Last year, Henderson European Focus Trust and Henderson EuroTrust merged to form Henderson European Trust (LSE: HET), with £680 million of assets (after significant cash exits) and a well-regarded management team in charge. Just a few months later, though, the co-managers left Janus Henderson, and the combined trust will now be merged into the larger Fidelity European Trust (LSE: FEV).
The three- and five-year investment records of FEV and HET are already very similar at 33% and 74%. This is behind JPMorgan European Growth & Income (LSE: JEGI), on 46% and 99% respectively, but ahead of the rest of the sector. The enlarged FEV, with £2.1 billion of assets, should now have better liquidity and will aim to maintain a mid single-digit discount to net asset value (NAV). Fees should be lower, and the dividend yield moderately higher.
On the negative side, an average holding size of nearly £50 million for the 45 holdings will severely limit the ability of FEV to invest in smaller companies. This has not been a problem in recent years, with smaller companies underperforming, but it could be in the future. Investors may want to hold a European smaller companies specialist trust as well.
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Focus on growth
FEV looks for companies that produce improving dividend growth “as this indicates steady structural growth”. Their criteria include a good performance record, a good return on capital, the ability to generate cash and structural but not acyclical growth. This is summed up as “good quality at a reasonable price”. They dislike companies with high levels of borrowing.
The focus is on stockpicking rather than reading the macroeconomic or geopolitical tea leaves. “Although the outlook for continental Europe is uncertain and faces challenges, we are excited about the prospects for the individual companies in which we invest,” says co-manager Sam Morse. “European companies have often kept pace with global indices because they are less and less reliant on the domestic European economies – two-thirds of sales and profits now comes from outside Europe.”
Stocks are generally held for three to five years, with no holding over 4% of the portfolio. The largest holdings – SAP, Roche, ASML, Nestlé and L’Oréal – reflect a bias to growth, but banks, energy and basic materials are also well represented. These top five explain why FEV has fallen behind JEGI in the last year – ASML, Nestlé and L’Oréal had a miserable second half of 2024, falling 25% in value on average. Only Nestlé has had a respectable (but dwindling) recovery in 2025, rising 9%.
First-rate European funds
Both FEV and the smaller JEGI (£525 million of net assets) are first-rate funds trading on low discounts to NAV. JEGI has the higher dividend yield at 4% against 2.25% for FEV, supplementing its income with payments from capital. Exposure to smaller companies is via a holding of 2.5% in its sister trust, the £640 million European Discovery Trust (LSE: JEDT), whose performance has been revitalised in the past year by management changes.
JEDT’s largest rival in the sector has been the European Smaller Companies Trust (LSE: ESCT). This trust recently bought back 42% of its share capital following a hostile takeover attempt by Boaz Weinstein’s Saba Capital (which sold its 30% stake in the buyback), but is now regaining scale by absorbing the dismally performing European Assets Trust (LSE: EAT). This will take net assets back up to £780 million, providing better scale and liquidity and lower management costs. However, the decision to double the dividend yield to 5% by paying out of capital looks impetuous.
The European trust sector may be shrinking but in both the mainstream and smaller companies sector, investors still have the luxury of choice.
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