£1 bn Euro fund that’s bucking downward trend

ALTHOUGH Europe may be a fashionable destination to take a summer holiday, it remains deeply unpopular with UK investors. The eurozone’s fragile economic health means more money is flowing out of European funds than coming in – with outflows close to a 15-year high.

Yet some funds with a European bent are proving remarkably resilient as they invest in big (European) brand names that are enjoying business success on the wider international stage. One such vehicle is Fidelity European Values, a £1.1 billion investment trust with big stakes in luxury goods manufacturer LVMH (Louis Vuitton Moet Hennessy) and L’Oreal, owner of fashion brands such as Giorgio Armani, Ralph Lauren and Diesel.

The trust is currently managed by Sam Morse who is quietly confident that its recent success can be continued. Over the past five years, it has generated a return in excess of 90 per cent, compared to 40 per cent from the FTSE All Share Index and 67 per cent from the ‘average’ European fund.

Currently, the trust is invested across 45 companies with the overriding emphasis being on searching out businesses with resilient balance sheets that have the capacity to deliver a growing dividend on the back of strong earnings growth. If a company Morse selects stumbles – for example, by shaving its dividend – he is quick to cut his losses and move on. But if a business shows a determination to increase its dividend payments, he is content to carry on holding.

This approach explains why he has remained fiercely loyal to Swiss food and drinks giant Nestle – the trust’s biggest holding – that has an annual dividend growth record going back more than two decades. It also explains why he sold the trust’s stake in brewer AnheuserBusch, following its decision to cut its dividend in the autumn of last year in response to a mounting debt pile caused by its takeover of rival SAB Miller. ‘A dividend cut is a no-no as far as I am concerned,’ he says.

Under Morse’s watch that goes back to the start of 2011, European Values has consistently grown its annual dividends – and occasionally boosted them with a one-off special payment (2014). Yet he says future growth cannot be promised. He says: ‘There has been a big currency mismatch in recent years and sterling’s weakness has worked in our favour. But if the pound rose strongly against the euro, it could be difficult to maintain the trust’s dividend growth.’

Reassuringly, the trust has more than a year’s income in reserve that it can draw upon if the going gets tough.

While Brexit is not a big issue for the trust, Morse has ensured he does not hold European banks that have significant exposure to the UK – the likes of Banco Santander and Banco Sabadell (owner of TSB). He is also wary of many automotive companies that could suffer supply issues if a Brexit deal is not struck by the end of October.

Instead, he is more interested in some of the resilient global brands and a handful of banks with strong franchises in domestic markets, including Norwegian bank DNB and Belgian bank KBC. A recent addition to the portfolio is Spanish pharmaceuticals company Grifols.

The trust pays dividends twice a year and it has an overall annual charge of 0.88 per cent – on the expensive side. Morse also manages fund Fidelity European that is run along near identical lines although it does not have the ability to borrow that European Values does.