Earlier this month Jupiter European Opportunities Trust’s (JEO) board confirmed that it will follow current manager Alexander Darwall when he leaves Jupiter Asset Management. The transition to Devon Equity Management, the asset management firm Mr Darwall is setting up, will take place on 15 November.
Following Mr Darwall to Devon should benefit the trust’s shareholders in a number of ways. He has an outstanding long-term performance record with this and other European equity funds. Since he started running Jupiter European Opportunities Trust in November 2000 it has delivered a net asset value (NAV) total return of 13 per cent a year versus just 4.9 per cent for MSCI Europe ex UK index, according to analysts at Numis Securities.
The trust is scrapping its performance fee, which has resulted in very high charges. For example, in its financial year to 31 May 2019, the trust’s ongoing charge was 0.9 per cent, but with the performance fee added this came to 1.71 per cent. And in its financial year to 31 May 2018, the performance fee took its ongoing charge of 0.9 per cent up to 2.5 per cent. Although the new base fee of 0.90 per cent a year of net assets (about £959m at time of writing) on assets up to £1bn and 0.80 per cent a year on net assets over this amount is slightly higher than the current base management fee of 0.75 per cent of total assets, losing the performance fee should still cut the total payable by a great deal.
The trust will also be the only way for private investors to access Mr Darwall’s stockpicking skills in the near future because he has agreed with Jupiter that Devon will not launch any Undertakings for the Collective Investment in Transferable Securities (Ucits) compliant funds for two years – the structure via which most funds available to UK private investors conform. Until recently, Mr Darwall also ran open-ended funds including Jupiter European (GB00B5STJW84), which is available to UK private investors.
However, Jupiter European Opportunities Trust had been trading at a discount to NAV recently, at one point of nearly 6 per cent, whereas in the past it has traded at a tighter discount or a premium due to of its outstanding performance. But the trust's discount has tightened: by close on 14 October it had come in to a discount of 3.5 per cent.
But James Carthew, head of investment companies research at QuotedData, says: "There's a very strong body of support for this trust, which will help keep the discount tight, so I wouldn’t say that it is necessarily looking expensive. There may be occasional opportunities to buy [at a] wider [discount], but if you are a long-term investor you shouldn't worry [about getting it at a slightly wider discount].
Analysts at broker Winterflood add: “Alexander Darwall has an exceptional long-term performance record generated through an unconstrained investment approach that is focused on special, growth-orientated companies. His commitment to the investment trust is evidenced by his sizeable personal holding and he clearly has a strong desire to continue investing. We see any weakness in the trust’s rating as a buying opportunity, although our expectation is that the trust will eventually be rerated to a premium on the basis that soon it will be the only publicly available vehicle for investors to get exposure to Mr Darwall’s investment approach.”
But there is no guarantee that Mr Darwall will continue to perform well or that the discount could tighten because he continues to be manager. David Liddell, chief executive of online investment service IpsoFacto Investor, doesn’t think the trust was trading at a relatively wide discount to NAV because Mr Darwall might not have continued as manager. “It is rather because of the asset class it invests in and recent performance,” says Mr Liddell. “Europe trusts were generally on fairly wide discounts. The manager change was well flagged in July – most people thought Mr Darwall was likely to continue managing Jupiter European Opportunities.”
Jupiter European Opportunities Trust's NAV total return was a fall of 2.7 per cent in 2018, albeit less than FTSE Europe index’s fall of 9.7 per cent.
Mr Liddell adds: “The kind of defensive growth stocks [the trust holds have] done well over the past five to 10 years, but may not continue to. I would be cautious on whether it is the right portfolio [of stocks] at the moment.”
Mr Carthew says that if value stocks start to do better it could be a headwind for Mr Darwall's growth investment style. But he also thinks that it is too early to say if value-style investing is now going to do better than growth-style investing. Although valuations are more realistic, the sort of economic conditions in which value investing tends to do better, such as rising inflation and interest rates, have not yet emerged.
Mr Liddell also thinks that this trust in particular is riskier than many Europe funds because its 10 largest holdings accounted for 76 per cent of its assets at the end of September, and its largest holding – Wirecard (WDIX:GER) – accounted for 15 per cent alone. There have been problems with this holding, which experienced share price falls earlier this year due to allegations of irregularities in its Singapore office, although it has since recovered a good deal. Mr Carthew has reduced his personal holding in the trust due to the high exposure to this one stock as he thinks that you cannot know what is around the corner for any one company.
Also, when a manager moves to a new firm a key question is what resources they have relative to their former firm and whether they will be able to spend as much time on investing, in particular if they are setting up a new asset management firm rather than going to a well-staffed, established company.
However, Mr Darwall and the trust’s deputy manager, Luca Emo Capodilista, who is also moving to Devon, are used to being a small team – they were only supported by one further analyst at Jupiter on the open-ended funds they ran. And Devon has already recruited a team of five to deal with the administrative side of the asset management business, including chief executive officer Richard Pavry. Devon plans to add more employees and has outsourced some administrative functions to allow as much time as possible for Mr Darwall and Mr Capodilista to focus on investment, and is also looking to add to its investment team.
Mr Liddell says that, ultimately, whether you invest in the trust or not comes down to whether you want to add to your European equity exposure. “What do you already have in your portfolio and what are you looking for?” he asks.
