IC Top 100 Fund's share price rose 59.1 per cent, so shareholders still enjoyed a benchmark beating return. The trust's long-term performance record also remains intact, with three- and five-year NAV and share price total returns beating the benchmark by considerable margins.

As a result of its strong share price growth, the investment trust trades at a premium of more than 4 per cent, in excess of its 12- month average of 0.27 per cent. However, a number of investment trusts with good track records which have beaten their indices over the long-term have risen to premiums as investors chase their performance, according to Fin Bodman, who works on the investment trust desk at Investec Bank. "As long as the fund continues to perform then it represents good value," he says.

Not all analysts are convinced, though. Analysts at Westhouse Securities have Jupiter European Opportunities as a sell in their trading ideas. "Certainly a strong fund, but it is arguable that Jupiter European Opportunities tends to outperform in rising markets and the premium is touching a 12-month peak," they argue.

The main reason for the trust's NAV underperformance against its benchmark during its last financial year is because it was very underweight financials, in particular banks. This comes as European shares look set to rally, with some market commentators anticipating a rise in cyclicals and some, such as Ben Gutteridge, fund analyst at Brewin Dolphin, saying that an active manager may not be the way to play the anticipated recovery, preferring passives instead.

However, many other advisers still suggest Mr Darwall's funds as a way to play Europe (read more on this). Mr Bodman argues: "Jupiter European Opportunities has done very well in the rising market over the last three and five years. The manager takes a concentrated approach, which by his own admission, geographical and sector weightings play little part in. Specifically, the portfolio should be regarded as a collection of dynamic, long-term growth companies based in Europe that are exposed to growth in global trade and productivity. This is something investors should be aware of and be comfortable with. Given its long-term performance, we see no reason why they should be worried."

Analysts at Winterflood also comment that the trust's "emphasis on 'special' companies (which have durable, successful business models that can grow their top line and offer good quality risk) with no regard to the benchmark means that the fund is not a proxy for mainstream European equities and consequently, its performance will diverge at times."

Read more on how the trust's manager Alexander Darwall selects holdings

Mr Bodman also points out that despite NAV underperformance during its last financial year, the trust continues to outperform the benchmark on a monthly rolling basis. But he adds: "Sector concentration is something that should be looked at, with healthcare being one of the large exposures. Investors should also be aware the fund is at a premium and if for some reason performance declines then this may move to a discount."

Top 10 holdings also account for a considerable amount of the fund - nearly 58 per cent at the end of June.

JEO can levy an investment fee, but did not in its last financial year to 31 May because its NAV didn't beat its benchmark. In the financial year prior to this (to 31 May 2012), it did beat its benchmark but the performance fee did not kick in because the NAV did not beat the all-time high from the year before that of 316.73p, and no performance fee is payable unless year-end NAV beats that figure.

However, should the trust's NAV performance improve in future financial years then investors could expect the performance fee to kick in, which could mean the reasonable ongoing charge of 1.19 per cent rising. But if the trust increases in size it has the potential to bring the ongoing charge down.

To increase its size, Jupiter European Opportunities is undertaking a number of share issues at a premium to NAV so as not to dilute the interests of existing shareholders. Although this dilutes shareholders voting rights it should be beneficial to NAV and could increase liquidity - the ease with which you can buy and sell shares.

The trust's board ascribes its strong share price performance to a growing number of wealth managers putting their clients into the trust due to its long-term performance. "It may indeed be arguable that [Jupiter European Opportunities] is one of the beneficiaries of the Retail Distribution Review (RDR), in that the principal buyers of investment trusts focus on an exceptional performance record and a degree of marketability which ensures that they can build up - or reduce - sizeable positions in investment trust companies with relative ease," they add.

RDR came into force in January and prevents financial advisers from receiving commission, meaning they no longer have this incentive to recommend open-ended funds which used to pay this. It is anticipated that as a result investment trusts will become more popular, in particular core holdings such as global growth trusts.

Read more on investment trusts which could benefit from RDR

Read our tip on Jupiter European Opportunities

Jupiter European Opportunities share price performance

Source: Morningstar as at 22 August 2013

Top 10 holdings as at 30 June 2013