Henderson’s Lofthouse ups Europe exposure to highest ever

Henderson’s Ben Lofthouse has increased his International Income trust’s exposure to Europe to its highest ever weighting, 40 per cent, saying it has become harder to find yield in US stocks.

The manager of the £64.7m investment trust said he had invested as little as 12 per cent in Europe when stockmarket volatility was high and fears about a eurozone breakup were dominant, but now felt more positive about the region and the potential for company earnings.

“There are very low expectations for Europe, but it’s a very diverse place,” he said, adding that while capital appreciation was weak in the region, companies had been able to grow their earnings.

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The manager added that his weighting in the region could increase still further, and that he was considering investing in European banks if conditions continued to improve – with Swedish stock Swedbank potentially attractive now it had undergone a re-rating.

However, the manager said he still did not own any Greek or Spanish stocks.

“We have to be quite company specific about it, but I think there is definitely potential for these banks in the next five years to start paying dividends and having stronger balance sheets,” he said.

The manager said the increase to the region was funded by selling down stocks in the US and Asia which had rallied. He said he had sold down US telecoms company Verizon and Singapore Telecom because their strong recent performance meant there was less value left in either of the stocks.

While the highest country weighting in the trust has always been the US, the manager said that when he originally bought names such as Home Depot, toy manufacturer Mattel and logistics company UPS, their yield was at least 3 per cent and now it is 2 per cent or less.

The manager said he had sought ways to increase the trust’s yield recently, including moving away from sectors which are usually regarded as income-orientated.

“We have less in the more traditional areas than we used to,” he said, adding that the fund had reduced its holdings in telecoms, consumer staples and utilities as they had begun to offer less yield.

Instead, the manager said he was finding areas such as construction, autos and technology more appealing, with fifth-largest holding Microsoft providing a particular boost for the fund.

He said while Microsoft had “missed the boat” on some developments in the tech market, it still looked cheap and added that if it continued to survive in a world with competitors Apple and Google, it could be worth a lot more in the future.

Elsewhere, the manager had also increased the level of gearing on the trust to 15 per cent, suggesting the manager is bullish about markets.

Gearing is a type of borrowing used by trusts to amplify performance, although losses as well as gains are magnified.

Since launch in April 2011, the trust has delivered a share price total return of 23.9 per cent to July 15, compared with a rise of 26.5 per cent for the MSCI World ex UK Total Return index, according to FE Analytics.