SR Europe trust cuts back market exposure

Sloane Robinson’s SR Europe investment trust has pared net market exposure back to 41% over the second quarter in the face of declining visibility.

The manager Michael Hufton—who just took over from Rupert Dyson—says the company came into the first quarter almost fully invested and with limited hedging.

“We believed valuations showed modest upside while earnings estimates still looked likely to be upgraded further due to economic recovery,” he adds.

“By the end of the period, the trust was much less exposed to markets, with 75% in equities and a hedge against this of 34%, as visibility is low and the risk environment remains difficult.” (article continues below)

Over the first half of the year, the trust’s net asset value declined 12.1% against a 9.7% drop in the MSCI Europe.

“The outlook for consumer spending and corporate profitability is at best uncertain”

At stock level, the trust focused on larger market capitalisation opportunities and in more defensive areas such as healthcare, telecoms, utilities and oil.

This was also a modest contributor to poor relative performance and absolute decline as defensives generally lagged the market.

“With the European market trading on a current year PE multiple of sub-11 times, compared with a historic average of about 15x, fundamentals are supportive of a continued rally,” adds Hufton.

“However, with the age of austerity falling upon us in 2011, the outlook for consumer spending and corporate profitability is at best uncertain. We fear we may yet see a further phase of risk aversion and the company will continue, at least in the short-term, to look for more opportunities among larger stocks with greater liquidity.”