Henderson EuroTrust 01 December 2021

Henderson EuroTrust (HNE) offers investors a portfolio of continental European equities with the sole objective of capital growth. Managed by Jamie Ross, who is approaching his third year as lead manager, the trust continues to maintain its preference for high-quality European growth opportunities, though it has recently taken a more balanced stance. Having rotated into ‘reopening winners’ in the latter part of 2020, the portfolio now contains more cyclical and cheaper stocks. Jamie has begun normalising his portfolio turnover (currently 40% p.a.) since the aforementioned rotation, as outlined in the Portfolio section, with HNE’s portfolio still comprising of companies which demonstrate long and enduring business models that can generate attractive growth prospects.

Under Jamie’s tenure, HNE has been able to generate a strong track record of outperformance against its benchmark and marginally ahead of its peers. Yet recently, it has experienced an uncharacteristic 12-month period of underperformance. This is primarily due to external factors stemming from Chinese government policy, affecting two of its computer game holdings. However, this has not been enough to damage HNE’s long-term risk statistics, which still rank better than those of its peers and benchmark. HNE currently trades on an 8.1% discount, wider than that of its peers but consistent with its long-term average.

ESG continues to be a major component of Jamie’s process. He believes that sustainability will be the next major driver of global growth, and that it is an area which Europe already dominates as it contains the majority of the world’s most sustainable companies. The board of HNE is also proposing incorporating explicit ESG restrictions, and although this will not have a material impact upon the investment process, this is likely to entail a small number of positional changes.

In our view, HNE demonstrates the long-term benefits of taking a disciplined approach to quality growth investing in Europe. Jamie exhibits an element of continuity as HNE’s new manager, as he continues to hold the enduring growth opportunities that have long characterised the trust under the previous manager. Yet, his recent steps to create a more ‘balanced’ portfolio are an interesting development. As we enter into a more inflationary environment, Jamie’s rotation into both cheaper and cyclical companies means the portfolio should now be less sensitive to rising interest rates, especially when compared to some of the more expensive quality growth companies that represented a larger proportion of the portfolio until late 2020.

We also believe that HNE’s recent Performance is not a reflection of its true potential and is likely due to one-off stock specific factors. We note that HNE’s long-term risk-adjusted returns remain impressive. In fact, HNE’s current discount is in our opinion an attractive entry point, as once the performance recovers, investor sentiment around HNE may also reverse. HNE’s potential integration of explicit ESG targets may also make the portfolio more attractive, given it commits the trust to having strong ESG credentials without requiring material changes to its investment policy.