Fidelity European Values

Fidelity European Values Plc (FEV) is an investment trust that invests primarily in mid and large cap Continental European equities. The manager does not take aggressive sector positions (sectoral active weights are kept broadly within 5% of the FTSE World Europe ex-UK benchmark). The manager seeks to generate the majority of alpha from stock selection. Stock selection, within sectors, is driven by bottom-up fundamental analysis and the manager looks for companies with strong ability to grow dividends over the next three to five years. During the last 12 months, FEV has outperformed its benchmark by 13.0% and 9.0% in terms of price and NAV total return respectively.

Investment Strategy: Continental European Equities
FEV invests primarily in mid and large cap Continental European equities. To manage benchmark risk, the manager looks to construct a portfolio that is broadly balanced, so that FEV’s portfolio sector allocations are unlikely to be more than +/-5% those of the benchmark allocations. The portfolio typically has a low beta (currently c 0.95) and the manager looks to add value by generating alpha with the stock selection. In constructing FEV’s portfolio of c 60 stocks, the manager draws heavily on Fidelity’s in-house pan-European research team of c 40 analysts. The manager looks for companies with a strong ability to grow dividends over the next three to five years and has a strong focus on downside protection. FEV can gear up to 30% of net assets, although a more typical range is 10-15%, and is currently provided through contracts for difference (CFD) exposures. FEV currently has gross gearing of 10.1% and net gearing of 7.3%. FEV aims to be a core fund for European equity allocations.

Sector Outlook: Opportunity In Uncertainty
European growth forecasts are still falling, but there are significant differences across the continent and within the large universe of companies in which FEV can invest (c 4,000). The manager sees dividend income as an important component of returns and remains focused on companies with strong cash flows that are well positioned to grow dividends over the next three to five years. Many large companies in particular have a substantial international component to their businesses, which helps to insulate them from regional economic weakness.

Valuation: Ex-Income Discount In Line With Five-Year Average
The current ex-income discount of 10.6% is below the three-year average of 13.3% and broadly in line with its five-year average of 11.0%. Its yield is in line with the sector average (2.1% vs 2.2%). As such, we consider FEV may be of interest to investors looking for exposure to Continental European equities with a mid to large cap focus.

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