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Thomas McMahon
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Updated 08 Dec 2022
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Henderson European Focus Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

  • For the financial year ending 30/09/2022, Henderson European Focus Trust (HEFT) reported a NAV total return of -13.1% and a share price return of -18.3%, underperforming the -12.8% return of its benchmark, the FTSE World Europe ex UK Index.  Noticeably , HEFT’s returns were significantly better than the AIC Europe sector average of -19.3%.
  • The managers’ more valuation-conscious approach helped them during the year versus the growth-oriented peer group, with holdings in the energy sector in particular contributing to performance. However, versus the benchmark the consumer exposure was unhelpful while the unexpected Russian invasion of Ukraine also hurt returns, mainly through the largest single detractor, Nokian Renkaat, which produced 80% of its tyres within Russia pre-war.
  • Over the period, the discount of the shares to NAV widened from 8.3% to 14.0%. However, this has since narrowed to 11.5% as of 21/11/2022.  The board has recommended a full year dividend of 3.15p per share, a 31.4% increase on the previous year. The total dividend of 4.35p per share would amount to a yield of 3% (as of 21/11/2022 ). The board is also recommending a special dividend of 0.5p per share, the first since 2017. This is to come from the funds received from a settlement with HMRC for a claim to recover corporation tax unduly paid in respect of periods prior to 2009.
  • At the start of the financial year, the board took advantage of low interest rates and locked in cheap long-term borrowing. In two tranches of loan notes, EUR35m was borrowed for 25 and 30 years at a weighted average interest rate of just 1.57 %. This provides structural gearing of 9.7% of year-end NAV on a gross basis which, in addition to the flexible borrowings in place, affords the fund managers the flexibility to make full use of gearing as opportunities present themselves.
  • The board also bought back 0.4% of the shares in issue over the period.
  • Chair of the board Vicky Hastings said: “Our fund managers make a strong case for a European equity market that has to a large extent already priced in a ‘normal’ recession. In the near term there could well be further tumult, not least as central banks test the resilience of the global financial system by reversing over a decade of loose monetary experimentation. But, on any longer-term horizon – for which the closed-end trust structure is designed – Europe now abounds with opportunities to invest in quality, cash generative companies, which are able to pass through the scourge of inflation.”

Kepler View


It has been a challenging period for equity investors as economies struggle with the impact of rocketing inflation and an exceptionally fast increase in US interest rates. Henderson European Focus Trust's (HEFT) flexible, valuation-conscious approach has helped the trust do better than the peer group average in NAV total return terms, but the returns have nonetheless been disappointing on an absolute basis, and marginally behind those of the benchmark. Looking forward, we think HEFT looks like an interesting way to invest in a beaten-up European equity market and play a potential recovery. First, the managers’ flexible approach means they can take advantage of mis-pricings across the market – sentiment is so poor towards equities that we think there are likely to be opportunities in good companies swept up in the negativity in multiple industries. Secondly, the very cheap long-term gearing affords maximum flexibility to take advantage of any eventual market recovery.

Tom O’Hara and John Bennett argue that Europe is “exceptionally cheap in pockets”. In particular, they argue that the market has not yet acknowledged we have seen a macroeconomic regime shift. They believe that inflation is likely to remain higher than pre-pandemic levels for a long time, even after the current spike has declined. In their view the market has not priced this in, which leads to opportunities in “quality, cash generative champions across energy, materials and industrials, with strong management teams and, most importantly, pricing power.” In recent months, the managers have been adding to existing positions which possess these qualities, taking advantage of share price weakness. Examples include chemicals company Arkem, which was added to on a multiple of less than 6 times enterprise value to earnings before interest, tax and depreciation (EV/EBITDA). Meanwhile construction and materials producer Holcim was added to on less than 7 times EV/EBITDA and industrial tool manufacturer Atlas Copco was added to after a 30% YTD decline. Though these companies have some cyclical sensitivity, Tom and John believe that they will be relative winners and will deliver strong returns to shareholders. Accordingly, they are explicit about their appetite to increase the trust’s gearing into the expected recovery, utilising the low-cost loan notes placed earlier in 2022.

The exposure to the energy sector is also likely to be a key driver of relative performance in the near future. HEFT had 15% in the sector at the end of October, compared to c. 5% in the FTSE World Europe ex UK benchmark. The managers believe there is a cyclical upswing in the fortunes and reputation of the sector underway, with oil prices likely to remain elevated thanks to an imbalance between supply and demand, and note that their energy holdings were exceptionally cheap at year-end, with free cash flow yields of 15-20%. In our view, the war in Ukraine has highlighted the importance of energy security and of fossil fuels as the world transitions to cleaner energy sources.

Macroeconomic news is relentlessly negative at the moment. There is clearly the risk of further short-term equity market declines, and the economic sensitivity of cyclicals within HEFT’s portfolio has to be considered. However, we note that markets have already taken a significant knock, which may imply much of the poor outlook is in the price,  and HEFT’s discount has widened out into double digits, both of which should improve the risk/reward outlook for long-term investors. We think the trust could appeal to investors who are looking to add back risk in high quality companies such as those in its portfolio. The valuation sensitivity and the discipline of looking for companies with pricing power seem strong strategic benefits, and we note that the approach has delivered outperformance of the benchmark over 3, 5 and 10 year periods.

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