Investing in European funds gives investors "a luxury of choice"

Investors should profit from the consolidation of European funds brought about by a number of mergers, according to Kaylie Pferten

Henderson European Trust (LSE: HET) was formed last year by the merger of Henderson European Focus Trust and Henderson EuroTrust. It has 680 million assets (after large cash outflows) and a highly regarded management team. The co-managers, however, departed Janus Henderson a few months later, and the merged trust will now become part of the larger Fidelity European Trust (LSE: FEV).

FEV and HET's investment records over the last three and five years are already fairly comparable, at 33 and 74 percent, respectively. The sector as a whole is ahead of this, but JPMorgan European Growth and Income (LSE: JEGI) is behind it at 46% and 99%, respectively. Maintaining a mid-single-digit discount to net asset value (NAV) is the goal of the expanded FEV, which now has 2.1 billion in assets and more liquidity. The dividend yield should be somewhat higher and fees should be reduced.

The 45 holdings have an average holding size of almost £50 million, which will significantly restrict FEV's capacity to make investments in smaller businesses. Although smaller businesses haven't performed well in recent years, this might change in the future. Investors may also wish to maintain a specialized trust in smaller European businesses.

Pay attention to growth.

Companies with increasing dividend growth are sought after by FEV "because this indicates steady structural growth." They look for things like a strong track record of performance, a high return on capital, cash generation capabilities, and structural growth that isn't acyclical. "Good quality at a reasonable price" is the best way to describe this. They don't like businesses that borrow a lot.

Stockpicking is the main focus instead of interpreting the macroeconomic or geopolitical landscape. According to co-manager Sam Morse, "We are excited about the prospects for the individual companies in which we invest, even though the outlook for continental Europe is uncertain and faces challenges." Due to their decreasing dependence on the European domestic economytwo-thirds of sales and profits now originate from outside the continentEuropean businesses have frequently kept up with global indices.

The average stock holding period is three to five years, with no holdings exceeding four percent of the portfolio. A bias towards growth is evident in the largest holdings, which include SAP, Roche, ASML, Nestl, and Loral; however, banks, energy, and basic materials are also well-represented. ASML, Nestl, and Loral had a terrible second half of 2024, with their values dropping by an average of 25%. These five factors explain why FEV has lagged behind JEGI in the past year. The only company to have a decent (albeit waning) recovery in 2025 is Nestl, which increased by 9%.

Outstanding European funds.

First-rate funds with low discounts to NAV are FEV and the smaller JEGI (525 million of net assets). With payments from capital to augment its income, JEGI has a higher dividend yield (four percent) than FEV, which is between two and twenty-five percent. A 2 percent stake in its sister trust, the 640 million European Discovery Trust (LSE: JEDT), which has seen improved performance in the last year due to management changes, provides exposure to smaller businesses.

The European Smaller Companies Trust has been JEDT's biggest competitor in the industry (LSE: ESCT). This trust is currently regaining scale by acquiring the poorly performing European Assets Trust (LSE: EAT), but it recently repurchased 42% of its share capital after Boaz Weinsteins Saba Capital attempted a hostile takeover and sold its 30% stake in the buyback. This will restore net assets to £780 million, resulting in improved scale, liquidity, and reduced management expenses. It appears rash, though, to have decided to pay out capital in order to double the dividend yield to 5%.

Despite the decline in the European trust sector, investors still have a wide range of options in both the mainstream and smaller business sectors.