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October Investor Forum: Shareholder value in ESG investing

Over five years, Fidelity European Trust (FEV) has outperformed UK markets, UK listed competition and European benchmarks. It “follows the money” using detailed research, leveraging Fidelity’s global capabilities, to identify mis-priced strong, growing dividends. Over 10 years, Fidelity’s stock selection has added ca.2% p.a. to returns. Around two thirds of portfolio company revenue is non-European. FEV invests for the long term and in quality businesses with downside protection, but it can face short-term headwinds and have above-market volatility. FEV’s assets are listed and liquid, but its shares trade at a 7% discount to NAV.

  • Favoured companies: FEV invests in businesses with strong balances sheets, good franchises, robust dividend growth and above-average profitability. These factors give businesses sustainable and growing dividends, and good resilience to recessions; they have also outperformed their indices over time.
  • Other advantages: FEV has a long-term focus, and has all the advantages of a closed-ended structure. It enhances returns through modest gearing using derivatives, and has strong ESG credentials. Europe has the advantages of a wealthy population and catch-up from a low start to vaccination.
  • Valuation: 99.9% of investments are valued using quoted prices in active markets (around five-sixths is realisable in just three days). The NAV is “real” – so any discount is anomalous. The discount of 7% is below low-run averages but above peers, whom FEV has outperformed. FEV pays a modest dividend.
  • Risks: FEV has seen periods of short-term underperformance, when its investment style has been out of favour – typically when the market’s preference has been for lower-quality, more cyclical stocks assets. Usually, recovery has been swift. COVID-19 remains an uncertainty. There are European sentiment issues.
  • Investment summary: FEV has outperformed its peers, benchmarks and UK indices with a distinctive, research-driven, sustainable and growing dividend investment approach. Its companies show faster-than-average revenue growth (ca.2x European market average) and have higher ROE and ROIC (ca.50% and 20%, respectively). It invests for “Dividend Growth at a Reasonable Price” – so its companies’ valuations are also higher. FEV’s style will not always be popular, it is likely to see some return volatility, and sentiment to Europe may vary.
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