By James Thorneley Mercury European has the lowest share price beta of all the investment trusts in ...
By James Thorneley
Mercury European has the lowest share price beta of all the investment trusts in the European sector.
The main reason for Mercury's low beta, 0.76 times, relative to the other conventional trusts and the one split cap in the sector, is due to the amount of shares the trust's board has repurchased.
Between January 1997 and June 2000 the trust repurchased over £350m worth of shares, reducing its size by more than one-third.
The next biggest repurchaser of shares in the sector is Fleming Continental European trust, which has bought in £25.8m worth of equity.
Ian Barby, managing director of investment trusts at Mercury, said: "Last year we bought around one-third of the trust's share capital which dampened down volatility in our share price. This has led to a reduction in our institutional share base from 60% to 55%." Barby added having a relatively small institutional shareholder base was very important at controlling a conventional trust's share price volatility.
He said the main reason why Gartmore European traded at a premium or at a discount at close to NAV was the trust had a large retail component. He said: "Retail shareholders are long term investors whereas institutional investors move in and out of trusts."
Henderson Euro-trust's units, a composition of the two types of equity issued by the trust, have a beta of 0.79 times, the second lowest in the sector, because of their attractiveness to institutional investors as they offer highly geared returns from a blue chip portfolio. Between May 1997 and April 2000 the units returned 145.9%.
Within the peer group this is only surpassed by the shares Fleming European Fledgling which returned 207.46%. In contrast to Henderson Eurotrust units the beta of Fleming Fledgling shares is much higher at 1.49 times.
The units of Henderson Eurotrust are perhaps more tightly held, relative to Fleming Fledgling shares, because they provide more consistent returns. In each 12 month period between May 1997 and April 2000 the returns on the units have been positive.
While returns on shares of Fleming Fledgling have been positive between May 1997 to April 1998 and May 1999 to April 2000, but the shares declined in value during the 12 month period of May 1998 to April 1999.
The fluctuation between positive and negative returns reflects the part of the market Fleming Fledgling is invested in.
The units of Eurotrust can be seen as a core holding for a European portfolio while Fleming Fledgling shares are more specialist.
Perpetual European, TR European Growth and Fidelity European Values are the other trusts in the sector with above average betas.
Like Fleming Fledgling both TR European and Fidelity European Values invest further down the market scale compared to the other trusts in the sector.
One factor which may have contributed to Perpetual European's above average beta is its size. With a market cap of £65m the trust is the smallest generalist in the sector. Even a small sale of shares in Perpetual European can have an impact on the trust's share price.
However, if the same amount of shares were sold in the £521m Fleming Continental the impact on its share price would be smaller. Another reason for the Perpetual's higher beta relative to other generalists in the peer group is its investment strategy.
According to Martin Fothergill, an investment trust analyst at Deutsche Bank, the trust's investment mandate allows for complete flexibility throughout Europe with no investment constraints in terms of countries, sectors and size.
He added: "This policy has enabled Margaret Roddan, the manager, to enhance the performance attained in the unit trust by both taking advantage of the investment trust structure, closed-ended and gearing, and by running a more aggressive portfolio in terms of higher turnover and a more concentrated portfolio."
Over the three years to 31 May the trust's NAV returned £223.90 for each £100 invested, while Perpetual European Growth unit trust returned £183.70 on an offer to bid basis. Roddan's investment style is in contrast to that of Stephen Macklow-Smith, the manager of Fleming Continental European. He has a mandate from the trust's board to run a portfolio which is representative of the European market. He said: "The below average beta is not an accident and can only go plus or minus 3% in sectors and countries relative to the benchmark. Also 97% of the portfolio is in large cap stocks which are in general less volatile than small cap equities."
Macklow-Smith's more cautious approach to managing his portfolio relative to Roddan's style is illustrated in the trust's NAV return.
Over the three years to 31 May the trust's NAV returned £197.50 from each £100 invested.
The other trusts with a below average beta in the peer group are Martin Currie European, Foreign Colonial Eurotrust, European Assets, Charter European and Gartmore European.
Apart from Henderson Eurotrust, Gartmore European is the only trust in the sector with a below average beta of 0.96 times and an above average annualised monthly alpha of 5.56.
Gartmore European is managed by Roger Guy and he is assisted by Guillaume Rambourg.
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