Current portfolio positioning
Given the manager’s preference for companies at the forefront of innovation, it is not surprising that pharmaceutical and life science companies have the heaviest weighting in JEO’s portfolio of ‘special’ companies (Exhibit 3), while four healthcare companies feature in the trust’s top 10 holdings (Exhibit 4): Novo Nordisk; Genus, a UK animal genetics company; BioMerieux, a French diagnostics company; and Grifols, a Spanish blood plasma company.
In fact, the manager has recently added to JEO’s holdings of Genus and Grifols. Genus is a world leader in its field and global demand for its products is increasing. There is scope for ‘tremendous’ medium-term growth in the Chinese market, according to Darwall. He is also optimistic that the company’s efforts to develop a treatment for one of the main porcine respiratory diseases will soon succeed, opening a significant new commercial opportunity. Grifols’ share price was hit by constraints on blood collection during the pandemic, and the manager took advantage of the dip to increase exposure, as he expects demand for Grifols’ services to return and grow in the longer term.
The rapid encroachment of digital technologies into many aspects of daily life has ensured that technology stocks have the second largest sectoral weighting in JEO’s portfolio, notably via exposure to several companies involved in the production of semiconductors. Global demand for semiconductors is currently outstripping supply, creating logjams in the production of some tech products, while the burgeoning growth of ‘the internet of things’ and wearable technology, has driven up demand for ever smaller and more efficient semiconductors. This has prompted the manager to increase JEO’s positions in two semiconductor producers, Germany’s Infineon and Dutch company ASML.
He has also opened a new position in French manufacturer SOITEC. This company produces energy efficient silicon wafers that increase the battery life of wearable tech, and its unique technology means that is it well-placed to benefit from the 5G rollout. Following the release of encouraging results, Darwall also recently increased exposure to Oxford Instruments, a UK company producing high-tech tools used in many specialist fields, including the production of semiconductors.
Elsewhere in this sector, the increasing sophistication of cyber criminals is generating demand for cyber security services. The manager has acquired exposure to this trend by participating in the initial public offering of UK-listed Darktrace, a company with a unique process that uses unsupervised machine learning to protect companies’ systems from cyber threats. Darktrace’s recent partnership with Microsoft boosted market confidence in the company and JEO’s acquisition has proved profitable.
Exhibit 3: Portfolio sector exposure at 31 August 2021 (% unless stated)
Sector |
Portfolio weight end Aug 2021 |
Portfolio weight end Aug 2020 |
Change |
MSCI Europe ex-UK |
Active weight vs benchmark |
Healthcare |
29.4 |
28.1 |
1.3 |
14.5 |
14.9 |
Information Technology |
26.4 |
20.0 |
6.3 |
8.6 |
17.8 |
Industrials |
19.5 |
21.6 |
(2.2) |
15.0 |
4.5 |
Financials |
13.2 |
22.3 |
(9.2) |
15.4 |
(2.3) |
Energy |
3.3 |
1.9 |
1.4 |
4.2 |
(0.9) |
Consumer Staples |
2.8 |
2.8 |
(0.0) |
12.7 |
(9.9) |
Communication Services |
2.5 |
3.2 |
(0.7) |
3.8 |
(1.3) |
Consumer Discretionary |
2.0 |
0.0 |
2.0 |
12.0 |
(10.0) |
Materials |
1.0 |
0.0 |
1.0 |
8.5 |
(7.4) |
Utilities |
0.0 |
0.0 |
0.0 |
4.2 |
(4.2) |
Real estate |
0.0 |
0.0 |
0.0 |
1.4 |
(1.4) |
Total |
100.0 |
100.0 |
|
100.0 |
|
Source: European Opportunities Trust, Edison Investment Research
The manager has also increased the portfolio’s exposure to innovative alternative finance companies, including French credit services company Edenred, which provides prepaid corporate service vouchers. In addition, he has opened a new position in French digital payment services company Worldline, Europe’s largest payment processor, which should benefit from the continued expansion of digital payments.
Other new names to the portfolio include the UK retailer Pets at Home. Demand for pet products increased during lockdown and the manager likes the company’s uniquely integrated model, which includes pet food, toys, vet services and grooming and is helping the company gain market share. This holding was topped up in June following encouraging results.
A position in Norwegian sustainable salmon producer Mowi has been re-opened due to an increase in demand during lockdown and constrained supply, which will support prices. German sportswear company Adidas has also returned to the portfolio, following recent excellent results and the brand’s rising popularity in China. Elsewhere, the manager has topped up existing holdings in video games publisher Ubisoft and in Gaztransport Et Technigaz (GTT), which provides engineering and design services to LNG carriers. This position is a play on expected growth in LNG demand. In Darwall’s view, although European demand for LNG is diminishing, he sees ‘good, sustainable demand’ for LNG in Asia.
JEO’s most significant disposal over the financial year ended 31 May 2021 was the closure of its large position in the German digital payments company Wirecard. JEO had held this company for 13 years. Portfolio exposure peaked at 14.3% in May 2019. At this point, the board requested that no further shares should be added to the Wirecard position. To limit excessively large exposures, the board also imposed a rule that no position should be acquired or added to if it represents more than 10% of total assets on the date of purchase. The manager began selling Wirecard shares, and by end May 2020, the position had fallen to 10.4% of the portfolio, although it was still JEO’s largest position at the time. Concerns about the company had been circulating in the press for some time and shortcomings identified by KPMG in March 2020 led Darwall and his team to engage with Wirecard’s management and supervisory boards, research analysts and fellow investors. These enquiries satisfied Darwall that the concerns raised by KPMG and others were being addressed.
However, in June 2020, Wirecard’s auditors, Ernst & Young, declined to sign off on the year end accounts, due to serious accounting irregularities. Darwall sold JEO’s entire holding on 18 June 2020, the day after this disclosure, although this did not prevent JEO’s exposure to Wirecard from having a very significant adverse performance impact, as the share price plunged (see the following section). It is now clear that a small number of Wirecard’s senior executives, in collaboration with third parties, perpetuated a significant, long-standing fraud. Despite the persistent rumours in the market and press speculation about the company’s accounts, this fraud avoided detection not only by the company’s supervisory board, Ernst & Young, KPMG, business partners such as Visa and Mastercard, investors, brokers and journalists, but also by the German regulator (BAFIN), for several years.
Darwall concedes that it was a mistake to build up such a sizable position in the company and he is keen to stress that ‘lessons have been learned’ from this experience. The manager points out that he is not permitted to make any new purchases in holdings that comprise more than 10% of the portfolio, a rule imposed by the board in 2019 (as mentioned above). Furthermore, he intends to err more on the side of caution. As an example of this caution, Darwall cites the case of Grenke, a German financial and leasing firm servicing smaller companies. When Grenke was the subject of similar speculation about its internal controls in Q320, Darwall closed JEO’s exposure as a precautionary measure. However, Grenke has since received an unqualified opinion from its auditors for its most recent annual report and Darwall subsequently repurchased a smaller holding of the stock on expectations that the stock will eventually recover strongly, although to date, the share price remains near its Q320 lows.
Exhibit 4: Top 10 holdings (as at 31 August 2021)
Company |
Country |
Main area of business |
Portfolio weight % |
31 August 2021 |
31 August 2020* |
Experian |
UK |
Credit data provider |
10.4 |
10.7 |
Novo Nordisk |
Denmark |
Pharmaceuticals |
10.2 |
10.1 |
Dassault Systemes |
France |
Software |
9.4 |
7.5 |
RELX |
Netherlands |
Publishing |
8.6 |
8.7 |
Genus |
UK |
Animal genetics |
8.4 |
4.4 |
Intermediate Capital Group |
UK |
Asset management |
7.5 |
5.8 |
Deutsche Boerse |
Germany |
Stock exchanges |
5.1 |
9.9 |
BioMerieux |
France |
Pharmaceuticals |
5.0 |
7.5 |
Grifols |
Spain |
Pharmaceuticals |
4.8 |
5.6 |
SOITEC |
France |
Semiconductor equipment |
3.9 |
N/A |
Top 10 (% of holdings) |
|
|
73.3 |
75.6 |
Source: European Opportunities Trust, Edison Investment Research. Note: *N/A where not in end-August 2020 portfolio.
The manager has also sold a position in UK asset manager Arrow Global following an agreed takeover and taken some profits on other top 10 holdings Novo Nordisk, UK publishing and information company RELX and Deutsch Boerse, the stock exchange owner. The proceeds of these sales have been used to fund the purchase of other, more attractive opportunities.
JEO’s portfolio is more concentrated than those of all its close peers in the Association of Investment Companies (AIC) Europe sector. It currently has 31 holdings and its top 10 holdings comprised 73.3% of the portfolio at end August 2021 (Exhibit 4). It is also notable that the trust usually has a sizable allocation to UK-listed stocks (Exhibit 5) and at present three of JEO’s largest holdings are UK-based. This also distinguishes JEO from its peers and is purely a function of stock selection. Darwall says he prefers to hold the best stock in the sector, even if it happens to be UK-listed. The trust’s top 10 list is also testament to its relatively low turnover. Nine of the top 10 positions were in the portfolio at the same time last year and some holdings have been held much longer: Novo Nordisk, Dassault and RELX have all been in the portfolio since inception and JEO has owned more than half its holdings for more than six years (see the Investment process section below).
Exhibit 5: Portfolio geographic exposure at 31 August 2021 (% unless stated)
|
Portfolio end-Aug 2021 |
Portfolio end-Aug 2020 |
Change (pp) |
United Kingdom |
29.7 |
32.5 |
(2.8) |
France |
26.1 |
26.8 |
(0.8) |
Germany |
13.1 |
18.9 |
(5.8) |
Netherlands |
12.0 |
3.4 |
8.7 |
Denmark |
9.8 |
10.1 |
(0.2) |
Spain |
4.7 |
5.7 |
(1.0) |
Switzerland |
1.9 |
2.0 |
(0.2) |
Norway |
1.5 |
0.7 |
0.7 |
Finland |
1.3 |
0.0 |
1.3 |
|
100.0 |
100.0 |
|
Source: European Opportunities Trust, Edison Investment Research