Changes in the economy have pushed the co-managers of the Henderson US Growth fund into more “unique investments” in sectors such as biotechnology.
Co-manager Coralie Witter says: “We continue to see good opportunities in biotech where a resurgence in R&D [research and development] productivity has led to strong pipelines of new drugs. These therapies are more targeted, more efficacious and generally have fewer side effects.”
Ms Witter, who manages the fund alongside Tom Marsico, cites Gilead Sciences, which at 5.3 per cent, is the largest position in the fund, as a firm that could see exponential growth in the future.
“Gilead Sciences has the dominant franchise in HIV, but has also developed a novel Hepatitis C drug which cures the disease in less than 12 weeks with a single pill and no meaningful side effects, a dramatic improvement on existing treatments. We believe Gilead’s HIV and Hepatitis C franchises could result in EPS [earnings per share] quadrupling in five years.”
The £444.12m fund targets long-term capital growth, investing in US equities across the market-cap spectrum. The co-manager says that the portfolio is benefiting from a healthier consumer, a recovering housing market and shale oil discoveries that are improving the competitiveness of the US manufacturing sector.
The co-managers are supported by a global research team who work together to identify ‘best ideas’ without being constrained by industry or country. The research, Ms Witter says, hinges on a deep understanding of the companies and detailed financial models.
“[These] allow us to gain conviction in the best investment opportunities for the portfolio: a combination of unique companies with strong brand franchises and company fundamentals that should lead to better returns,” she says. “Increased emphasis is placed on the company’s ability to generate free cashflow and to return capital to shareholders via dividends and buybacks in a slower growth world. Our starting point is to identify business models with sustainable competitive advantages that can generate repeatable revenue growth and where we believe positive change is occurring.”
Examples of ‘free cashflow generative’ ideas in the consumer discretionary space are TJ Maxx, the parent company of the UK franchise TK Maxx, online travel agency Priceline and Starbucks, which Ms Witter says is leveraging its 20,000 store base to launch new consumer packaged goods brands. She adds: “We have also found opportunity in AIG and Citigroup, both of which have new management, are cleaning up their balance sheets and business models, and should in 2014 be able to resume returning cash to shareholders. Both are trading below book value, with the opportunity to rerate towards book as they execute.”
Based on five-year data, the fund is slightly lagging its S&P 500 index benchmark, returning 73.55 per cent compared with the index’s 79.75 per cent. However, the fund has outperformed the IMA North America sector peer group average of 68.3 per cent by 5.25 percentage points.