TR European Growth pauses for breath

TR European Growth pauses for breath – over the year to the end of June 2018, TR European Growth‘s net asset value total return per share was 0.6% compared to a total return for its benchmark of 6.9%. The share price total return for the year was -3.2%. This year of underperformance and discount widening followed a period of much better performance and, because its performance fee measurement period runs over three years, the manager did earn a £1.3m performance fee for bearing the benchmark by almost 10%.

Revenue return per share was 22.06p (2017: 17.09p), a rise of 29.1%. The board is proposing, subject to shareholder approval, a final dividend of 14.0p, an increase of 21.7%, bringing the total dividend for the year to 19.0p, an overall increase of 31.0% in the dividends paid last year.

Fee reduction

A reduction in the base fee has been agreed, with effect from 1 October 2018 the fee will reduce from 0.6% to 0.5% of NAV over £500m. For assets under this amount, the fee will remain unchanged. The board said it thought about scrapping the performance fee but concluded that it incentivised the manager appropriately and enabled the fund to maintain a lower base fee than its direct competitors.

Extract from the manager’s report

The company lagged the benchmark for the financial year due to a collection of stock specific issues causing earnings downgrades exacerbated by stock markets being highly focused on earnings momentum. The principal culprits weighing on the company’s performance were Italian clothing retailer OVS, which warned on trading after the poor weather in the first calendar quarter in 2018 and had to write down its investment, as well as further reducing exposure to its minority interest in Swiss retailer Charles Vogele. We do not think the business is fundamentally broken and consider the equity to be cheap. French flash sale site SRP Groupe persistently failed to hit forecast sales and margin projections. We disposed of the position as our growing reservations about the business model were exacerbated by our lack of faith in the management team. Ion Beam Appliances (“IBA”), a Belgian proton therapy equipment manufacturer whose products are used for treating cancer, suffered as it failed to deliver new orders following a couple of strong years which had boosted market expectations to levels that, it subsequently turned out, were not achievable. We have added to the position as we view the IBA market position as being strategic; there are only two serious players in proton therapy and we are of the view that it will take market share for cancer treatment in the years to come.

The stocks that weighed on performance were partially offset by strong performance from names such as French investment company Tikehau Capital, which focuses on alternative assets. The stock performed well in the period and remains attractively valued. Performance from Dutch listed speciality metal and mineral products company AMG Advanced Metallurgical was also strong, partly due to the attractive Tantalum price, but mostly as a result of a re-rating of the equity as the stock market understood that their lithium business was very well positioned in a world where lithium ion batteries are likely to be the principal energy source for cars. We benefited from the investment in French supplier of linings for Liquified Natural Gas (“LNG”) container ships, Gaztransport & Technigaz, which began to receive orders after a quiet spell whilst energy prices were low. Their very high market share and the strong demand backdrop for LNG leave this company well placed for the future.”

TRG : TR European Growth pauses for breath

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