Analysts opt to underweight European Growth after revamp

Investment trust analysts have labelled the Henderson TR European Growth trust a ‘sell’ following a move by manager Ollie Beckett to take it down the market-cap spectrum.

Beckett, who replaced former manager Stephen Peak in July, has opted to slash large-cap holdings in favour of small- and mid-cap stocks, and the portfolio no longer holds stocks with a market cap above £4bn.

However, the change came amid one of the worst sell-offs in Europe for years, and it has left the trust lagging peers in terms of performance.

The trust is bottom of the European Smaller Companies sector, falling 4.3% over three years, compared to a peer group average gain of 9.4%, and analysts are concerned over the impact of the switch.

J. P. Morgan Cazenove’s Matthew Hose is underweight the trust, owing to the short-term underperformance, but said the move could boost NAV over the long term.

“Unfortunately, given the recent falls in European equity markets and the underperformance of small and mid cap versus large cap year to date, the shift has been detrimental to near-term performance,” said Hose.

Collins Stewart’s Alan Brierley has urged clients to dump the trust, warning the portfolio is too highly leveraged.

He expects the trust’s NAV – which saw a total return of 36.8% for the year to end of June, outperforming its benchmark – to fall back as a result of its gearing.

The discount has also widened sharply after the removal of the discount control mechanism (DCM) last year, and Brierley said this – combined with his fears over the NAV – had led him to recommend investors to sell the trust.

“The discount is now 19% following last year’s clumsy removal of the DCM and while this represents a margin of safety – we see downside NAV risk and advise clients to sell out of the trust.”

Henderson said the board revised the DCM as the share buybacks needed to manage it meant holding cash and large caps.

“The board wanted those assets to be better invested in opportunities in European smaller companies.

“It believed shareholders invested in TRG for its focus on small caps and would prefer their manager to pursue a smaller companies policy without the constraint of a high level of liquidity to manage a hard DCM.”