InvestmentsNov 16 2015

Fund Review: Henderson European Focus Trust

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This £208m trust was launched in 1947 and has been managed by John Bennett since 2010.

The vehicle’s objective is to maximise the total return from a focused portfolio of listed continental European stocks, and it currently holds around 55 positions. Returns are generated from a mixture of sector allocation, stock selection and a tactical use of gearing.

Mr Bennett notes the team’s approach to fund management is characterised by the identification of global sector themes, combined with bottom-up fundamental analysis of companies and meetings with management.

He adds that rigorous fundamental analysis of stocks is employed and screening is then used to identify attractive companies within sectors.

“Stocks are selected for one or two reasons: as part of a sector theme or on their own merits,” the manager explains.

“For a stock that is identified as part of a sector theme, the team will start by first identifying the key investment themes that will drive the portfolio’s structure. [We] use a combination of macroeconomic research and company meetings to understand global market and industry dynamics. This narrows the focus to segments of the European market where the team’s stock analysis is concentrated.”

Mr Bennett adds that the aim is to identify blue-chip stocks and to determine those with the most robust investment cases for inclusion in the portfolio. The relative sizes of the positions are based on the team’s conviction; developing as the theme plays out.

“The key is that the stocks have compelling investment cases,” he points out. “The types of companies selected for the portfolio are typically large-cap, contrarian-type stocks, selected for alpha-generation potential. The size of the holdings is determined by the amount of conviction in the investment case and is actively adjusted accordingly.”

The team also takes into account macroeconomic factors as it takes the view that sector trends travel globally. Therefore, it uses “a combination of macroeconomic research and company meetings to gain an early insight into the behaviour of European companies and to understand global market and industry dynamics”, Mr Bennett explains.

In the five years to November 5 2015, the trust has delivered 94.4 per cent compared with the AIC Europe sector average return of 71.8 per cent and the FTSE World Europe ex UK index gain of 32.8 per cent, data from FE Analytics shows.

The vehicle has also outperformed both the sector and the benchmark across one, three and 10 years.

Mr Bennett notes that the broad structure of the strategy “remains unchanged”, and points to two themes that are driving the trust. These are pharmaceuticals, which is now into its sixth year as a portfolio theme, and smart cars.

But he adds: “The top-performing sectors in the year to September 30 2015 were financials, consumer goods and healthcare. The top contributors at a stock level were Fresenius – [part of] the healthcare theme – and Autoliv in the smart-cars theme. The trust also benefited from avoiding Banco Santander in the financial sector.”

On the flip side, the manager notes the main sector detractor in the past year has been technology, where the trust has been underweight versus the benchmark.

Looking ahead, Mr Bennett’s view is unchanged from last year, in the sense that equities are not particularly cheap “and our sense is that the tailwinds of the past five years are unlikely to be enjoyed in the year ahead”.

He adds: “This view is reflected in the portfolio, with gearing reduced substantially and in the fact that the list of names in the portfolio has been reduced. It is an overused cliché in the world of equity investment, but stock picking will be crucial for the year ahead.”

EXPERT VIEW

Juliet Schooling Latter, director of research, Chelsea Financial Services

This trust is a mirror to an opened-ended fund run by John Bennett that we rate very highly. His process is governed by early identification of industry or sector themes that will still be around a decade from now. This allows him to ignore the macro-driven fear and optimism that makes the headlines, and focus on what matters – real or absolute value. It had a bad October as he is overweight pharmaceuticals and he holds some car component firms, which got hit when the Volkswagen story broke. Both should be short-term issues though. The trust is trading at a slight premium of 0.5 per cent, so I’d probably wait for it to return to a discount before I invested.