FIDELITY EUROPEAN TRUST: Fund delivers stellar income

Investment trust Fidelity European is a prudently managed fund with an emphasis on delivering a mix of capital return and dividend growth for shareholders.

The publicly traded trust is led by veteran investment manager Sam Morse, with assistance from Marcel Stotzel, and has a track record of 12 years of dividend growth. And with more than a year’s income tucked away in reserves, it’s likely that 12 will have turned into a healthy 13 by this time next year.

With the £1.4bn trust having the best overall performance record in its peer group over one, three, five and 10 years, it should deliver a jolly annual general meeting at Fidelity’s London offices this Wednesday.

Over the past ten years, the trust has generated a total return of 205 percent. By contrast, the average European investment fund has returned 149 percent, while the FTSE World Europe ex-UK Index has gained 133 percent.

Morse, who has had his steady hand at the helm of the trust for more than 12 years, says caution is at the heart of everything he and Stotzel do.

“We are interested in companies that are focused on growing their dividends,” he says. “These companies tend to reward shareholders with better total returns than those who keep or cut their dividends.” He adds: “But as we build the fund’s portfolio, we try to make sure these dividend-friendly companies are spread across sectors, which creates a degree of balance in the assets we manage. We also want to make sure that the portfolio is robust enough when inevitable downturns occur.”

The result is a trust made up of companies (currently 44) with sustainable balance sheets, many of which have been core interests since Morse entered the scene in early 2011, such as Swiss food giant Nestlé, Danish pharmaceutical company Novo Nordisk and Dutch computer chip company. manufacturer ASML.

“It’s a low-turnover portfolio,” says Morse. “If we like a stock and the company pays a growing dividend, we usually stick with it. We may expand our position or take a little profit from time to time, but we like it for the long haul.”

It has interests in, among others, the European banks DNB (based in Norway) and KBC (Belgium). While Morse says the regional banking crisis in the United States is a concern – especially for the health of the US economy – he is confident that contagion can be prevented.

‘I recently called DNB,’ he adds. “No deposits are coming out the door. European regulators seem to be on top of things, unlike their counterparts in the United States, allowing regional banks to operate under a more lax regime.’ Both DNB and KBC, says Morse, are providers of attractive dividends and have the potential to deliver future dividend growth. “They are essentially simple retail banks,” he adds. “They’re nothing like Credit Suisse.”

As an investment fund, Fidelity European can borrow money to increase its exposure to equities. Sometimes it can also use complex financial instruments to make money when stock prices fall. This flexibility is the main reason why the trust’s performance is superior to its £4bn sister investment fund Fidelity European over all major time periods. While the portfolios are almost identical, the latter fund is set up as an investment trust and thus cannot borrow like the investment trust.

The annual fee for the trust totals 0.92 percent, the exchange ID code is BK1PKQ9, and the market ticker is FEV. Dividends are paid semi-annually and totaled 7.7 pence per share for the fiscal year ended December 31, 2022. The shares are trading at just under £3.60.