Buy, hold or sell: Argonaut European Enhanced Income

Published by Rebecca Jones on 09 November 2015.
Last updated on 09 November 2015

Roll the die


Olly Russ first bought German telecommunications firm Drillisch in June 2014, convinced by the company's innovative model. The firm is a virtual mobile network operator.

It rents network space from larger telecoms companies and puts together cheap packages for the lower end of the market - typically, pay-as-you-go customers.

Russ says: 'There is a lot of business at the bottom end of the mobile market that big guys such as Vodafone aren't interested in, so they tend to outsource it to other groups. A huge variety of brands compete, mostly on the internet, to attract the bargain end of mobile telephony, and Drillisch is a key player.'

With its €2 billion (£1.5 billion) market capitalisation, Drillisch is certainly no minnow, and it has big plans to expand its operation. A recent deal with Telefonica Deutschland, in which the firm purchased more than 300 shops, means Drillisch will soon have a high-street presence.

Describing the move as a 'step change', Russ is confident the company's decision will prove a profitable one. Perhaps more importantly for the fund, however, Drillisch pays very good dividends, which is a key requirement for all of Russ's holdings.

Currently, the firm yields around 4 per cent, but Russ says that, should the Telefonica deal go according to plan and the share price remain relatively stable, the dividend could rise to around 7.5 per cent in the near future.


Gjensidige is the dominant insurer in Norway. It has a unique business model that makes it very difficult for competitors to get ahead. According to Russ, every customer who takes out a new insurance policy with the firm receives an annual customer dividend from its charitable foundation, Gjensidigestiftelsen, which gives the company a significant price advantage.

Also attractive is Gjensidige's strong track record of returning cash to shareholders. In October 2013 the firm found itself over-capitalised after selling down its stake in financial services company Storebrand. So it returned 3 billion krone (£295 million) to investors via an extraordinary special dividend.

Russ says: 'European companies normally only pay one dividend a year, in spring - occasionally there is a small secondary payment, but nothing like the payments made in the UK.

However, Scandinavian companies are catching on: Gjensidige was over-capitalised and returned cash to shareholders, and that's the kind of commitment I want to see.'

The manager first bought into the firm in April 2011, since when the share price has risen by more than 70 per cent, providing a nice capital return on top of a solid income stream. Despite this, Russ says he does not expect great things from the firm in terms of growth.

'It's not the most exciting company in the world - as the dominant insurer in Norway, you can't really grow the top line particularly fast - but it does give pretty decent payouts, and we're looking at about 5 per cent for next year. It's a good stock in an unexciting sector.'


Russ has been strategically reducing his exposure to European pharmaceutical giant Novartis for about two years. He originally purchased his holding when the firm was yielding around 5 per cent. However, its dividend has not kept pace with the increase in its share price.

This means Novartis now yields less than the fund's 3.5 per cent minimum requirement. As a result, the company now accounts for just 1.4 per cent of Russ's portfolio, down from a peak of 3.3 per cent four to five years ago.

Russ says: 'It is a great name, but on a valuation basis, it's expensive. When we were buying it in 2010, it was on a dividend yield of around 5 per cent. Now we're down to 2 to 3 per cent, purely as a result of the share price rising. We've been allowing it to run down and not reallocating.'

However, the manager is quick to point out that this is not a decision based on the strength of the company or the pharmaceutical sector, both of which he is bullish about in terms of headline growth.

He says: 'Novartis is an excellent company. Along with Roche it is dominant in the pharmaceutical space, which is arguably a European global niche, and they are benefiting from a secular trend as emerging markets start to use more pharmaceutical products. So it's a good long-term story.'