European Opportunities Trust is a tender offer that investors should not turn down

It is sad to see what was once the best performing listed fund in its sector reach the position when shares trade well below their asset value

European Opportunities Trust, once the best-performing listed fund in its sector, is embroiled in a struggle with US activist investor Saba Capital that has left shareholders with a decision over whether to sell some of their shares in a tender offer.

Tender offers give shareholders the opportunity to sell shares back to a company at a level above their current price. Trusts do this to release unhappy investors reluctant to sell when their shares trade well below their asset value. Investors in the £830m trust, run by Alexander Darwall at Devon Equity Management, have reason to be discontented. Five years ago, it was the top-performing European investment trust, but the collapse in 2020 of Wirecard, the German payments processor that had accounted for 14pc of the portfolio, damaged Darwall’s credibility. The poor performance of some of his other stocks led to the shares falling to the bottom of its sector.

Its five-year total return to Jan 9 of 19.6pc lags well behind the 53.6pc average of its peer group and the 47.4pc of the MSCI Europe index. Since its launch in 2000, however, it has beaten the benchmark with a 10.2pc average annual return against 5.8pc from the index. At the end of last year, faced with a triennial continuation vote, European Opportunities announced two tender offers. Both offered to buy back up to a quarter of the shares at 2pc below net asset value (Nav), compared to the 12pc discount at the time.

The first tender offer unveiled in October was conditional and will only take place in 2026 if the trust’s underperformance continues for another three years. This wasn’t enough for its top four shareholders with 41pc of the shares. These were institutional value investors which buy trusts on wide discounts and sell them when their share prices re-rate to Nav.

They saw no reason why they should wait. In response, in early November, the trust’s board proposed a second 25pc tender to take place this month. New York-based Saba, the most aggressive of the value investors with a then 10pc stake, demanded more.

It threatened to vote against continuation if the tender offer was not doubled to 50pc, an unprecedented move that would have halved European Opportunities.

Paul Kazarian, a Saba partner, argued that the trust would still be viable at £400m. He said it was necessary to clear out all investors who wanted to sell and prevent the trust falling back to a 15pc discount.

“This could lead to all shareholders suffering a net loss in value, even the ones who participate in the tender,” he claimed in a letter to European Opportunities chairman Matthew Dobbs. A former Schroders Asia fund manager, Dobbs dismissed this as

‘If up to 70pc of shareholders apply to sell shares, it will raise questions about the trust’s future’

“conjecture” and said the 50pc tender “would not be in the best interests of the majority of shareholders”, who would see the shares become less liquid and more expensive to trade.

The following week the trust passed its continuation vote but with 37.7pc of votes cast against. A month later, before Christmas, shareholders approved this month’s 25pc tender offer.

So where does this leave shareholders? At face value, the chance to sell at 2pc below Nav is a good offer, although not as compelling now the discount has narrowed to 8pc, reducing the uplift after expenses to over 5pc.

Richard Pavry, the Devon chief executive, hoped private investors would take part as big online stockbrokers now make it easier for individuals to respond to corporate actions. Time is short, though, with the offer ending on Jan 29. Investors selling shares outside an Isa or pension need to consider capital gains tax and should take professional advice. Investors will get their cash in the week of Feb 5. Pavry said some investors might sell their shares and then buy back in again. Shareholders who did not participate would still benefit from a small 0.65pc uplift to the trust’s Nav, he said.

Darwall has already sold £220m of investments in preparation for the tender offer which is certain to be fully taken up. The question is how oversubscribed it will be. If up to 70pc of shareholders apply to sell shares, it will raise questions about the trust’s future. Winding up the fund would be a massive blow to Devon Equity, which Darwall set up after leaving Jupiter Asset Management five years ago.

Questor thinks shareholders should sell a quarter of their holding in the tender offer and retain the rest. Other investors should look for the discount to widen after the offer before considering buying in.

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