Buy European for potential discount tightening

The trust’s board said that since Edinburgh Partners was appointed on 1 February 2010 the trust had lagged its benchmark, FTSE All-World Europe ex UK Index, as well as over three and five years to 30 September 2019. It has also lagged MSCI Europe ex UK Value Index, which more closely reflects Edinburgh Partners' value investment style over three and five years to 30 September.

The trust has often traded at a double-digit discount to NAV over the past few years, at times wider than 17 per cent. But the change of manager could result in an improvement in performance and tightening of the discount.

When the trust moves to Baillie Gifford in around three months' time it will be co-managed by Stephen Paice, head of Baillie Gifford’s European equity team, and Moritz Sitte, who have co-managed Baillie Gifford European Fund (GB0006058258) since 2011 and 2014 respectively. This fund has outperformed FTSE Europe ex UK index and the Investment Association (IA) Europe ex UK fund sector average over three, five and 10 years, putting it in the first quartile of its sector in terms of performance over these periods. Its managers invest in high-quality companies with strong competitive positions which they believe can deliver strong earnings growth over a number of years.

They will take a multi-cap approach with European Investment Trust, so also invest in smaller stocks than their other fund holds and, over time, can add unlisted investments, which will be able to account for up to 10 per cent of the trust’s investments.

Moving from Schroders to Baillie Gifford in June last year narrowed the discount on Baillie Gifford UK Growth Trust (BGUK), which had often traded at a discount of around 12 per cent to 13 per cent over 2016, 2017 and the first few months of 2018. 

European Investment Trust is also the cheapest Association of Investment Companies (AIC) Europe sector investment trust, with an ongoing charge of 0.61 per cent, and that is likely to remain low as Baillie Gifford will be paid via a similar fee structure to the current one. And to offset any payment to Edinburgh Partners for the termination of its appointment and contribute to the costs of the transition, Baillie Gifford will waive the management fee payable to it for the first six months that it is Alternative Investment Fund Manager.

Although smaller and unquoted companies have the potential to make strong returns over the long term they are much higher risk than the listed equities the trust currently invests in – unquoted companies in particular.

European Investment Trust's value investment style – buying assets that appear to trade for less than their value – has been out of favour for many years but has shown signs of making a comeback. Baillie Gifford’s funds, by contrast, invest via a growth style, which has done well over the past few years but might not do as well going forward if value-style investing comes back into favour. As a result, the ratings on a number of Baillie Gifford investment trusts have fallen recently.

European Investment Trust’s share price has already risen and the discount is not as wide as it has been. At market close on 9 October, the day before the manager change was announced, European Investment Trust traded at 800p a share and a discount to NAV of 10.2 per cent, according to Winterflood. But by market close on 15 October it was trading at 808p a share and a discount to NAV of 9.2 per cent.

However it could tighten further. Many of Baillie Gifford’s trusts often trade at premiums to NAV. And when European Investment Trust moves to Baillie Gifford it plans to do a tender offer for 10 per cent of its ordinary shares at a 2 per cent discount to NAV, which could help to bring in the discount or at least give shareholders an opportunity to exit at a tighter level than at present. 

James Carthew, head of investment companies research at QuotedData, adds: “It might be that for a period value does better than growth-style investing, but I don’t see that just yet. And if you buy the trust on a high single-digit discount it cushions you against underperformance.”

Many Baillie Gifford funds have also made good long-term returns regardless of market conditions.

So if you are a long-term investor seeking growth, have a high enough risk appetite for exposure to unquoted companies and to ride out periods of underperformance and volatility, and want to take advantage of potential discount tightening, European Investment Trust still looks like a good option. Buy.

European Investment Trust (EUT

Source: Winterflood, *AIC, **Edinburgh Partners

Performance

Source: Winterflood as at 16 October 2019

Top 10 holdings (%)

Source: Edinburgh Partners as at 30 September 2019

Geographic breakdown (%)

Source: Edinburgh Partners