Rigorous metrics and an emphasis on quality have allowed the Henderson EuroTrust to achieve above average returns since the March sell-off, but also over the long term.
Jamie Ross, who has managed the fund since September 2018, looks for the companies that have been the winners of today, while keeping an eye out for those that will be the winners of tomorrow.
Ross (pictured) labels these two investment categories as ‘compounders’ and ‘improvers’, using them to balance the £300.86m portfolio and taking an agnostic approach to sectors. 
Launched in 1982, Henderson EuroTrust aims to achieve superior total returns from high quality European equities, excluding the UK.
“The EuroTrust approach is finding the good companies of today – compounders, or the good companies of tomorrow – improvers,” the manager said.
“The primary metric for compounders is to have high sustainable returns on capital” he added.
While the compounders are for the short term, improvers are marked out to be the good companies of the future. “However, on their current metrics look average,” Ross said.
“They may be loss making companies, but there’s something about them.”
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
Year-to-date, the trust has made a total return of 10.96 per cent, compared to 0.45 per cent for the IT Europe sector.
The manager argued that in a question of quality versus value, quality will win every time.
“Quality must come first,” he said. “Even businesses that happen to be attractively valued are held because of their quality. When we look at compounders, we’re valuation agnostic. However, the improvers have to be tight on valuation.”
This is a small component of a significant amount of due diligence undertook by the manager and the long research process is based on a standardised approach to analysis.
“We’ll always model the company looking at standardised assumptions,” he explained. “We’ll also always produce an investment thesis which will always be based on the same five areas of analysis.”
These five areas are compiled into a ranking framework which categorises all the company’s research metrics.
Ross said the trust’s outperformance had been driven by individual stock picks in every sector rather than the dominance of any one sector.
“I’m not a sector picker or thematic investor,” he said. “Our sector decisions have been neutral and our stock picking within the sectors has been a strong positive.”
One strong performer is Cellnex, a Spanish telecommunications infrastructure company, which makes up just over 3 per cent of the fund’s holdings.
“It has extremely long revenue visibility and clear visibility over costs,” he said. “It’s also completely unaffected by Covid.
“The beauty of the business is that the larger telecom operators are struggling.”
He explained that this is linked to various regulatory burdens, high capital expenditure (CapEx) requirements and a lack of pricing power.
“They’re looking to sell some of their most attractive assets to realise some value and raise cash to pay dividends,” he said.
“The crown jewels being the towers themselves.”
Given its position, Cellnex has the luxury of choice in Europe for all these telecom operators and increasing opportunity to buy these towers.
“It represents a big growth opportunity as they have low cost of capital and can buy them at a decent return on capital,” he added.
Ironically, Telecom Italia, one such example of the operational struggles of these large telecoms companies, is a holding within the fund.
“We initiated a position in Telecom Italia at the start of this year because the valuation had reached ludicrously low levels – it’s a classic improver,” he explained.
Ross outlined that Telecom Italia’s management team are reducing the debt burden on the business and operating a much more efficient cost structure.
Its most attractive element is the potential of an upcoming merger with Italian fibre company called Open Fiber.
This would create a fixed broadband spin-off FiberCop, creating a single national operator.
This has clear similarities with the merger of BT and Openreach, creating a situation wherein the value of the subsidy becomes greater than its parent company.
“The model that Telecom Italia have followed is very much like the Openreach model,” Ross said.
The board of directors of Telecom Italia approved a sale of a 37.5 per cent stake in FiberCop to US private equity company, KKR for $2.15bn.
He finished: “The business will be majority owned by Telecom Italia but will not have operational control.”
Performance of fund vs sector & benchmark over 10yrs
Source: FE Analytics
Over 10 years, Henderson EuroTrust has returned 250.91 per cent in comparison with 192.53 per cent from its average peer in the IT Europe sector and 122.35 per cent for the FTSE World Europe ex UK benchmark.
The trust is 3 per cent geared, has ongoing charges of 0.82 per cent, is trading at a discount to NAV (net asset value) of 8.6 per cent and has a yield of 2.4 per cent, according to data from the Association of Investment Companies.