Results analysis: Henderson European Focus Trust

• This week Henderson European Focus Trust (HEFT) reported its results for the year ending 30 September 2021. Over the period, HEFT reported a NAV total return of 22.6% and share price return of 28.8%, compared to the 22.0% return of its benchmark, the FTSE World Europe ex UK Index. This means that as of 30 September, HEFT’s NAV return has managed to outperform its benchmark over one, three, five and ten years.
• The managers have positioned HEFT’s current portfolio to capitalise on the recovery of Europe’s consumer sector, leading to the managers being overweight in the consumer discretionary, basic materials, and consumer staples sectors. Regardless of how the team view the market, they still aim to maintain the trust’s balanced approach to equity valuations that have long underpinned their style.
• As of its 2021 financial year-end, HEFT traded on an 8.3% discount, representing a narrowing from 12.6% earlier in the year. The board remains conscious of the issues which a sustained discount can pose to investors and is focused on efforts to narrow the discount over the current financial year. As of 7 December 2021, the discount is 10.3%. The board has recommended a full year dividend of 33.1p per share, a 5.8% increase on the prior year’s.
• The board has also proposed a share split, with shareholders being asked to approve a sub-division of each ordinary share of 50p nominal value into ten new ordinary shares of 5p each, designed to address the nominal high share price of 1,590p per share, and make the trust more affordable to investors.
• HEFT continues to see an evolution in its management, with co-fund manager Tom O’Hara increasingly shouldering more of the responsibility from co-fund manager John Bennett, who is the longer tenured and higher profile of the two. Tom is now taking the leading role in managing the investment relationship with the board and in promoting the company to shareholders and prospective investors. Though the board notes that this will not impact the management of the portfolio.

Kepler View

Henderson European Focus Trust’s (HEFT) recent outperformance against its index shows, in our opinion, the benefits of its manager’s ‘balanced’ approach to equity investing, intentionally eschewing strong stylistic biases within the trust. The team, led by John Bennett and Tom O’Hara (who will soon mark his second year as co-manager of the trust), make a point of avoiding a bias toward growth or value, as it provides them with the flexibility to tactically shift their portfolio to navigate the prevailing market environment. They believe this is becoming increasingly important as market direction has become erratic in recent months. Fears of inflation and supply chain restrictions have been compounded by Chinese political and economic concerns, as well as the recent emergence of the Omicron variant, all of which make stylistic bets riskier.

Since the start of 2021, the team have been increasingly overweight in companies which can benefit from the V-shaped recovery in consumer activity, with a 13.4% combined overweight to consumer and material sectors as of 30 September 2021, funding this from their previously successful allocation to industrial recovery stocks. This may act as a tailwind to the strategy, so long as the European consumer remains strong. The managers believe Europe’s continuing vaccine rollout and the effects of fiscal stimulus in the region will be supportive

While John and Tom do consider macro factors in their approach, they are predominantly bottom-up stock-pickers, and to that end they highlight several attractive opportunities they have found over the last 12 months, both in the consumer and non-consumer space. Importantly, these companies were not solely purchased as a play on the macro-economic environment, but rather because of the imminent ‘changes' their holdings are undergoing. Corporate ‘changes’ can take multiple forms, such as new management teams or a change in strategy, but all of these offer the potential for a positive re-rating, an idea which forms a major component of the team’s investment thesis. The team has added companies such as Danone, the French food production giant, highlighting the positive impact its recent change of CEO could have.  

While Danone, along with other new purchases like Hugo Boss and Pandora, are potential beneficiaries of a strong European consumer sector, the team have also found opportunities in over-sold value stocks; companies that are fundamentally attractive but are not highly rated by the market. One such example is the team’s holding in Daimler, the owner of Mercedes, which they believe has been unfairly penalized in the hype around Tesla and other ultra-expensive electric automakers.

We believe that the team’s balanced approach could appeal especially to those who are concerned about near term valuation risks, or the imminent inflation pressures that may unwind the associated ‘long duration’ trade, which has benefitted expensive, high growth stocks that have much of their potential future growth priced in today. HEFT may also offer attractive diversification for investors looking to add alternatives to many of the growth-focused strategies that have come to dominate the market. Similarly, in a world where ESG investing has led to increasing sell pressures on a subset of stocks, investors may find the team’s considered approach to ESG – which we describe in our report on the trust – another attraction. We think the current 10.3% discount could be an attractive long-term entry point for investors who can wait until risk appetite recovers and Europe comes back into favour, although we note it is slightly wider than the five-year average of 7.1%.

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