BlackRock Greater Europe Investment Trust — Positive prospects for high-quality portfolio

The managers have highlighted three areas of the market that they believe can transcend short-term political and economic disruption: semiconductors, luxury goods and healthcare. In semiconductors, Asia has dominated, but European companies are now taking on greater importance. Semiconductors are an integral part of long-term growth areas, such as AI, electric vehicles and smart devices. Hence, there is increasing demand for smaller, faster and greener chips, and nations are racing to secure adequate supply chains. The EU has passed a law to reinforce its position and increase market share in the global semiconductor industry and has allocated c $50bn to support these initiatives.

Europe, with around a two-thirds share, dominates the global luxury goods market. Many of the largest European companies operate in this sector including LVMH, Ferrari and Hermès International; these businesses can generate margins that are comparable to those of major technology companies. One of the important growth drivers for luxury goods is the rising Asian middle class; however, there has recently been weakness in demand for luxury goods due to softer economies, notably in China. This has had a greater effect on LVMH, which has a wide range of aspirational brands and whose customers have been more negatively affected by high interest rates and the cost of living. Ferrari and Hermès cater to very high-net-worth customers and sell their products on allocation. Their businesses remain robust and their valuations have held up.

BRGE’s healthcare holdings are supported by ageing European populations, which are creating increased demand for healthcare products and services. Industry innovation is high, such as for GLP-1 drugs, which were used by diabetes patients and are now being used in the treatment of obesity, as well as being trialled for the treatment of a range of other conditions. Within the healthcare sector, there have been positive developments in other therapeutic areas, including gene therapy and oncology.

Performance: NAV and share price total returns of +16.4% and +15.5% respectively versus the reference index’s +15.8%.

Revenue and dividends: revenue per share of 7.35p was 7.3% higher than 6.85p per share in FY23. The annual dividend of 7.00p per share (1.05x covered) is 3.7% higher than 6.75p per share in FY23.

Share repurchases: buybacks of c 1.7m shares at an average 5.4% discount and a cost of c £10.2m. There were no tender offers during FY24 (in November and May), nor in November 2024.

The board: Chair Eric Sanderson has been on the board since April 2013 (chair since November 2016) and will step down once a successor is identified. Guidelines will be introduced for maximum tenures of nine years for directors and 12 years for the chair.

BRGE’s Russian securities: dividends paid on these are held in a custody ‘S’ account in Moscow. At the end of August 2024, the balance was c £2.5m based on the exchange rate at that date; there is no certainty that this money will ever be received and it is not recognised in BRGE’s NAV or income statement. The underlying local value of the trust’s Russian securities on the Moscow Stock Exchange at the end of August 2024 was c £23.1m, although again there is much uncertainty whether any value will be received and they are valued at £0.01 in BRGE’s NAV.

Gries reports that the European economy is bifurcated, with weakness in some old economy businesses. Purchasing manager indices (PMIs) have been below 50 for an extended period of around two years, which is the longest contraction since the 1950s. This contrasts with other areas of strong structural capex, including AI and energy transition. Some businesses are experiencing a post-COVID 19 normalisation, the Chinese economy has been weaker than expected, while the geopolitical environment is the riskiest it has been in the last 50 years.

However, the manager reports that there is stabilisation in some soft areas of the economy, interest rates are coming down and household and corporate balance sheets are in good shape. An increase in investment should lead to higher earnings growth, although there is likely to have been some spending delays, rather than cancellations, ahead of the US presidential election. This leads Gries to expect a stronger European economy in H225, which should be reflected in the market ahead of time. He reiterates that the European stock market is not the European economy, with 60% of the revenues of companies in the broad 600-stock index generated outside of the region.

The manager highlights that the structure of the European market has changed over the last decade with higher weightings in capital goods, semiconductors and pharma/biotech/life sciences stocks and lower allocations to energy, banks and telecom companies. He views the overall changes as an improvement in the quality of the European market.

BRGE’s 10 largest holdings are shown in Exhibit 1. At the end of November 2024, they made up 51.9% of the portfolio, which was modestly higher than 50.4% 12 months earlier; six names were common to both periods.

Commenting on some of the trust’s largest holdings, Gries says that while Novo Nordisk’s share price has pulled back, the managers continue to like the obesity market, which they believe is in an early growth innings. They estimate $150bn in peak revenues and they expect the obesity market to remain a two-horse race between Novo and Eli Lilly, with further opportunities both in the US and overseas. Novo is growing its cash flow at 25% per year, which the managers expect will continue.

ASML had a disappointing Q324 update and poor 2025 guidance due to a reduction in Chinese assumptions for the next two years. However, Gries believes in the huge growth potential of AI and explains that in the development of AI chips there are many processes, each of which has up to four suppliers. The exception is lithography, where ASML is the only player, so while the company is going through a weaker patch, the managers believe that the company’s long-term outlook is very favourable.

Schneider Electric is viewed as a beneficiary of a capex renaissance and the intense need to upgrade infrastructure. Gries comments that the amount of money required is enormous, while many of the programmes are government backed. He says that historically, when PMIs were at current levels, Schneider’s sales would be declining by 5–10% per year. However, despite weak PMIs, the company is growing its revenues and the order book growth is even stronger, helped by the upgrade of public and office buildings. Schneider has a very robust product pipeline in the US and is seeing similar development opportunities in Europe and elsewhere across the globe.

In the 12 months to the end of November 2024 (Exhibit 2), there were two notable changes in BRGE’s sector exposure: a 6.3pp higher weighting in industrials and a 10.1pp lower allocation to technology stocks. Its largest active positions versus the reference index were overweight industrials (+10.8pp) and consumer discretionary (+8.9pp) and underweight financials (-9.7pp) and consumer staples (-5.9pp). There continues to be zero exposure in three of the 11 market sectors, which together made up 11.1% of the reference index at the end of November 2024.

Exhibit 4 shows that in the 12 months to the end of November 2024, there was a meaningful 5.1pp reduction in BRGE’s Danish exposure and the largest active weight at the end of the period was the Netherlands (+10.9pp).

During FY24, portfolio turnover was c 22%, which implies a c five-year holding period. The important transactions were a new position in L’Oréal and disposals of DSV and Sartorius Stedim.

L’Oréal is the largest global cosmetic company with a diverse product portfolio ranging from mass-market to luxury. Its ongoing R&D and technology and data analytics provide a competitive advantage, while continued expansion into emerging markets provides growth opportunities and potential for margin expansion as customers aspire to premium products.

DSV had been in the portfolio since 2016, but the emergence of red flags lowered the managers’ conviction in the investment thesis. The company announced a $10bn exclusive logistics joint venture with Saudi’s Neom city project, which raised concerns about corporate governance, capital intensity and a shift away from DSV’s core strategy, along with execution risks. Also, the highly regarded CEO stepped down after 15 years and DSV’s organic growth was negatively affected by lacklustre global trading volumes.

Sartorius Stedim experienced a revenue decline in the first nine months of 2023 and had to lower full-year sales and earnings guidance due to lower demand and excess customer inventories. The company also acquired Polyplus in 2023, which the managers considered was an overpriced transaction and raised questions about capital allocation and the merits of buying growth during a period of weak demand. To fund the deal, Sartorius Stedim undertook a dilutive equity raise.

There are six funds in the AIC Europe sector following the merger of two Janus Henderson Investors funds; BRGE is mid-sized ranking third. The trust’s total returns are above average over the last one, five and 10 years, ranking fourth, fourth and first respectively. BRGE’s three-year performance continues to be negatively affected by the de-rating of growth stocks in a rising interest rate environment between Q421 and Q222. The trust has the narrowest discount, an above-average ongoing charge and level of gearing and a dividend yield that is 70bp below the mean. The below-average yield is not surprising given BRGE’s growth focus.

Morningstar classifies four companies, including BRGE, as large-cap growth funds, with Henderson European Trust and JPMorgan European Growth and Income as large-cap blended funds. All of the companies have different features: Baillie Gifford European Growth can invest in both private and listed companies and European Opportunities Trust’s manager invests by taking top-down factors into consideration. Further analysis from Morningstar data show that BRGE is the second most concentrated fund to European Opportunities Trust in terms of the lowest number of holdings and the highest percentage of the fund in the top 10 holdings. Considering style breakdown, BRGE has the highest growth exposure at c 77% versus an average c 58%, the second lowest value exposure at c 5% versus c 13% and the lowest core exposure of c 18% versus c 28%. The trust also has a slightly higher than average cyclical sector exposure (c 32%), a below-average defensive sector exposure (c 18%) and an above-average economic sensitive exposure (c 50%).

Commenting on BRGE’s performance in FY24, Gries says that it was a decent year with an NAV total return outperformance versus the reference index, and modest share price underperformance. The managers point to a diversified list of top positive contributors, which was achieved by being part of a large, well-resourced investment team. Positive contributors included RELX and AIB Group. RELX has experienced a step change in its organic sales growth profile due to investment in new products. Rather than just selling data, the company builds state-of-the-art analytical tools. RELX is also generating revenue from its investment in AI tools. AIB Group has been gaining market share in Ireland and has been undertaking share buybacks.

BRGE’s negative contributors included STMicroelectronics and LVMH. STMicro lost market share in China and its industrial business shrunk by a half. The company had to lower its full-year guidance twice in 2023, due to weaker demand in important sectors, such as automotives and industrials. LVMH was hurt by Chinese demand weakness. Typically, weaker markets are offset by stronger ones; however, along with China, there was softness in the US and Europe.

Over the last decade, BRGE’s cumulative upside capture rate was 122%, illustrating that the trust is likely to outperform the market by around 22% in months where European ex-UK shares are rising. The downside capture rate was 116%, suggesting that BRGE tends to underperform to a lesser degree in months of European ex-UK share price weakness.

The trust’s cumulative downside capture rate increased during a period of underperformance in a rising interest rate environment between Q421 and Q222, so BRGE may actually be more defensive during falling markets, so could suit investors seeking to protect their capital, while gaining exposure to an asset class that has generated excess returns over the long term compared with other major asset classes, such as bonds or cash.