David Kuo chats with Sam Cosh, director at F&C and lead manager Of European Assets Trust.
The Motley Fool's David Kuo chats with Sam Cosh, director at F&C and lead manager Of European Assets Trust about investment trusts. They look at some of the main differences between investment trusts, unit trusts and exchange-traded funds. Sam also reveals some of his favourite European shares; namely, a cider maker, a sports goods company, a food producer and a sausage skin maker.
You can listen to or download the full podcast here.
David:
This is Money Talk, the weekly investing podcast from The Motley Fool. I am David Kuo, and if there is one thing that we here at Money Talk have been guilty of is that we have not talked enough about investment trusts, so we're going to put things right today, and we're going to talk about investment trusts in detail. With me in the studio is Sam Cosh, director at F&C, and lead manager of European Assets Trust. So welcome to Money Talk, Sam.
Sam:
Many thanks.
David:
Thank you so much for coming in so early in the morning. Now, there will be some people listening to this podcast today who won't know what investment trusts are, so given that F&C, or Foreign & Colonial, was the first to start investment trusts back in 1868, before you and I were born, can you please explain what investment trusts are?
Sam:
OK, well an investment trust is a collective investment fund, in many ways similar to a unit trust, but also very different. An investment trust is a listed company, which has its own board of independent directors that appoint the fund manager to manage the assets that the company owns.
David:
So what you're saying is, an investment trust is a company with shares?
Sam:
Exactly, yes.
David:
And the shares are listed on the stock market?
Sam:
The shares are listed on the stock market, so if you want to invest in an investment trust, you buy the shares on the stock market, rather than a unit trust, where you inject your money directly with the management company.
David:
So people say that investment trusts are closed end funds, so what exactly does this mean, Sam?
Sam:
OK, well a unit trust is a vehicle where you can invest directly in the assets of the trust, or take money out of the assets of the trust on a daily basis, whereas an investment trust has a fixed amount of shares listed on the stock exchange, and the assets of the company which are behind those shares are only changed depending on the performance of the assets within the company, so they don't grow or shrink depending on the investors' appetite for that fund. That's reflected in the share price.
David:
So why is there a difference between the share price of the investment trust, and the underlying value of the trust itself – why you think that has an advantage?
Sam:
Yes, because the net asset value is quite a transparent thing, you can see it on a daily basis; for example, the European Assets Trust is the trust I manage. Its underlying investments are all listed, European equities, and European equities trade, as we know, throughout the day, five days a week, and we release the NAV on a daily basis to shareholders, whereas the share price reflects the demand and supply, it's the demand of the shares from investors, and that can fluctuate depending on a whole number of reasons, but if you look at investment trusts, they can trade at a premium, or they can trade at a discount, depending on the investor appetite for those shares. Now, the European Assets Trust at the moment trades at a 12.5% discount to its NAV, and I think this reflects the fact that European shares are clearly not that popular at the moment, but if you looked across the board, and you looked at say growth and income-type products, or maybe perceived safer investments, they can trade at a premium or narrow discount. Global smaller companies are trusts that F&C trades that have narrow discount or a premium at the moment, so it very much depends on the demand for those shares at any particular time.
David:
So in your particular case, the fund that you manage – what was the name of that fund again?
Sam:
The European Assets Trust.
David:
OK, so if I bought all the shares in the European Assets Trust at a 12.5% discount, and then I sold all the shares in it, wouldn't I just make 12.5%?
Sam:
What you would do, if you owned 100% of the company, is wind the company up and cause the fund manager to sell the underlying investments, and you would realise 12.5% minus your costs.
David:
And it's as simple as that?
Sam:
Yes. Because there has been corporate activity in the sector in the past, and the board has a job to look after minority shareholders, there are ways to avoid situations like that, if it's detrimental to minority shareholders, and we have discount control mechanisms. We will go out and buy our own shares in the market, if the discount widens too much, and because it's at a discount to NAV, that's a very attractive thing for shareholders to do.
David:
OK, so does that mean that in general people should be buying investment trusts when they're at a discount to the NAV, rather than when they're at a premium to the NAV?
Sam:
I would suggest yes, because taking it, a wider discussion, that sort of really reflects the current consensus view on a particular area, and I would sort of caution that when things are at a premium to the NAV, it may well reflect that that's the current popular area to be in, and that's not necessarily the right time to invest there, whereas things are at a discount, maybe that is the time to invest, and we've seen a very high profile launch in the last couple of years, where the shares went to a premium. There was a significant issue of shares, and well, we've seen what's happened to the performance of that fund. So investment is always quite tricky, but the best thing to do, to borrow a Warren Buffett quote, is to be greedy when people are fearful and be fearful when people are greedy, and maybe discounts can reflect that. Now, maybe somehow there's discounts because there's something structurally wrong with the fund; maybe the fund manager isn't very good; maybe there's a structural problem with the underlying asset class – I don't know, so it's difficult to have a broad view on that.
David:
OK. Something that we do quite like here at The Motley Fool are exchange-traded funds, so how does an investment trust differ from an exchange-traded fund, because it sounds to me as though the two are quite similar?
Sam:
Well, they are similar in that they're listed, but I think the point about an exchange-traded fund, it's a tracker fund, which is good for large liquid investment areas, but investment trusts, you'll find it's good for actively managed funds, very often in niche areas, and I think it's quite a good example again to use the European Assets Trust, which invests in European small and mid companies. You cannot get an exchange-traded fund which covers that area, and that's a very dynamic, exciting area. It's also an area where you can be rewarded handsomely for good stock picking, where active management actually does pay, so I'm sure there's a place for exchange-traded funds, but if you want focused, high conviction investment in actively-managed areas, then investment trusts are a very good way of getting that.
David:
OK, now at the outset, I introduced you as a lead manager of F&C's European Assets Trust. Europe is something that people are very fearful of right now. As a manager of European shares, what are your views about Europe? – apart from being terrified!
Sam:
I'm not terrified at all. I think what people make the mistake of is sort of talking about Europe as one homogenous area, when it is very, very different. You've got, on a country level you've got the strong countries, in Norway, for example, Sweden, Germany. We know where the weak countries are, but on a stock level, you've got some great areas to invest. You've got the mittlestand businesses in Germany, Switzerland; you've got the fashion brands of Italy; you've got the food and nutritional companies of Ireland, so talking about Europe as one homogenous area is very dangerous. Actually, when investors abandon a region or an area, it can be very positive for returns. The future returns, one of the best indicators of good future returns is the price at which you buy the assets in the first place, and you're getting great prices. I think if you look at Ireland, it's a very good lesson for investors. I have a significant amount of funds invested in companies that happen to be listed in Ireland, about 20% at the moment, and in 2011, the end of 2011, it was very difficult not to read a paper telling you how dreadful Ireland is, and you would have been foolish to invest in Ireland, but looking at on it, it was the best-performing stock market in 2011. So it provides great opportunities when investors abandon regions wholesale, because it means you can buy good assets at good prices.
David:
But isn't the one common thread that sort of runs through most of Europe is the euro itself? – so whilst you're saying that companies may perform well, at the same time, if the euro were to fall out of bed, wouldn't you actually decimate your investment?
Sam:
I'm not sure about that. I mean firstly, I don't have a crystal ball, of course, but I don't think that's going to happen. I think there is a political will which is, it's sometimes quite difficult to see, but the latest summit helped to provide some indication of that, and there is a sort of financial imperative. We might not have the same countries in it now, in the future than we have now, but I tend to try not to get too distracted about that, because my philosophy is, if you invest in really good businesses, they can do well no matter what the environment, and particularly at the moment I think good stock picking can override these macro concerns, and of course when we see companies, we ask them about that – what are your contingency plans, etcetera? But when a company has got a good, wide moat around it, has got good growth prospects in niche areas that aren't dependent on a domestic European economy, yes, there'll be volatility, but if someone told me the euro was going to collapse now, would I change the portfolio – no, I wouldn't. I invested in good-quality businesses, and I try and do it at very good prices, and I think over the long term you should be rewarded for that.
David:
OK, well that's wonderful. The other thing is, I did a quick trawl of European equities recently, just to have a look at the dividend yields in some of those countries: German shares, 3.5% yield; French shares, 4.1% yield; Dutch shares, 3.1%; Swedish shares, 4.1; and Swiss shares – 3.4%. Some of these countries are not really renowned for their dividend yields, and yet we're actually seeing these massive dividend yields in some countries. What does that tell you about what's going on in Europe?
Sam:
I'm glad you asked me that, because I think dividend yields relative to bond yields have only been cheaper twice in history, and that was 1939, or 1938, I think, and 2008.
David:
Well, I've never seen negative dividend yields, but I'm seeing negative bond yields.
Sam:
Exactly, and actually I've written a bit of an article about this, and I think that's extremely dangerous, when there's such a flight towards perceived safety, that I think there's a bubble being created there, and I think that's a combination of investors' fears, investors' appetite, but also regulation at the moment, Solvency II, for example, that's driving, and insurance companies who are a significant buyer of assets within Europe, towards these perceived low-risk government bonds, when actually, perversely their balance sheets are in worse shape than equities at the moment. So that encourages me, if you can go and buy a very good business with a strong balance sheet that's delivering a good yield, it's very attractive.
The other thing I would add to that is that yes, growth prospects globally are not great. Companies have very strong balance sheets, so they're having to make a decision as to what to do there, and I think there's also an improved shareholder culture throughout Europe over the last ten years. So I think what are companies going to do? Are they going to go and bark on big capex programmes, when they're not quite sure of the return on those programmes? I think they're facing two choices. Do they go and improve their market positions by making M & A? I think we're seeing a little bit of that happening. Or do they reward shareholders a bit more by paying out, and I think we're seeing that at the moment. So I would say that those dividend yields just reflect the state of the market, a bit of strange investor behaviour. I think we're seeing a dangerous bubble in some bonds. The stat that caught my eye the other day was, it was a Merrill Lynch strategy piece that showed that in June, the Dutch bond yield fell to the lowest level for 500 years, so that tells you something.
David:
OK, now, it's quite good to hear that you're bullish about the eurozone, and Europe in total. Are there any no go areas in Europe, do you think?
Sam:
Well, I mean this is quite an interesting question, and I think sovereign bonds is no go area, and I think low-quality, highly-leveraged businesses are no go areas, and that might sound obvious, OK, but pre-2007, you could be highly leveraged, quite a poor quality business, and actually do pretty well, because growth was abundant, financing was easy to get buy. Now growth isn't abundant clearly, and financing's hard to come by, so you need to be a good-quality business. I think geographically it's a harder question to answer, because if you use the example of Ireland, where actually a country addresses the problems that it has, they've reduced their unit labour costs by 30% since 2005, which is in stark contrast to a lot of other European countries. They've also remained flexible, open, got a low corporate tax rate – it's a good place to do business, and as a shareholder you're looked after, and I think those things are important when you look at countries. If you really push me, I'd be wary about investing in Greece, because I think maybe they aren't going to be part of the euro this time next year, and there are some countries in Europe where I still think they're a little bit dragging their feet on the shareholder culture side, and maybe it's not a coincidence that I'm underweight in France, for example. But I think the theme through the last decade has been improving shareholder culture, but I think some countries have some way to go.
David:
OK, so let's have a look at some of the companies that you particularly like, and one that caught my eye in your portfolio was C&C Group (LSE: CCR), so tell me a little bit about C & C Group.
Sam:
Yeah, a lot of investors will know the name, because it came to the stock market with the Magners' premium cider brand, and had a fantastic time. People couldn't get enough of this business.
David:
They got burnt, didn't they, a lot of the people?
Sam:
Well, they got burnt big time, but that's when we got interested. My colleague, David Moss, went to the investor day, I think it was in 2006, and he couldn't even get in the room, but 2007, there was only two other people there, and that's the time to buy it, to get interested, and why were we interested? – well, for a number of reasons. Magners itself is a good brand, it's a growing brand in a fast-growing area. Now, long alcoholic drinks is a tough area to be, but one of the few areas in which it's growing is in premium cider, so that was good. It also had a strong balance sheet. Thirdly, it was well-invested – it had just spent a huge amount of money on a new facility in Ireland, so the capacity utilisation was something like 30%, so they could grow for many years to come without having to invest in the business. Also, the P & L, while it looked in trouble, what the previous management had decided to do was spend as much marketing as Guinness had done, so they were sponsoring the whole sector, so it meant competition could come in on the back of that, and compete. But when we invested was when new management came in from Scottish & Newcastle, who knew the sector inside-out. They took a big equity stake, and they started to turn the business round, and they've done some pretty impressive things since then. They've repaired the P & L, they've sold off some businesses. They've also invested in two businesses which have been fantastic deals – they've bought the Tennent's lager brand in Scotland, 70% market share in Scotland, under-performing because it was part of a larger group elsewhere. They also bought another cider portfolio in the UK, which gave them far greater pricing power with the supermarkets. So what they've done is, now, by the end of this year, they're net in the balance sheet again, even after making those deals. So you've got a great portfolio of assets and you've got growth. The international business is relatively small, but it's growing very quickly. A statistic I always like to bring out is that 50% of the world's cider is drunk in the UK and Ireland, which not many people know, but it's one of the fastest-growing categories outside of that. So it's a really attractive asset, strong balance sheet, very well run, superb management, and it's a big discount to the sector. I think within a month out, you are seeing some sort of deal in the beverage/beer sector, and I think an international brewer would love to get hold of an asset like this.
David:
So you think it's going to be a takeover target, then?
Sam:
Well, at some point, but you know what?
David:
Somebody like SAB Miller (LSE: SAB) or something might be interested?
Sam:
I don't know the large caps well enough, but all the ingredients are there, but what I would say is, if somebody put a bid in now, I think you'd probably, as a shareholder, won't get the returns that you would if you held it for the next five years, ten years. What we try and do is hold things for this time. We try and invest for a very long time.
David:
OK, so this is one for the present and one for the future as well, and a good example of a company in Ireland that's doing well. Now, another one of your companies is Amer Sports (OTC: AMEA.PK). Tell me about them.
Sam:
Yes, so this is quite a simple story, in that this is a relatively small, Finnish business, but actually its brands are very good. It owns the Wilson tennis brand, which has 30% of the world tennis market. It owns Atomic and Salomon ski brands – that's 30% of the ski market. Salomon also has a fantastic outdoor, hiking, trail running business. They also own Mavic, the cycling brand; Arcteryx, another very good outdoor brand.
David:
Cycling's a hot topic at the moment, isn't it?
Sam:
It is, yeah, exactly.
David:
Can you ride a bike?
Sam:
I haven't done it for a long time!
David:
I'll tell you something – I can't ride a bike.
Sam:
No?
David:
No. I'm from the Far East, I'm from Hong Kong. There are, was it – nine million bicycles in Beijing, and I can't ride a bike.
Sam:
Yeah, so that song goes. You need to get on a Boris bike.
David:
It helps if you can ride it first. Anyway, tell me about Aimer, why you like Aimer.
Sam:
Well, what happened was, this was managed by, well the management that liked collecting good-quality assets, but actually they never properly integrated, commercialised these assets, so it never really showed the economics, the margins, the sales growth that it should have done. But management came in a couple of years ago, and stopped buying new brands, integrated the brands, changed/improved the manufacturing process, improved the supply chain, and now you're seeing better growth, better economics out of the business, and it's still priced like it was five years ago, so quite a simple story, a recovery story, a transformation story.
David:
But the truth is, Finland is actually one of the stronger countries within the eurozone anyway.
Sam:
Yeah, but this isn't a Finnish company. It's listed in Finland, but it sells its products globally, so those brands I've read out, they're global brands. It's a good example of an international business which is actually quite small at the moment, and is listed in Europe. When people take a broad brush to Europe, they don't appreciate these things.
David:
OK, let's have a look at another one of your companies. This is another Irish one – this one is called Glanbia (LSE: GLB).
Sam:
Glanbia, yes.
David:
I remember Glanbia as being the owner of Yoplait.
Sam:
Yes, it was, so they did have the Yoplait brand in Ireland, but they recently actually sold it back to the Yoplait parent company, and they got a very good price for it, and that's part of this capital reallocation story that this management have done over the last say eight years. It's been a quite long journey that they've been on. A lot of people think of Glanbia as a domestic Irish dairy business, quite high capital employed, capital-intensive. They still got decent returns, but it's valued as an Irish dairy business, but what the management have done is been selling off, or taking capital out of the more capital-intensive areas, and investing in global nutritionals, which is whey protein isolates for food companies. But I think more importantly, and what they're now going to be known for, is pre and post-exercise workout drinks for muscle recovery, muscle building, that sort of thing, which, the point about that is, it's a niche, high-growing market, high margin, high returns on capital, and they have the top two brands in the US, for example, and now that makes up over 50% of the profit. So everyone values it as an Irish dairy business, but actually it's an international, fast-growing nutritionals business. It's been re-rated over the last three years, but I think there's much more to go there.
David:
I think I could do with some of those products, not that I do any sort of heavy weight-lifting or anything.
Sam:
Well, you don't need to.
David:
The thing is, I did some heavy gardening yesterday, and my muscle are aching.
Sam:
Yeah, exactly – I think they could have a product for heavy gardeners.
David:
OK, right – and your final company is Viscofan (OTC: VIS.PK)?
Sam:
Viscofan, yeah.
David:
This is a company I've never heard of before.
Sam:
No, OK, well some of the people listening to this podcast might know Devereaux [? 18.52], the Scottish company, and they're very similar. This company makes sausage skins, synthetic sausage skins, and that turns quite a few people off actually, but it's a great investment story. There's pretty much a global oligopoly in this market, which sort of confers pricing power and a good market structure on those that operate, but the real story here is long-term growth in synthetic sausage skins. Now, I'm not talking 15%, I'm talking 5%, but for the next 20 years. And why is that? – well, you've got a combination of emerging market diets, increasing consumption of meat, but more importantly actually, there's a greater penetration or conversion from gut casing to synthetic casing. Why is this happening? – well, food manufacturers are under pressure all over the place, and if they convert from gut casing to synthetic casing, they can save money, they can have a more efficient manufacturing process. But also, gut casing is getting more expensive because dairy herds are sort of taking over the grasslands globally, and the only gut casing you really need for sausages, if it's natural, is from grade A lambs, which have to be fed off grass, and because the supply of these are reducing, the cost is going up, so it pushes the conversion further. This isn't a theme that's going to finish in five years – this is a long-term theme, and Viscofan is a very good operator within that market.
David:
So where is this company based?
Sam:
It's in Spain. So again, a great example of a good business, listed in a pretty poor performing country, let's be honest, but actually it's a global business, and it's performed very well despite being in Spain. So going back to that point about good stock selection can override macro concerns, this is a very good example of that. In fact, the other Irish companies, you could say the same thing for.
David:
So am I taking from what you're saying is that, if you cast your net far and wide within Europe, you are going to find some really good undervalued shares out there?
Sam:
Yeah, I mean European small and mid caps, there's over 2,000 companies in my universe, and I only own 40 of them, so hopefully they're the 40 best out there, but it's a massive, diverse universe, very under-researched or understood, and at the moment shunned by investors, which is a great recipe for being a long-term investor.
David:
OK. I know I'm going to be putting you on the spot here. At the outset, you said that your investment trust was carrying a 12.5% discount to its net asset value. How long do you think it would take for Europe to turn itself around, so that that discount would start to narrow to something a bit more reasonable?
Sam:
I've got to be honest here – I don't have a clue.
David:
Do you care?
Sam:
I don't let something like that distract me. I'm very disciplined in what I try and do. The team's very disciplined. We just go out and try and find really good businesses and buy them at good prices, and that's all we do, and if you get distracted by other things, you might not follow that process. You might get distracted by the noise of the market, the behaviour in the market, and that's where you end up making a worse decision, so I don't know the answer to that. But if you look – be greedy when people are fearful.
David:
OK, and do most of these companies pay a dividend as well?
Sam:
Not all of them. I think if you've got a company that can reinvest in its business, and get very good returns out of it, then there's no point in paying a dividend, but a lot our companies are very high dividend payers. I guess it's important to say for European Assets Trust, we pay out 6% of the NAV at the year end to shareholders through the year, so the realisable yield on the share is higher than 6%, because of the discount. Now, that dividend is paid both out of capital and income, so yeah, it's a way of returning the NAV to shareholders, which is attractive at a discount, and you can reinvest it back at 12.5%.
David:
Yeah, so in fact it's quite a good investment for income seekers, then?
Sam:
Yeah, absolutely – the realised yield is quite high at the moment.
David:
Well, thank you so much for coming in today, Sam.
Sam:
Many thanks.
David:
It's good to have somebody in here who is actually bullish on Europe, rather than all these bears that I see.
Sam:
I'm bullish on specific European companies – that's my caveat.
David:
OK, that's great. Now, I have just one more chore to perform, and that is to find a quote to sum up today's podcast. The quote is supposed to sum up the sentiment of today's podcast, and the quote comes from a guy called Waldo Emerson, who said, “I dip my pen into the blackest ink, because I'm not afraid of falling into my ink pot.” That sounds pretty much like you.
Sam:
Perfect.
David:
OK, this has been Money Talk, I have been David Kuo, and my guest has been Sam Cosh, director at F&C and lead manager of European Assets Trust. Now, don't forget you can find out more about investing by signing up to the Collective at fool.co.uk/davidkuo, and if you have a comment about today's show, please post it on the Money Talk web page, which you can find at fool.co.uk/podcast. Until next week, have a great week!
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