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2. Uncovering Trusts - BlackRock Greater Europe Investment Trust (BRGE) image

2. Uncovering Trusts - BlackRock Greater Europe Investment Trust (BRGE)

S1 E2 · Uncovering Trusts by Edison Group
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39 Plays8 months ago

In today's episode, Milosz dives into how BlackRock Greater Europe Investment Trust has employed its concentrated, high-conviction strategy and broad investment remit to outperform the broad Europe ex-UK market. He also discusses the trust’s current cyclical bias, its overweight positions in technology, consumer discretionary and industrials, as well as its largest holding – the Danish pharma company Novo Nordisk. Finally, he highlights the relatively attractive valuations of European equities at present.

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About Uncovering Trusts:

Uncovering Trusts is a podcast run by Edison analysts, which is released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.

About Edison:

Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: Engage and build bigger, better-informed investor audiences for our clients.

Edison covers 50+ investment trusts. Read about them here:

https://www.edisongroup.com/sectors/investment-companies/

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Transcript

Introduction to Uncovering Trusts

00:00:07
Speaker
Welcome to Uncovering Trusts, a podcast by The Edison Group, a content-led IR business integrating analyst content, digital targeting and investor engagement.
00:00:19
Speaker
Each episode will uncover the distinct features and latest developments of a selected listed investment company. So tune in to find interesting investment ideas and to stay on top of what is happening in the investment company sector.

Guest Introduction: Milos Kappst

00:00:33
Speaker
I'm your host, Rob Murphy, Head of Financials and Investment Trust at Edison.
00:00:37
Speaker
And today I'm joined by Milos Kappst, Director of Investment Trust Content at the Edison Group, who will talk about the BlackRock Greater Europe Investment Trust. Ticca is B-R-G-E. Milos, thanks for joining today. Thanks for having me.

Overview of BlackRock Greater Europe Investment Trust

00:00:54
Speaker
So, please can you start by providing a high level introduction to BlackRock Greater Europe Investment Trust for those listeners less familiar with the fund?
00:01:02
Speaker
Sure, BlackRock Greater Europe Investment Trust has a market cap of more than £500 million, and its objective is to generate capital growth from a portfolio of European companies, excluding UK, across the market cap spectrum, so ranging from small and mid cap, which now make up around 20% of the fund, up to large cap stocks, now around 80%. The trust managers are Stephen Greece since June 2017, and Alexander Dangoor, who was appointed as co-minor in September 2023.
00:01:31
Speaker
Great. And can you provide more information about Alexandra, the new manager? Yep. The trust's two managers have worked closely together in recent years as Alexandra joined the BlackRock fundamental European equity team in 2019 after participating in the company's graduate rotation program, where she was an analyst in the natural resources and European equity teams.
00:01:53
Speaker
Her experience in the European equity team has enabled Alexandra to develop a deep understanding of the philosophy of running concentrated high conviction, low turnover portfolios. And how does the trust differentiate itself versus its peers?

Comparison with Peers

00:02:10
Speaker
The trust is one of seven funds in the AAC Europe sector, four of whom have a growth mandate, though with some differences.
00:02:18
Speaker
These are Blackrock Greater Europe Investment Trusts, obviously, Bailey Gifford European Growth, which can invest in both private and listed companies. Then there is European Opportunities Trusts, that invests taking top-down factors into consideration. And JP Morgan Growth and Income seeks capital growth, but also pays dividends based on its quarterly nav. Blackrock Greater Europe Investment Trust is different in that it has a broader remit and has a relatively concentrated portfolio of typically around 35 names.
00:02:47
Speaker
Thanks. And you mentioned a broader remit. I think that also means they can invest in emerging Europe as well. Yes, that's correct. The trust can invest in emerging European markets, although there are currently no emerging market companies in the fund. Stefan considers Russia to be uninvestable following the invasion of Ukraine and the managers are finding better opportunities in developed European countries. And so what's the managers' stock selection process in finding those opportunities?
00:03:17
Speaker
The managers invest for the long-term with the investment horizon of around five years, so they want to avoid short-term market noise. Stefan regularly refers to his approach as being an investor in businesses, not a trade in shares. Companies are only considered for inclusion in the trust portfolio after thorough fundamental research and if they fulfill the following criteria.

Research and Investment Strategy

00:03:39
Speaker
First, a unique aspect such as a product or service.
00:03:42
Speaker
then a sustainable high return capital and strong free cash flow conversion, the ability to deploy cash in high return operations and finally a high quality management team. A position may be solved if there is a change in the company's original investment thesis, a business is fully valued or if a superior investment opportunity is identified. So you said the trust follows a concentrated high conviction strategy
00:04:09
Speaker
How does that show up in the trust top 10 holdings? So the trust top 10 holdings make up more than half of the fund and the largest position
00:04:19
Speaker
Approaching the maximum permitted 10% weight in the portfolio is the Danish pharma company Novo Nordisk, whose share price has performed very well due to high demand for its anti-obesity products. Novo has been in the portfolio for more than six years now. And in August 2023, the company's select trial showed that its Wigovi weight loss struck and decreased the risk of cardiovascular events by 20%. And this is important given the high prevalence of deaths from cardiovascular diseases, which are very expensive to treat.
00:04:49
Speaker
And beyond this, how is BRG's portfolio positioned, would you say? First, I should mention that the trust sector and geographic splits are an outcome of the manager's bottom-up stock selection. That said, I think it is still instructive to compare it with its reference Europe-X-UK index. The trust now has notable overweight positions in technology, consumer discretionary and industrials, with a large underweight allocation to financial stocks.
00:05:15
Speaker
In the technology sector, the trust has exposure to the semiconductor industry with holdings including ASML holding, BE semiconductor industries and ST microelectronics. The trust consumer discretionary positions include luxury goods businesses, including LVMH, Hermes International and Ferrari.
00:05:36
Speaker
Now, the trust industrial holdings are quite diverse and include names such as the Aerospace and Defense Business Saffron and the industrial transportation company DSV Panalpina. Interestingly, four sectors are not represented in the trust portfolio, as companies in these sectors do not meet the manager's quality growth criteria. These are energy, real estate, telecom and utilities, which combined make up around 15% of the reference index.

ESG and Risk-Adjusted Returns

00:06:03
Speaker
And how do the trust managers take ESG considerations into account?
00:06:09
Speaker
The managers employ ESG information when conducting research and due diligence on new investments and also when monitoring holdings in the portfolio as they believe that this can help enhance risk adjusted returns. They use both quantitative and qualitative assessments focusing on areas including environmental risks, corporate structures and capital allocation. Given its size, BlackRock has unparalleled access to company management teams and its managers seek to understand how firms approach ESG risks and opportunities
00:06:39
Speaker
and what potential impact these may have on their financial returns, encouraging change when required. The managers believe that the company's ability to manage ESG matters demonstrates strong leadership and good governance that is essential to sustainable growth. The criteria applied for the trust stock selection means that portfolios made up of businesses that score well from an ESG perspective
00:07:03
Speaker
And the managers highlight the importance of a strong corporate culture within industry companies in terms of creating value for shareholders. OK, that's assuring. And how about the trust dividend policy?

Dividend Policy and Performance

00:07:18
Speaker
While the trust has a capital growth focus and one of the lowest dividend yields in the peer group, it both employs a progressive dividend policy. The annual dividend has grown every year since the trust was launched in 2004 and over the last five years has compounded at an annual rate of around 4%. The trust has revenue reserves equivalent to around 0.9 times the last annual dividend payment at present. Great.
00:07:44
Speaker
What circumstances would show BRG performing well? The trust managers suggest that as they seek the best businesses that are based in Europe, investors do not necessarily need to have a positive view on the European economy to consider the trust. In aggregate, the fund has a reciprocal bias and below market defensive exposure, and together with its emphasis on capital growth,
00:08:07
Speaker
It should perform relatively well in anticipation of and during periods of economic improvement. Moreover, the trust discount to NAF is currently wider than its historical averages, which obviously provides additional upside potential when investor sentiment improves. Importantly, the trust has outperformed the Europe X-UK market over the last one, five, and ten years, and its NAFDA returns also rank favorably versus the other three funds with a growth mandate in the AAC Europe sector I mentioned earlier over these periods.
00:08:38
Speaker
The trust-faced performance headwinds in 2022 as growth stocks devalued during a period of rising interest rates, but this was insufficient to derail its positive long-term performance record.

Opportunities in European Equities

00:08:49
Speaker
Okay, and in terms of valuation then, are European equities attractive right now?
00:08:57
Speaker
European equities remain attractively valued versus history in both absolute and relative terms and the region is unloaded by global investors in present as witnessed by continued negative fund flows. So I think this creates an interesting opportunity as
00:09:11
Speaker
Well, a change in investor sentiment, perhaps due to economic improvement or a peak in the interest rate cycle, could provide a positive catalyst for the performance of European stocks. Once inventory, the stocking comes to an end and purchasing manager indices turn upwards, risk appetite should improve and stocks could re-rate. Hence, an investment in European equities currently appears to have a favorable risk reward profile. Well, thanks, Milos. That's been a very useful and interesting rundown. Thank you.
00:09:42
Speaker
Great. You've been listening to Uncovering Trusts, a podcast by the Edison Group. If you want to find out more about BlackRock Greater Europe Investment Trust, and indeed other investment trusts we cover, please visit www.nasa.gov.au.