Fidelity European Trust: Follow the money

Hardman & Co

Over five years, Fidelity European Trust plc (LON:FEV) has outperformed UK markets, UK listed competition and European benchmarks. It “follows the money” using detailed research, leveraging Fidelity’s global capabilities, to identify mis-priced strong, growing dividends. Over 10 years, Fidelity’s stock selection has added ca.2% p.a. to returns. Around two thirds of portfolio company revenue is non-European. FEV invests for the long term and in quality businesses with downside protection, but it can face short-term headwinds and have above-market volatility. FEV’s assets are listed and liquid, but its shares trade at a 7% discount to NAV.

  • Favoured companies: FEV invests in businesses with strong balances sheets, good franchises, robust dividend growth and above-average profitability. These factors give businesses sustainable and growing dividends, and good resilience to recessions; they have also outperformed their indices over time.
  • Other advantages: Fidelity European Trust has a long-term focus, and has all the advantages of a closed-ended structure. It enhances returns through modest gearing using derivatives, and has strong ESG credentials. Europe has the advantages of a wealthy population and catch-up from a low start to vaccination.
  • Valuation: 99.9% of investments are valued using quoted prices in active markets (around five-sixths is realisable in just three days). The NAV is “real” – so any discount is anomalous. The discount of 7% is below low-run averages but above peers, whom FEV has outperformed. FEV pays a modest dividend.
  • Risks: FEV has seen periods of short-term underperformance, when its investment style has been out of favour – typically when the market’s preference has been for lower-quality, more cyclical stocks assets. Usually, recovery has been swift. COVID-19 remains an uncertainty. There are European sentiment issues.
  • Investment summary: Fidelity European Trust has outperformed its peers, benchmarks and UK indices with a distinctive, research-driven, sustainable and growing dividend investment approach. Its companies show faster-than-average revenue growth (ca.2x European market average) and have higher ROE and ROIC (ca.50% and 20%, respectively). It invests for “Dividend Growth at a Reasonable Price” – so its companies’ valuations are also higher. FEV’s style will not always be popular, it is likely to see some return volatility, and sentiment to Europe may vary.

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