Results analysis: Henderson European Focus Trust

• Henderson European Focus Trust (HEFT) has recently published its interim results, for the six months to 31 March 2021. For that period HEFT reported a NAV total return of 13.6%, outperforming the 11.9% return of its benchmark, the FTSE World Europe ex UK Index.
• The managers continue to actively position the trust around the varying phases of the pandemic recovery. The most recent change has been a substantial increase in its exposure to consumer discretionary stocks, in preparation for an expected recovery in consumer spending resulting from Europe’s vaccine rollout and increased consumer savings.
• HEFT trades on an 8.9% discount as of 25 May 2021, despite generating strong long-term returns. HEFT has generated a five-year NAV total return of 90.5% to the same date, beating the 81.9% of its FTSE World Europe ex UK benchmark.

Kepler view

Henderson European Focus Trust (HEFT) offers investors a ‘core’ approach to active European equity investing. Its managers, John Bennett and Tom O’Hara, follow a concentrated yet pragmatic approach to investing, intentionally avoiding the restrictions of a single investment style, be it value or growth. The fund managers believe that by adopting this flexibility they can avoid being caught on the wrong side of the market i.e. being committed to a single style of investing during periods where the market deems it to be out of favour. This flexibility is a by-product of the fund managers’ six-part investment process which includes conventional aspects, such as prioritising cash flow and avoiding excessive leverage, but also ideals such as believing in change and in market cycles, as well as committing to a long-term view and understanding that investors make mistakes.

While all of these components are key to HEFT’s long-term success, helping the trust to outperform its benchmark by 6.7% over the last five years, the fund managers’ flexible approach to rapidly changing corporate conditions has been particularly effective amid recent market turmoil brought about by the pandemic. Over the last six months, they have benefited from identifying the nature of the post-pandemic V-shaped recovery in Europe. Whereas previously the portfolio was positioned to capitalise on a rapid recovery in industrial stocks post-crash, the managers now foresee a rapid rise in consumer spending. Thanks to the combination of increasing immunisations as well as extremely high savings ratios, the managers believe there is an incoming release of pent-up consumer demand. This has led them to increase the portfolio’s allocation to consumer discretionary stocks, such as Adidas, Daimler and Inditex. They have recently increased their allocation to banks and the oil sector, as part of their belief in the recovery of value stocks, though they remain underweight in these sectors versus the benchmark.

The trust does retain a large weighting to materials however, with its largest holding being Holcim, the cement manufacturer. The managers cite not only the fundamental strength of the company and Europe’s increasing demand for construction materials, but also its ESG credentials as Holcim is a global leader in eco-friendly concrete. Currently HEFT’s largest sectoral positions are in the materials and consumer discretionary sector, while industrials and consumer discretionary were the largest contributors to its total return over the last 12 months. As a result of the recent changes to its positioning, HEFT has a slight tilt towards value relative to its benchmark.

We believe HEFT is positioned particularly well for the near term, thanks to the managers’ adaptability and current standing. They have proven the effectiveness of their investment process over the pandemic, having been able to successfully navigate the varying phases of the recovery. While this is not only a clear source of alpha, we believe that the trust offers a form of hedge against incoming inflationary pressures. This is due to its overweight to the sectors which are most likely to drive near-term inflation and thus indirectly benefit; specifically consumer discretionary, materials and industrials. As a result we believe HEFT can be viewed not only as a means to gain exposure to European equities, but as a near-term diversifier to a pre-existing holding given its active positioning around any recovery which follows the pandemic. This near-term potential makes the current discount of 8.9% interesting, especially if the trust can continue its recent outperformance.

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