Europe specialist with strong valuation discipline
The European Investment Trust Plc (LONDON:EUTP) is a focused portfolio of continental European companies chosen for their ability to outperform the market on a five-year view. Valuation is a key tenet of the investment process, with the manager working on the basis that the best-performing stocks will be those with a year five P/E ratio of 11x or less. Because of the strong valuation discipline, the portfolio may underperform peers in a bull market, although both NAV and share price total returns have been ahead of benchmark over most periods under the current management. While the main focus is on achieving capital growth, EUT also currently yields in excess of the peer group average.
Investment strategy: Selecting for value and growth
EUT’s manager, Dale Robertson of Edinburgh Partners (EP), follows an investment process that hinges on the view that future earnings, not past performance, are the best predictor of share price total returns. The concentrated portfolio of 35-50 stocks is the product of rigorous financial analysis, with EP’s investment team constructing a five-year inflation-adjusted earnings growth outlook and generating a year five P/E ratio for all prospective holdings. In formulating the process EP founder Sandy Nairn noted a clear relationship between price total return and earnings growth on a five-year view. As such, all stocks are bought on the basis of their five-year outlook, although some may achieve their valuation target sooner. The FTSE All World Europe ex UK index is used as a benchmark for performance comparison, although sector and geographic weightings are driven by bottom-up stock selection.
Market outlook: Less obvious value after QE rally
European markets have outperformed the UK and world indices since the announcement of eurozone QE in January. While the possibility of a Greek debt default has caused some investor jitters, at the time of writing it looks as though a compromise may be reached, removing a short-term source of uncertainty. However, forward P/E valuations in Europe are now c 25% above 10-year averages, similar to the US and UK, suggesting long-term investors would benefit from taking a valuation-focused approach, rather than seeking returns at any price.
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