Ian Cowie: does this region offer investment trust bargains?

16th February 2022 07:37

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Russia-Ukraine tensions are simmering, but for the brave there’s the opportunity to ‘buy low’.

Buy on the bullets - or sell before the shooting starts? That’s the big question facing all equity investors this week, especially those of us with shares in businesses and investment companies based on the continent of Europe.

Russian troops massing on the borders of Ukraine caused continental bourses to slump on Monday. Then reports of tanks withdrawing on Tuesday prompted some recovery in share prices on hopes that peace might break out after all.

However, Russia’s ongoing installation of field hospitals is not an encouraging sign, as the British prime minister Boris Johnson pointed out. At the time of writing, this could go either way.

Coming down from the clouds, investment trusts in the ‘Europe’ and ‘European Smaller Companies’ sectors are trading at double the average discount to net asset value (NAV) across all members of the Association of Investment Companies (AIC). Do European shares offer bargains for the brave or are they cheap for good reason and about to get cheaper still?

These questions are close to my wallet because I am a medium- to long-term shareholder in abrdn European Logistics Income (LSE:ASLI), the owner of warehouses on the Continent that hope to benefit from the growth of online shopping, and European Assets (LSE:EAT), the medium-sized and smaller continental companies specialist.

adidas (XETRA:ADS), the German sports goods giant; Essilorluxottica (EURONEXT:EL), the Franco-Italian optician that makes a third of the world’s spectacle lenses; Givaudan (SIX:GIVN), the Swiss flavours and fragrances group; Heineken (EURONEXT:HEIO), the Dutch brewer; Nestle (SIX:NESN), the Swiss food giant; and Novo-Nordisk (NOVO) the Danish insulin-maker, are among my other major shareholdings in this geographical area.

While the average investment trust share is priced 2.9% below its NAV, the typical discount in the AIC’s ‘Europe’ sector is 5.8% and ‘European Smaller Companies’ are trading 8% below their NAV. These discrepancies reflect recent contrasts in performance figures.

The average returns from all kinds of investment trust over the last 10 years, five years and one year were 218%, 63% and 2.4% respectively, according to independent statisticians Morningstar. Meanwhile, investment trusts in Europe returned 227%, 62% and 2% over the same three periods, while European Smaller Companies delivered 318%, 70% and -0.5%.

So, contrary to the tabloid myth that the Continent is a basket case for business, European shares remain ahead of the global average over the long term but have fallen behind over the last year. Never mind the generalities, what about ASLI and EAT?

I invested at 100p per share in the initial public offering (IPO) of ASLI in December 2017, since when it would be fair to say an attractive dividend yield - currently 4.7% - has been offset by disappointing total returns. This trust with assets of £573 million sits at the bottom of the ‘Property-Europe’ sector over the last year after shrinking shareholders’ money by -4.7%.

That compares with sparkling performance by Schroder European Real Estate (LSE:SERE) and Phoenix Spree Deutschland (LSE:PSDL), which lead this sector with total returns of 36% and 18% respectively. To be fair to ASLI, its current share price of 106p this week remains ahead of what I paid and dividend income over the last four years further improves the position.

However, I know that I am not the only shareholder to be less than impressed by ASLI’s tendency to issue new stock that knocks the market price, as it did when the latter peaked at 130p last summer. No wonder City cynics claim that ASLI is better at gathering assets than growing shareholders’ capital.

EAT also demonstrates the danger that a high yield may mean low - or no - total returns. Its mouth-watering 7.5% dividend yield is offset by total returns over the three standard periods of 272%, 48% and 0.8%. Only the last, very short-term, figure beats its sector average, and the difference is insignificant.

More positively, EAT’s top 10 underlying holdings include Nordic Semiconductor, a Norwegian business that should benefit from the global shortage of digital chips; Interpump Group (MTA:IP), an Italian hydraulics specialist; and Lectra (EURONEXT:LSS), which is a French software company that serves the fashion industry. All offer scope for growth that may justify EAT’s practice of boosting dividend distributions with capital returns.

So this small shareholder intends to continue holding continental European shares, despite swashbuckling politicians and the knowledge that tanks are manoeuvring over the horizon in snow-bound forests.

Here and now, I am very glad I got rid of all my direct exposure to Russia when I sold all my shares in BlackRock Emerging Europe (LSE: BEEP), immediately after reading about the Novichok nerve agent attack on the Skripals in Salisbury four years ago. Sometimes, as I may have pointed out before, doing the right thing morally is also the right thing to do financially.

More recently, I sold all my Chinese shares a couple of years ago after reading about the alleged “genocide” of its Uighur Muslim minority. Many more British investors have exposure to China than Russia - or even continental Europe - whether they know it or not. For example, Scottish Mortgage (LSE:SMT), Britain’s biggest investment trust, allocates nearly 14% of its assets in China; its second-largest geographical allocation.

I mention my disinvestments from China and Russia against a background of recent talks between Chinese and Russian leaders, Xi Jinping and Vladimir Putin, in opposition to the West. If the macro-economic and political situations take a turn for the worse, investors wouldn’t want our life savings to be caught on the wrong side of that divide, would we?

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Abrdn European Logistics Income (ASLI); Adidas (ADS); European Assets Trust (EAT); EssilorLuxottica (EL); Givaudan (GIVN); Heineken (HEIO); Nestle (NESN); and Novo-Nordisk (NOVO) as part of a globally diversified portfolio.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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