BlackRock Greater Europe Investment Trust plc (LON:BRGE) is the topic of conversation when Edison Group’s Head of Investment Trusts Robert Murphy caught up with DirectorsTalk for an exclusive interview.
Q1: How did BlackRock Greater Europe Investment Trust fare in last year’s macro driven market?
A1: Well, last year was a tough year for the trust. As you say, it’s a capital growth fund, we had rising interest rates and inflation which tend to depress the earnings of growth companies so it suffered from that. In addition, it had some Russian exposure which you had to write down to zero over the year which obviously was a one-off factor which won’t be repeated. They also had as couple of issues with some of the investments which didn’t do quite as well as expected but the core companies like Novo Nordisk and LVMH in the luxury good sector performed strongly.
The last six months have seen an improvement in performance and it’s worth focusing on the longer term performance of the trust which still remains excellent. It’s outperformed the sector peer group over the last 10 years by about 15% and about 17% over 5 years, despite this weaker year.
So, I think focussing on the long term is the key with these kind of funds and the manager invest for the long term.
Q2: What can you tell me about the key characteristics of BRGE’s portfolio companies?
A2: The portfolio itself is built out of an opportunity set of about 2,000 companies and it only picks the highest conviction 35-40 ideas out of those. It has good concentration and the top ten, for instance, are 52% of the portfolio so it has high conviction in the companies. Many of these are actually global leaders in their industry which means that they’re not completely tied to what happens in Europe in terms of the economy or market.
The manager believes that the market is underestimating the earnings prospects of those companies over the longer term.
The key considerations in choosing a company are its return on cash characteristics so they like highly cash generative businesses that can deploy that cash into growth opportunities at high returns, a strong corporate culture and also the ability to control cost and to also have pricing power, particularly in an inflationary environment.
Q3: Why would you say that the manager is relatively upbeat about the prospects for the European economy?
A3: The European market is attractively valued, certainly relative to the US and the global market, sentiment is depressed and in addition, the multiple compression that we’ve seen, the manager believes is largely complete now.
Remember, in terms of the companies they’re investing in, those earnings, cash flow and growth fundamentals are going to matter more than if the market’s rotating from one theme to another in the shorter term.
If you look at the economy as a whole, corporate and consumer balance sheets are in pretty good shape in Europe, certainly post the financial crisis, and we’ve seen a decade or more of deleveraging since then so debt levels are manageable.
Labour shortage means that actual consumers are getting wage increases but those are not too severe and are manageable by most corporates. At the high end of the consumer businesses, those luxury goods names like LVMH and Ferrari, those are doing well because they’re actually benefitting from the environment. They tend to have more financial assets and don’t suffer from the cost of living crisis to the same degree as consumers at the lower end.
Q4: Having held a negative view for a long time, why is the BlackRock Greater Europe Investment Trust manager now more positive on the outlook for European banks?
A4: So, the fund is still overweight consumer discretionary, the high end type companies; tech, healthcare, industrials, but it has reduced the underweight in financials. I think the reasons there are three or four-fold:
Banks do now have stronger balance sheets, credit qualities is decent, there hasn’t been a lot of loan growth over the last few years, they’ve written back many provisions that weren’t needed during COVID, and with interest rates rising, you’re seeing less interest margins rise and that’s a key driver of revenues and profit in the banks.
So, the manager thinks there’s good potential for positive earnings revisions in those companies at this stage.