Bargain hunter: High-yielder on steepest discount in 3 years

European Assets, one of our sister magazine Money Observer's Rated Funds and a favourite with income investors because of its much higher yield compared to rivals, has slipped to its widest discount level since 2013.

There are various factors behind the discount move, but the most obvious driver has been the fund's pedestrian performance over the past year, up just 4.6%. In contrast, TR European Growth trust, the best performer in the European smaller companies sector - which contains only four trusts - is up 22.4%.

The manager, Sam Cosh, has held his hands up; in a recent note to shareholders he admitted the portfolio has "yet to shake off the reverberations of the UK referendum" and as a result "a number of our holdings which were adversely impacted by the result continue to struggle".

Previous star performer

Cosh, who has a bias towards quality companies, is sticking to his guns and says that despite disappointing recent performance he is confident he will turn the fund's fortunes around.

Prior to its recent performance woes, the trust was the star long-term performer among the European smaller companies sector, winning Money Observer's best trust award in 2014 and 2015.

Innes Urquhart, an analyst at Winterflood, described the 8% discount as eye-catching, particularly when the trust usually trades tightly to its net asset value (NAV).

Due to the decline in the share price (down 4% in the past month), the yield on offer now is 7.3%But Urquhart was quick to caution that the yield is "artificial", as it is funded out of both capital and income. One danger of subsidising dividends from capital is that it eats into a trust's future earning power.

At the end of September the board stated that, barring unforeseen circumstances, it will pay an annual dividend equivalent to 6% of the NAV. Due to the recent decline in European Assets' share price (down 4% over the past month), the yield on offer today is 7.3%.

"A widening discount and a slump in performance go hand in hand," says Urquhart. "But it is also worth pointing out that in general European trusts have fallen out of favour with investors, which is why there are other trusts in the sector that also look attractive on a discount basis, including Fidelity European Values.

"European Assets is not on our recommendation list, but the current discount certainly looks attractive.

"Income investors, however, just need to remember that the 6% yield is not guaranteed. If the NAV of the trust falls 10% in a given year, for example, there won't be a 6% dividend paid. The other trust in the sector we like is Henderson European Focus Trust."

How we find investment trust bargains

Each month Money Observer will be highlighting a couple of investment trust bargains, both online and in our monthly magazine.

We will also occasionally draw attention to investment trusts that are "too hot to handle" - those that are trading on big premiums.

Our ideas come from regular conversations with investment trust analysts, and we will try to provide a mixture of bargains, from "hidden gem" trusts with less than £200 million in assets to the more established names that typically trade on a smaller discount or premium.

For the sake of simplicity, rather than using technical measures such as the "Z score", in this column we will identify bargains by comparing current discounts with their 12-month averages.

Only those trusts with a wider discount than their average are considered. We will also look at the overall sector and the quality of the trust, and then take a view on whether the discount looks a good opportunity.

This article was originally published by our sister magazine Money Observer here

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.