Assuming ‘Brexit means Brexit’ and the UK leaves the European Union, these islands may be viewed
as more seperate from continental Europe as an investment bloc.

Most funds are pan-European and include UK stocks alongside their mainland European counterparts. Henderson EuroTrust (HNE) is one of only a handful of investment trusts which offers exposure to Europe while entirely excluding the UK.

It is therefore an interesting selection for a UK investor seeking to add genuine geographic diversification to their portfolio.

Strong track record

The investment trust has a good track record of outperforming its benchmark and of delivering dividend growth.

The £229m trust has been managed by Tim Stevenson for more than 20 years. He’s been at its manager Henderson for three decades.

After a tumultuous year of political shocks Europe is bracing itself for several key votes in the coming 12 months. This includes an Italian referendum on political reforms and elections in France and Germany.

The failure of many pollsters to predict both the ‘Leave’ vote in the UK’s referendum on EU membership and the victory of President-elect Donald Trump means levels of uncertainty and stock market volatility could be high as investors fret about the possible election of a populist outsider such as France’s Marie Le Pen.

‘This may sound irresponsible,’ Stevenson says, ‘but it isn’t necessarily changing the way I invest. I’m definitely concerned about it but I’m not convinced the rhetoric of the right-wing press in the UK is giving an accurate picture of the situation in Europe.’

Fully invested

Stevenson explains he is fully invested at present. ‘In a way, I’d like to be more cautious but Europe has lagged for such a long time there doesn’t seem much point. If you put the politics to one side, and I accept the politics can make you pretty bearish, and look at what is happening in Europe, the economies are actually doing OK.

‘Unemployment is coming down, growth is returning, and there’s a gradual shift away from aggressive austerity to increased fiscal spending. The glass is as much half full as it is half empty and if you look at the companies, they are doing really well.’

Typically running a concentrated portfolio in the region of 50 holdings, he doesn’t like the idea of ‘a great long list of 120 to 140 names’ says that would lead you as an investor to be indecisive.

Bottom-up approach

The approach focuses on bottom-up stock picking rather than a top-down thematic approach. ‘I like to say that we offer exposure to the 50 most interesting investments in Europe at any one time,’ he says.

Although Stevenson sees risks from a rotation out of quality into cyclical names, and has added to a previously underweight position in the banking sector, he reckons the quality growth companies in which he is invested do not look significantly overvalued.

Quoting consensus forecasts, he says his portfolio is set to deliver average earnings per share growth of 11% on a one-year view against 2.7% for the benchmark.

The average earnings multiple for his list of invested stocks is 17.3 times, only a modest premium to the wider market’s 15.3 times.

Weak sentiment has prompted an increase in the discount to net asset value (NAV) so far in 2016 but Stevenson says he is not a fan of pursuing large scale buybacks to address this issue, as it would eat into his liquidity.

Poised to deliver

Ryanair (RYA:ID), which is listed in Dublin as well as London, was reintroduced into the portfolio of late with Stevenson describing it as a long-term winner with an excellent cash generation.

Another relatively recent addition is Swiss plumbing systems supplier Geberit (GEBN:VTX).

He also likes Deutsche Post (DPW:DE) thanks to its ownership of leading mail logistics business DHL, which ties it in to growth in e-commerce.

‘I’m afraid the idea of Amazon (AMZN:NDQ) flitting backwards and forwards with drones with single item deliveries isn’t realistic; it just can’t work on that kind of scale so I think the existing guys can do well.’

Turnover in the trust is particularly low at present but Stevenson’s approach has a bias to the long-term. For example, the owner of high street fashion chain Zara, Inditex (ITX:BME), has been part of the portfolio since its IPO in 2001.

The manager has sold some names which have disappointed including paper company SCA (SCA:STO) and German TV station ProSieben (PSM:DE).

There has been some rotation within sectors such as a position in Swedish oil company Lundin Petroleum (LUPE:STO) exited in order to move into Total (FP:EPA) to gain access to the latter’s dividend.

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