Fidelity European Trust plc (LON:FEV) is the topic of conversation when Hardman and Co’s Investment Companies Analyst Riccardo Bindi caught up with DirectorsTalk for an exclusive interview.
Q1: What can you tell us about the note you have just published?
A1: In this note, we analyse how Fidelity European Trust has performed YTD, and highlight a few of its investments as key examples of its philosophy and process. Despite the tough start, it is worth reiterating that their focus is on stock-picking and downside risk, and this should reassure investors that FEV is continuing to add value to investors over the long term.
Q2: Are FEV’s investment philosophy and long-term track record worth re-visiting?
A2: Yes. We touched on their investment philosophy in our previous two notes, but it is worth reminding readers of the trust’s core tenets. It is a bottom-up process, which seeks out companies that can grow dividends sustainably over a three – to five-year horizon. The managers look for attractive valuations: good quality at a reasonable price, with low turnover, and hence low transaction costs. It is a cautious strategy that focuses on managing downside risk, and the fund is always fully invested.
Q3: How important is pricing power in FEV’s philosophy and process?
A3: At the AGM in May, the investment team mentioned the importance of pricing power in its stocks and gave three examples of how pricing power can arise, along with some stock examples; inelastic demand, small but critical and competitive position.
The best defence against inflation is pricing power, as it protects dividend growth in times of inflation. Fundamentally, companies with strong earnings will hold up better, and companies with pricing power usually fare better in a recession than companies that are more cyclical and have lower-quality and more volatile revenues, margins and earnings.
Q4: Do you give some examples of this process and philosophy in action?
A4: Yes, we do. Given the market turbulence so far this year, and the poor performance of some stocks, we thought it would be a good idea to touch on a few stocks to show why FEV is invested in them. They are all great examples, in different ways, of the importance of pricing power, and they are also great examples of how pricing power can arise from the fundamental, structural strengths of the business.
Q5: Do you also touch on the year so far?
A5: 2022 has been a difficult year for many asset classes, and hence we briefly mention the macro backdrop. It is worth reminding the reader that FEV’s long-term track record is driven by bottom-up stock selection. Fidelity European Trust’s managers are stock-pickers that focus on company fundamentals, and this is where FEV’s long-term value comes from. However, no fund or asset class exists in a vacuum, and, if equity markets are in positive markets, favourable tailwinds arise; conversely, challenging macroeconomic markets generate headwinds, even if only in sentiment.
