The European Investment Trust (EUT) adopts a strict valuation-based investment approach to construct a relatively concentrated portfolio of stocks that can be held for the long term. Manager Craig Armour says that monetary conditions are slowly normalizing following the extreme policies adopted as a result of the global financial crisis. He believes that this process will lead to an increase in stock market volatility, which will in turn lead to a greater investor focus on company valuations. Armour has been selectively adding attractively priced new positions to EUT’s portfolio across a range of industries. However, on balance he has been taking some risk off the table by reducing the fund’s cyclical exposure.
Investment strategy: Valuation-based stock selection
EUT is managed by Edinburgh Partners (EP), whose analysis shows that stock prices are correlated over the long term with a company’s inflation-adjusted, five-year earnings performance, but that share price moves over shorter time periods are more random. The manager and his team undertake in-depth research, seeking companies with attractive fundamentals, which are trading on a five-year (Y5) P/E of less than 11x. EUT’s typical 35-45 stock portfolio is diversified by geography and sector, and is constructed without reference to the FTSE All-World Europe ex-UK index benchmark. Gearing of up to 20% is permitted, but at end-May 2018 the trust had a net cash balance of 0.4%.
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