BlackRock blitz on Europe paying off

BlackRock took swift action when its Greater European trust started to lag. With a revamped portfolio, a bigger team and a new manager, the trust is narrowing the gap on its benchmark.

European equity markets have been going through a difficult period, prompting BlackRock to take steps to boost the performance of its Greater European investment trust (GEIT). In a bid to improve returns the company has enlarged its European team, appointed a new manager and adjusted its portfolio.

GEIT has mirrored the performance of its benchmark, the FTSE All World Europe ex UK index, since its launch in September 2004. But towards the end of last year the £196m fund, formerly known as the Merrill Lynch Greater Europe investment trust, began to lag behind.

This brought swift action from BlackRock. January saw the arrival of several former Scottish Widows Investment Partnership (Swip) personnel, including Vincent Devlin who has just taken over James Macmillan’s role as a co-manager of GEIT.

Devlin and his former colleagues swelled the ranks of BlackRock’s European team from nine to 15 members. Devlin himself was put in charge of BlackRock’s Continental European fund, which has since achieved top-quartile performance. He joined MacMillan’s GEIT team in April, just as Macmillan started to reposition the portfolio.

GEIT aims to achieve capital growth through investment in large, medium and small-capitalised European companies with some investment in the developing markets of Europe.

According to figures from Morningstar, the fund is down 11.3% in the year to August 29 compared with a 3.18% fall in the FTSE All World Europe ex UK index. But the gap between the trust’s performance and its benchmark has narrowed. Over three months the fund is down 8.73% compared with a 9.42% drop in the index. Over one month it is up 2.12% compared with a 3.17% rise in its benchmark. Both the fund and the index are up 74% since GEIT’s launch.

Devlin, who now manages the continental Europe part of GEIT while Sam Vecht runs the emerging Europe part, puts the improvement down to the changes started in May. “Investing in emerging Europe has made the performance more difficult, so exposure has been reduced. In central Europe we have reduced exposure to telecoms and automobiles and increased exposure to pharmaceuticals and capital goods,” says Devlin.

The trust’s remit allows it to invest up to 25% in emerging Europe. But this year exposure has been reduced from 15% to 10%, Devlin says. “The hurdle rate for emerging Europe has increased with rising inflation, reducing the number of investment opportunities relative to western Europe,” he says. “Hence, investment trust exposure to this region has declined. But over the longer term we see great potential and expect the opportunities to increase.

In May the fund also started to lower its exposure to telecoms and the motor industry, selling holdings in OTE (a Greek telecoms firm) Telecom Austria, BMW and Daimler.

The proceeds have been invested in pharmaceuticals, which Devlin says are more defensive than telecoms, and in capital goods through companies such as Vestas wind systems and Alstom, a French turbine firm.

GEIT has large holdings in several pharmaceuticals stocks such as Bayer of Germany and the Swiss firms Novartis and Roche. This along with its heavy weightings in financials means the trust has about 43% of its assets invested in Switzerland and Germany.

But while the trust is about 6% overweight in pharmaceuticals, it is underweight against its benchmark index in financials. “We are underweight in banks but overweight in insurance, with companies such as Allianz, which is one of our largest holdings because of its attractive valuations,” says Devlin.

In July the fund benefited from its positive bias to the healthcare sector and saw several financials contribute positively towards performance. It reduced its holdings in energy, telecoms and materials and added select financials, including new positions in UBS and Société Générale.

Devlin is happy with the 47 stocks in the portfolio and the way it is positioned. With the enlarged European team now in place, he expects the trust to be able to take full advantage of future opportunities.

“The European team has been significantly improved in resources and we believe this will generate more ideas. We also have a new research process that will deliver repeatability in the performance of the fund,” he says.

In the meantime BlackRock remains cautious about the European outlook. Business confidence across Europe has been hit as companies struggle with increasing input costs and a stronger euro.

Industrial production is down in several countries, with inflation rising and economic growth slowing. Despite this the company says that as a long-term investor it considers European valuations cheap on a relative and historical basis and sees good entry level opportunities.