- Portfolio underperformed benchmark in H1
- Stock mistakes included salmon farmer Mowi
- Discount to net asset value remains wide
Alexander Darwall-managed European Opportunities Trust (EOT) underperformed its benchmark in the half to November 2022 as the fund’s low exposure to oil and gas stocks and the financial sectors weighed on relative returns.
And yet the veteran investor remains ‘confident’ about his strategy based on identifying companies which serve customers with ‘value adding innovations’ and compete and succeed on the world stage, ‘hugely increasing their addressable markets’.
Managed by Devon Equity Management, European Opportunities Trust’s net asset value (NAV) was down 0.4% on a total return basis in the half compared with a positive 2.1% total return from the MSCI Europe Index.
Performance was hampered by the fund’s relative absence of exposure to the hydrocarbon energy and financial sectors versus the benchmark, although since launch in 2000, European Opportunities has delivered an NAV total return of 848% against 226.3% for the benchmark.
WHAT WORKED AND WHAT DIDN’T?
Darwall, who thinks and acts as an owner and investor and not as a speculator, insisted investee companies delivered satisfactory or more than satisfactory results during the period, but their share prices did not respond as positively as hoped.
He admitted some stock mistakes, notably Grifols (GRF:BME), the Spanish blood plasma-based products play, and Norwegian salmon farmer Mowi (PND:FRA).
Grifols proved the largest performance detractor, with blood donors slow to return post-Covid and staff shortages impacting margins, while sentiment towards Mowi soured following the Norwegian government’s proposals to impose high taxes on the sector.
Another underperformer was Bayer (BAYN:ETR), the German pharmaceuticals-to-agricultural chemicals firm whose shares are ‘still held back by its legal travails in the US’.
Once again, European Opportunities’ biggest performance contributor was Novo Nordisk (NOVO-B:CPH), the world leader in diabetes treatments, while the next most important contributor was global information services company Experian (EXPN), which posted strong results and guidance.
CONFIDENT DESPITE TOUGH BACKDROP
Darwall’s macro-economic outlook made for bearish reading, with the challenges faced by Europe including the energy crisis, inflation, higher interest rates and weak demand in China for Europe’s exports.
In addition, European equities are out of favour and Darwall believes rates are likely to remain high due to embedded inflation.
However, he remains confident about his strategy and believes that the results of clinical trials and drug approvals, new customer wins, profits growth and technology breakthroughs should trump macro concerns.
‘Our companies, typically, have data to show the superiority of their products or services; they can price for the value delivered; and they are serving customers who can and will pay,’ he explained.
‘This approach contrasts with more consumer-facing and fashion-orientated strategies, which we believe are vulnerable to a further squeeze on consumers’ disposable incomes. We look forward with confidence.’
THE NUMIS VIEW
Numis commented: ‘Alexander Darwall has a strong long-term record but his performance now looks disappointing over three and five years. The fund has a continuation vote approaching in November 2023 and it will be interesting to see if the company comes under any pressure in advance of the vote, given that the shareholder register now includes a number of value-orientated investors.’
The broker explained that a management fee reduction will be welcomed by investors and pointed out the shares are trading on a 13% discount to NAV ‘with the board seeking to maintain single-digits through buybacks’.
Unfortunately, ‘the nature of the register means that we believe it is unlikely to see a significant narrowing of the discount in the near term, given value orientated investors are likely to be sellers into any discount narrowing.’
