BlackRock Greater Europe Investment Trust plc share price, company news, analysis and interviews

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.

BlackRock Greater Europe Investment Trust plc (LON:BRGE) is the topic of conversation when Edison Investment Research Managing Director Rob Murphy caught up with DirectorsTalk for an exclusive interview.

Q1: Rob, could you describe BlackRock Greater Europe Investment Trust’s philosophy and processes?

A1: Edison put out a note on the 19th of November which was titled ‘Philosophy and process shining through’ so it’s a good place to start with that.

BRGE is really focused on capital growth, it’s an all-cap fund so it looks at both larger and smaller accounts and it’s pretty focused so about 30 to 45 names typically, and they look at both developed Europe and also some emerging European countries.

It’s managed by Stefan Gries who does the developed part of the portfolio and Sam Vecht who manages the emerging European parts and they’re backed up by the BlackRock equity team which has 21 investment professionals. Obviously, they have access to the whole of the group resources and corporate access which is very important for them because they like to see companies and, obviously ask them all the important questions they need to know.

The focus of the companies themselves is very quality driven, they look at good balance sheets, strong management that has demonstrated an ability to grow that can articulate well what their strategy is. They focus on companies that deliver high returns on capital but then they’ll also have the options to deploy that capital using strong free cash flow to fund further sustainable growth.

They like something extra in the companies they manage, a special feature that could be a desirable or unique product, brand, certain types of contract structures and they take a longer-term view which allows them to capture the underappreciated earnings power of these kinds of companies.

They also employ a very constant process monitoring the positions they have, every position is competing against the others for their capital so they always want to make sure they have the conviction best ideas in there. They will exercise sell discipline if information changes or if performance and valuation becomes too high for them so that’s basically the process they’re using.

Q2: How has the trust performed versus the European market and its peers in the AIC Europe sector?

A2: It’s been a good performer, as people know growth has been a good sector to be in in the markets, but they’ve actually demonstrated good performance over the longer term, not just more recently.

The trust in terms of NAV total return has outperformed the relevant Europe Ex UK indices over one, three, five, ten years and since inception back in September 2004 and relative to the peer group in the AIC, it’s basically number one in greater than three, five, ten years. It’s number two over one year so just pipped by one of the fund over one year so you can see it’s been a very consistently performing fund.

Q3: Now, you touched on the managers earlier, are BRGE managers constructive on the outlook for European equities?

A3: Yes, I think they are. We’ve seen obviously a few very positive developments coming through on COVID, we have now a number of very strong vaccine candidates now and Europe has responded with the €750 billion recovery fund which is a very significant development. That will support a number of investments that the company can actually benefit from too, especially in moving to a lower carbon future, biofuels, electric vehicles and so forth.

Having that fund behind the block is expected to reduce the risk premium on European equities and in a way, it’s helping consolidate the fiscal picture across Europe so a lot of that money will help some of the Southern European countries and could be quite significant for those.

I think the managers would also stress that you don’t have to be hugely optimistic on Europe itself to find very good companies that that can perform well because many of our companies have global brands, a lot of foreign revenues and have, again, as I said, unique products or features which attracts the company to those companies.

So, overall, they’re constructive, we saw evidence actually of the pickup in summer when we had some easing of lockdowns across Europe so there was quite a big pickups, it’s come back the other way a bit recently.

I think that’s given us a picture of what we should hopefully be able to move into next year as we get through the spring and hopefully the vaccines get rolled out.

Q4: You hinted at the portfolio earlier, could you highlight the structure of the BlackRock Greater Europe Investment Trust portfolio and some of the more recent transactions?

A4: As I said, the portfolio is pretty concentrated, the top 10 positions are about 45% of the portfolio and in terms of positioning by sector, it’s very overweight technology, that’s 15% above the benchmark, industrials and consumer services, and also a little bit on the healthcare side.

Where they’re underweight is on the consumer goods side, financials, utilities, and basic materials so they have that tilt in there and they would probably, if you look at the note, they will categorise the portfolio maybe into three areas with regards to sort of COVID.

You’ve got the resilient companies which would be things like DSV or Royal Unibrew in Denmark and there’s those that benefit from COVID such as Lonza which is contract drug manufacturing. Then there’s those that are suffering a bit typically because of less travel, which would be Safran which is aerospace and Amadeus which is travel technology but they reviewed those positions and they’re very happy to keep those on and,  obviously, they’ll benefit as we get recovery coming through.

In terms of what they’ve been adding to new companies they’ve added it has been in the technology sector, Netcompany Group in Denmark, that’s an IT services business, the Danish government is a customer and they’re helping people digitise effectively so moving processes from paper to digital processes. There’s billions of tax documents that need digitising for instance.

Another one would be ALD Automotive in France which is a corporate fleet leasing business, fears over writing down the fleet because of diesel had been over egged and 20% of the fleet is now electrical hybrid. So, although that’s a small cap, those kinds of companies can fit into this strategy. It’s on a Pe of 8, it makes a return on equity of 15 and of course, because you’re an investment trust, you can hold smaller, less liquid names because you don’t have the flows that you get through open-ended vehicles.

As a result of COVID, Stratec Biomedical Systems in Germany, basically upgraded guidance twice, it experienced supernormal demand from COVID so there was less potential for those upgrades to come through and it was no longer attractively valued. So that’s an example of something that they sold.