Managed by James Henderson and Laura Foll, Henderson Opportunities (HOT) trust aims to achieve capital growth in excess of the FTSE All-Share index through a portfolio of UK companies. Operating with an unconstrained mandate with regards to market capitalisation, the trust structurally incorporates exposure to seven different categories of stocks.
As we discuss under Portfolio, there remains significant flexibility in the indicative ranges of these different categories and the managers are primarily driven by stock opportunities they are identifying. However, these different categorisations are used to help ensure the portfolio does not become overly aligned with specific macroeconomic outcomes and remains balanced. The indicative ranges further give rise to a structural overweight exposure to smaller companies.
This leads to a fairly high degree of correlation in the relative fortunes of HOT and UK mid and smaller caps. Along with consistent use of Gearing, this has helped returns in recent months. The balanced stylistic approach incorporated and a degree of valuation discipline in rebalancing away from previous winners ensured that HOT outperformed in both the pre-vaccine and post-vaccine rallies seen in 2020 and 2021 to date, with different portions of the portfolio boosting returns at different times.
Despite this, HOT has seen its discount widen once again to c. 11.7%. Although this is somewhat narrower than HOT has typically traded at in recent years, it is substantially wider than the peer group. As we discuss under Discount, the discount has widened once again in recent months having traded at close to NAV earlier in 2021 with share price declines against a relatively static NAV.
HOT shareholders have enjoyed outperformance over the longer term over the past five and ten years, and with an actively differentiated portfolio and a consistently positive information ratio we think that this can in part be attributable to stockpicking. The diversified investment approach and use of different structural categorisations looks to us to have prevented factor risk from becoming the primary driver of relative returns, though we think the consistent deployment of gearing and structural tilt towards small caps lends the portfolio something of a degree of pro-cyclicality. This structural overweight to small-caps differentiates HOT from peers in the UK All Companies sector, but is likely to do so even more from a typical open-ended product. We note that over the five years to 25/06/2021, HOT had the second highest tracking error in the UK All Companies sector on a total return basis (Source: Financial Express Analytics), emphasising the differentiated proposition.
Despite the strong long-term returns, the relatively wide discount compared to peers looks attractive. With the discount nonetheless narrower than has been seen on average over the previous five years, this cannot be taken as a given, but should UK outperformance relative to the rest of the world and HOT’s NAV outperformance persist we think that there remains the potential for a substantial boost to returns from discount narrowing. However, the relatively small market capitalisation of HOT perhaps precludes some institutional interest which might otherwise catalyse this.
|Differentiated and highly active portfolio||Discount has frequently proven volatile|
|Wide discount compared to peer group average||Gearing can exacerbate downside (as well as amplify upside)|
|Has tended to outperform in rising markets||The trust is subject to a performance fee|