Henderson European Focus Trust 10 June 2021

Henderson European Focus Trust (HEFT) offers investors a flexible approach to large-cap European equities. The managers, John Bennett and Tom O’Hara, have an investment ‘DNA’ which is composed of six distinct facets, encapsulating both financial analysis and their general philosophy around investing. The team are acutely aware of the need to remain flexible, and avoid becoming married to a single style of investing. They believe that such an approach will ultimately prove of value to HEFT’s shareholders by avoiding prolonged underperformance when a specific style is out of favour. We discuss the investment philosophy of the team in further detail in the Portfolio section.

The team have recently made substantial changes to their portfolio in order to capitalise on the post-pandemic V-shaped recovery across varying sectors. During the second quarter of 2020 the team positioned HEFT to capitalise on the recovery in industrial stocks, foreseeing the rapid revival in industrial output. The team have unwound this trade at the start of 2021, having now positioned HEFT to take advantage of the second V-shaped recovery, this time in consumer-sensitive stocks. The impact of the team’s flexibility is clearly seen in their performance because they have outperformed their benchmark over the long term, and have generated even stronger near-term performance, as we describe in the Performance section.

HEFT currently trades at a Discount to its peers, despite its recent outperformance. We believe this is likely a consequence of investors’ historical avoidance of European equities, rather than a factor unique to HEFT. We also note that HEFT has good ESG credentials – even with its recent allocation to value-oriented stocks – as a result of the managers’ holistic approach to investing.

HEFT offers something we believe is rather rare in either the open- or closed-ended European equity space: a team who successfully incorporate top-down factors in their investment process. In doing so they diversify the source of HEFT’s alpha, offering investors not just successful stock-picking but also a macro overlay which enables HEFT’s style exposures to shift over a given cycle.

In contrast to the vast majority of the European peer group which have a clear growth bias, HEFT offers a differentiated proposition at the current time. In our view, HEFT is currently well positioned as a partial inflation hedge. This is thanks to its increased allocation to financial stocks, lower overall valuation metrics and recent overweight to consumer discretionary stocks (which will likely be the driver behind near-term inflation as demand picks up). As such, and potentially of relevance to the discount, HEFT may be increasingly attractive to investors as the recovery continues if the prospect of inflation continues to raise its head.

In our opinion, the recent performance of HEFT illustrates the potential of having a flexible approach to investing. The team have made decisive moves to position towards industrials first, and then latterly towards consumer discretionary as the recovery took hold. In doing so they have altered the overall style tilt of the portfolio, yet have also successfully generated significant alpha. Such actions are inevitably difficult to time, but we are encouraged not only by HEFT’s recent outperformance but in hindsight also by the timeliness of the team’s trades.