Ian Cowie: 11% yield and out of favour, time to top up

An investment trust purchased last year has given our columnist short-term pain. In pursuit of long-term gain, more shares have been bought in an attempt to ‘buy low’. 

How do you fancy an eye-stretching dividend income of 11% that increased by an average of 4% per annum over the last five years? I had better say straightaway that this investment trust is strictly for the very brave investor - arguably, verging on bonkers.

As a matter of fact, I did buy some more for myself earlier this month on the basis that the best time to invest is often when we least feel like doing so. That’s when confidence and prices are depressed, and buying low is often - but not always - the first step toward bagging a bargain.

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Regular readers may have guessed by now that I am talking about European Assets Trust, which focuses on medium-sized and smaller companies on the Continent. Europe’s worst war since 1945 has not only caused many deaths but it has also destroyed wealth and stock market confidence.

That’s why the average trust in the Association of Investment Companies (AIC) ‘European Smaller Companies’ sector has lost 31% of shareholders money over the last year. Even bigger businesses on the Continent have been battered by the conflict, with the AIC’s ‘Europe’ sector suffering a negative total return of 21% over one year.

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It’s only fair to admit that EAT has done even worse than both those awful averages, losing 36% over the same period. Nor can this £323 million trust put all the blame on the Russian leader, Vladimir Putin, because EAT lost 14% over the last five years - preceding the invasion of February 24 - and its 138% positive return over 10 years, which is the worst in its four member sector.

To be candid, even before the violence began, I had begun to wonder whether EAT was a value trap - or a share where a high dividend yield was a warning of low or no capital returns in future. I paid 145p per share in August last year, and topped up at 85p on 4 October for stock that costs just 79p now. Ouch!

On the other hand, these remain very short-term snapshots and I never invest without the intention of remaining a shareholder for at least five years - or, preferably, forever. Also, a series of stock market shocks - including Covid-19, rising inflation and interest rates - have hit smaller companies harder than most, because corporate tiddlers tend to be less diversified than bigger businesses and carry less fat to help them survive an economic winter.

European Smaller Companies, a £661 million trust managed by Ollie Beckett, Rory Stokes and Julia Scheufler at Janus Henderson, is doing best in this beleaguered sector over the last year, having shrunk by 24%. Perhaps more significantly, ESCT’s total returns over five and 10 years are -2.6% and a sector-leading positive 292%.

Montanaro European Smaller Companies, with total assets of £250 million, is top over five years with a 37% total return, after 201% over the decade, but shocking shrinkage of 43% over the last year.

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So I asked Sam Cosh, who co-manages EAT alongside Lucy Morris, to peer through the smoke of war and share his view of the outlook for investors.

He told me: “Europe is cheap; the discount to America is as large as it has it has ever been.

“It is also a huge consensus avoid and global investors are underweight at record levels. A great deal of this dreadful sentiment must be because of the war and any resolution would lead to an aggressive rally.

“Small caps have been hit particularly hard and we would expect them to outperform in this scenario. We need to be clear, though, that this is not our central view.

“Concern over the geopolitical situation and worries over inflation have created extremely attractive prices for some great companies. Taking advantage of this should yield good returns in the medium term as it has done in the past during similar volatile periods.”

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Cosh has been at the helm of this trust since 2011 and so he speaks from experience. Looking much further back, Nathan Mayer Rothschild - a founder of the banking dynasty - made a fortune out of buying when others sold during the Napoleonic Wars.

He is said to have summed up his investment strategy with the somewhat insensitive observation: “The best time to buy is when there is blood in the streets.”

Few fund managers, if any, would be quite so outspoken today. But the fundamental attraction of very low valuations remains the same as it ever was, whatever we might - or might not - dare to say.

Ian Cowie is a shareholder in European Assets Trust (EAT) as part of a globally-diversified portfolio of investment trusts and other shares.