Henderson European Focus Trust 21 June 2023

Henderson European Focus Trust (LON:HEFT) takes a long-term, bottom-up approach to investing with a pragmatic, no-nonsense style that has worked well since manager John Bennett first took the reins in 2011. His co-manager, Tom O’Hara, started in the role in 2020 and together they sit within Janus Henderson’s pan-European equity team, managing a number of mandates in a similar way. As the name implies, HEFT owns a focused portfolio of between 35 – 45 stocks, all of which are truly active investment decisions rather than picked because of their presence in the benchmark.

The team’s approach is to ignore short-term noise and focus instead on fundamental principles, in part related to financial metrics, and in part by more qualitative assessments of change, be that fundamental secular changes or changes to cyclical trends. While not casting themselves as contrarians, the team are often drawn to stocks from unloved sectors.

Flexible thinking has led to strong performance since John first took over managing the trust and this has been shown in both rising and falling markets, including 2022. In addition, HEFT has a dividend yield of 2.7% and the board has a progressive policy of increasing the dividend each year whenever possible. As we discuss in the Dividend and Gearing sections, low-cost gearing may also enhance income in a modest way. HEFT is currently net geared by c. 8% although it has approached 11% at points in the recent past.

HEFT currently trades at a c. 11% discount, in line with its five-year average and with the current peer group average, which we discuss further in the Discount section.

Pragmatism seems to be an unfashionable concept in these days of polarised opinions on just about anything you care to name, but Tom and John’s pragmatic approach to managing HEFT seems to be working rather well. It is easy to confuse the word ‘focus’ with volatile, but HEFT’s relative performance shows a consistency in all kinds of market conditions that many investors may find appealing. Negative performance in the calendar year 2022 still beat the benchmark and, although no one enjoys negative performance, this resilience is even more notable because it came after several years of strong positive outperformance. HEFT has a meaningful dividend yield and a good track record of progressively increasing dividends, which we discuss in the Dividend section.

HEFT’s structural gearing also adds to its appeal. We think an average interest rate of 1.57% and no refinancing until 2047 is a really attractive deal for shareholders, not just for the normal benefits of gearing, i.e. amplified capital returns, but also the pick-up in yield. HEFT’s portfolio yield is 3.6% , meaning there is a positive spread of almost 200bps between the cost of debt and the portfolio yield. In HEFT’s case, while the primary intention is to gear for the traditional reasons of enhancing capital returns, an additional benefit is that the interest cost is so low that the yield on the portfolio more than pays the interest.

Historically, HEFT has attracted new investors at a premium to net asset value. We discuss in the Discount section why we think this suggests that the current discount of c. 11% represents an opportunity. Alongside very low valuations for some European equities, this could be a very good entry point for long-term investors.