- An assessment of a trust with a focus on well-capitalised companies, with good management, in an unpopular region
- 43 per cent of trust's assets are invested in technology and healthcare
UK investors have a tendency to shrug off Europe as a market loaded with companies in unattractive investment sectors such as banks. It’s true that investors who own a Europe index tracker are likely to be disappointed, with MSCI Europe now roughly at the same level as it was five years ago.
But for patient investors with high levels of conviction there are plenty of attractive growth opportunities, says Stefan Gries, manager of BlackRock Greater Europe Investment Trust (BRGE). The fund offers a concentrated portfolio, with just 38 holdings at the end of August, and very low annual turnover.
Mr Gries argues that to invest successfully in Europe you have to be selective.
“There is a real bifurcation in the market – I’d be the first person as an investor in Europe to admit that there are parts of the European market that don’t lend themselves to value creation, and it is our job as active investors to make sure that we steer away from those," he explains. “One of the first questions I ask when I look at a new investment idea is: can I own this business for the next three to five years?”
Mr Gries adds that he looks specifically for companies where there is some predictability with cash flows, free cash flow conversion is high, and management teams have a proven track record of creating value for shareholders over time.
Although the trust’s share price fell by more than a third amid the sell-off of February and March, it has since made significant gains and is up by more than 20 per cent in the six months to 2 November. Mr Gries credits the resilience of the trust’s performance to the long-term fundamentals of the companies he invests in.
“When I look at how we have come through this crisis there are a number of companies that have continued to deliver very attractive growth despite the fact we are going through quite a difficult period,” Mr Gries says. “This is mainly because these companies were tapping into an end market that had such strong underlying currents they weren’t really impacted by what’s happening in the general economy.”
The managers did not make substantial changes to the composition of the portfolio during the crisis this year, instead keeping conviction in their process of backing well-run businesses with a clearly articulated strategy, high returns on capital and strong free cash flow generation.
One new position was initiated in Atlas Copco (SWE:ATCO), which the managers see as one of the most attractive industrial businesses in Europe. The company sells mission-critical components such as compressors used in petrochemical and processing plants, and vacuum pumps used in the production of semiconductor chips and equipment.
ASML (NET:ASML), a global leader in lithography equipment used in the production of semiconductor chips by big producers like Intel, TSMC and Samsung, is one of the trust’s largest holdings. Mr Gries says it has maintained very robust revenues this year because the company's product is key for its clients' tech roadmap over the next five years. It is currently the only manufacturer of lithography machines that use extreme ultraviolet light, and orders are booked years in advance.
Lonza Group (SWI:LONN) is another large holding in the fund whose share price has proved resilient. The Swiss company manufactures high-end biological drugs for the likes of Bristol Myers Squibb, Roche and Sanofi. Mr Gries says: “When we had a meeting with the management team recently they basically said business is going really well, all of our production sites are sold out and we need to invest in new capacity because demand is so strong.” He adds that they are involved in the development and production of vaccines which should supply the next leg of growth.
Elswhere, Mr Gries singles out Royal Unibrew (Den:RBREW), a brewing and beverage company based in Denmark, as an example of an excellent management team.
He explains: “The management team are laser focused on costs at the best of times, but in this crisis they were immediately taking out costs, protecting returns, and were the first holding to come back reinstating guidance and starting to beat expectations on earnings. They have raised guidance twice since the March/April slump.”
The trust has significant exposure to Danish companies. Mr Gries says geographic exposure is simply a function of where they find the best opportunities, but Danish companies often have strong governance and company structures which incentivise employees to think about returns, free cash flow generation and long-term growth.
He adds that companies held by the trust are largely global so are generally not too dependent on the success of their local economies. As an active investor, Mr Gries does not believe that a positive view on the European economy is a prerequisite for attractive equity returns in the region.
However, even Europe's outlook could look somewhat brighter now. In the trust's annual report, published last month, Mr Gries said: “We find ourselves today feeling more optimistic about the outlook for Europe than we have done in many years. The newly established European Recovery Fund marks a structural change in the outlook for Europe and provides a facility for a cohesive response to all future crises.”
Stefan Gries CV
Stefan Gries is a member of BlackRock's European equity team. He co-manages BlackRock Greater Europe Investment Trust, and the BlackRock European Absolute Return and BlackRock Continental European funds.
Before joining BlackRock in 2008, he spent two years at Scottish Widows on its two-year graduate programme. During this programme Stefan was an analyst covering auto and auto suppliers, metal and mining sectors, and small and mid-cap eurozone stocks.
He has an MA in Economics and Spanish from the University of St Andrews and is a CFA Charterholder.
