Buy into European Assets Trust’s high income at a bargain price

A cost-effective way to tap into these payouts could be European Assets Trust (EAT) which is trading on a relatively wide discount to net asset value (NAV) of about 8 per cent (as of 22 November). This is partly because the trust has underperformed its benchmark, EMIX Smaller European Companies (ex UK) Index, over one, three and five years. But much of what has caused this cumulative underperformance has been recent performance.

The trust's NAV return underperformed its benchmark in 2016, was in line with it last year and so far this year has delivered a negative NAV return of around 9 per cent. Reasons for the trust's recent underperformance included a lack of exposure to telecoms, oil and gas, and healthcare in the first half of this year, which its manager Sam Cosh has since slightly increased. More recently, Italian credit information systems provider Cerved (IT:CERV) fell more than 24 per cent due to the departure of its chief executive officer and a poor quarterly earnings report. But Mr Cosh points out that there is no evidence of a deterioration in the company’s competitive position, and its cash generation and stability of revenues is strong.

Between 2010 and 2015, European Assets Trust’s annual NAV returns outperformed its benchmark every year, and it has often traded at a much tighter discount or premium – including as recently as earlier this year. If the trust's performance returns to form, its share price return could follow and the discount to NAV could tighten.

In the meantime, European Assets Trust is paying a very attractive level of income. It aims to pay a dividend worth 6 per cent of what its euro denominated NAV is worth on 31 December each year, and as of 22 November its yield was 7.9 per cent. The trust is able to make such a substantial payout because it partly pays dividends from capital as well as income from underlying investments, and is a reason why it has often traded on a premium to NAV.

The trust does not invest in the UK, meaning it is a good diversifier to UK equity income funds.

Last year it introduced a tiered fee of 0.8 per cent a year for assets up to a value of €500m (£442.68m) and 0.65 per cent a year for those with a value above that. So if the trust grows, its ongoing charge of 1.06 per cent could fall. It also plans to change its domicile from the Netherlands to the UK, which its board says is likely to reduce its ongoing charge.

European Assets Trust invests in small- and medium-sized companies that can be very volatile, and suffer in times of economic difficulty because they are not as established and resilient as their larger counterparts. There is no guarantee that the trust’s performance will improve and even if it does it might not be for some time. And although the trust’s shareholders are receiving an attractive dividend stream, the exact amount they get depends on the sterling/euro exchange rate.

The trust had performed well until fairly recently and is run by an experienced manager with a good record. Its ability to pay income from capital also provides it with a way to support its dividends, even if its holdings are not producing enough income. So if you are looking to diversify your equity income, and buy into what seems like a reliable income stream and growth at a discount, European Assets Trust looks like a good option. Buy. LW