Darwall’s £382m trust has an outstanding long-term track record, and is the leading Europe-focused trust over three, five and 10 years. However, it has had a shaky past year of fourth quartile returns and has underperformed its benchmark over the past six months.
For a long time the portfolio has benefited from the health of companies selling into emerging markets, but as those weakened last year, the trust underperformed.
“Growth rates in the major emerging markets – China, Brazil and India – all fell markedly from earlier expectations in 2013,” Darwall said.
“Thus 2013 marked the reversal of the pattern of preceding years that saw strong emerging markets growth and weak performance in developed economies.”
“This reversal explains in large part the fund's underperformance in the six-month period: exposure to emerging markets, a feature of the portfolio, was not the positive driver that it had been, whereas more local 'plays', notably financials, utilities and telecommunications, performed well.”
Data from FE Analytics shows that Jupiter European Opportunities has made 404.74 per cent over the past 10 years while the FTSE World Europe ex UK index is up 125.09 per cent.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
However, in the six months to 30 November, the period Darwall was discussing, the trust made just 3.47 per cent to the index’s 5.47 per cent. Its underperformance has continued, and over the most recent six months the trust has made 2.45 per cent to the benchmark’s 5.41 per cent.
Performance of trust vs sector and index over 6 months
Source: FE Analytics
The underperformance of emerging markets has been one of the most concerning features for investors over the past year.
A poor period became a terrible one in May 2013 when the US Federal Reserve began preparing to reduce its quantitative easing programme.
Performance of indices over 3yrs
Source: FE Analytics
As a consequence of his focus on emerging markets, Darwall has been unable to match the startling returns of many of his peers, who have rushed into cyclical and undervalued companies and the European periphery to benefit from the snapback in these sectors.
Henderson European Focus made 44.18 per cent in share price terms in 2013, while the European Investment Trust made 39.56 per cent.
Jupiter European Opportunities made 23.87 per cent, putting it seventh out of eight trusts in the sector; however, it has to be noted that it only narrowly underperformed its benchmark, which made 25.18 per cent.
In 2012, just one year previously, the trust was way ahead of its peers, returning 53.83 per cent.
Source: FE Analytics
The manager says that he is sticking to his guns and will not be changing his style.
“Our strategy remains the same: we identify companies that provide differentiated products or services and get well rewarded for so doing,” he said.
“While it is clear that exposure to emerging markets is not, if ever it was, a panacea, we are confident that 'our' companies are well placed to succeed in many markets.”
“Whilst there are always protectionist impulses, the drivers of globalisation, leading to productivity gains, are still in place. A good proportion of these gains accrue to owners of capital.”
“For this reason we remain confident that there are good investment opportunities and that our process for finding them is still an appropriate one.”
Darwall acknowledges that poor stockpicking was also a contributing factor at times; for example he says the trust’s holding in CGG, which manufactures equipment and collects data for seismic surveys, hindered performance.
“Against that there were notable successes: the electronic digital payments companies Ingenico and Wirecard performed well; our decision to retain a big position in Reed Elsevier, which controls legal, scientific and personal information, was vindicated by its strong showing; likewise, the decision to keep Novozymes, the world's leading industrial enzymes company, proved to be wise as it has contributed significantly to performance,” he said.
“Amadeus, the Spanish-listed world leader in its field of air travel IT, again performed well. Like many of the winners in the portfolio, it is a beneficiary of the development of digital technology, extending its reach, offering new and better monetised services.”
Despite the dip in performance, the trust is still trading on a small premium of 1.4 per cent, although this is not as high as the 5 per cent it has reached this year.
Tom Tuite Dalton, analyst at Oriel Securities, says that the trust remains a core recommendation of his despite the recent sluggish performance.
“The manager remains focused on owning companies he feels are transparent, which he can understand, and predict with some confidence future earnings,” he said.
“As a result, he has never had much exposure to deep cyclicals or to commodities and this is likely to remain the case.”
“The portfolio may be concentrated at around 30 holdings, but the strategy, as well as having a compelling logic about it, appears to have worked well over time. The manager’s attitude to risk also appears sensible: and so it should, given he himself is a significant shareholder in the trust.”
