Disclaimer
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.
- Over the six months to 31/03/2023, Henderson European Focus Trust (HEFT) produced a NAV and share price total return of 22.8% and 28.3% respectively. The AIC Europe peer group on average produced equivalent figures of 22.3% and 25.7%, and the benchmark’s total return was 21.7%. Over three years, which the Fund Managers believe is a more relevant period, HEFT’s NAV and share price total return was 64.0% and 73.3%, compared to the peer group’s equivalent figures of 54.7% and 56.2%. The benchmark total return over the same period was 56.2%.
- Positive contributors to performance came from HEFT’s exposure to European semiconductor stocks such as BE Semiconductor, ASM and STMicroelectronics, as well as stocks such as Holcim, a leading cement manufacturer and Kion Group, an equipment manufacturer which showed a strong recovery in the aftermath of a profits warning and share price fall earlier in 2022, and which remains a key performance contributor over the longer term.
- Detractors from performance included the insurance company ASR Nederland – part of the collateral damage of the ‘banking crisis’ – along with Finish forestry company UPM Kymmene, as well as HEFT’s exposure to oil companies such as Shell, which having performed well prior to HEFT’s half year, lagged the strong market run-up more recently.
- The team has initiated new positions in several stocks including brewer Anheuser-Busch InBev, which they believe is well placed against its competition in an inflationary environment, with a rapidly improving balance sheet and high margins. Siemens was added, as the team expects it to benefit from a number of mega trends such as onshoring, digitalisation and automation, and it has undergone a significant streamlining of its business. A position in Adidas was re-established following management changes at the company, which the team believe are very positive for this leading franchise.
- Net gearing rose from 1.9% to end the period at 6.8%, leaving the Managers with some cash remaining from the long-term gearing facility to take advantage of further opportunities.
- The interim dividend has been increased to 1.3p from 1.2p for the same time last year, with the shares going ex-dividend on 1 June 2023. HEFT’s dividend yield is c.2.7%.
- Noting the board’s frustration with the discount to net asset value, which currently stands at 12%, the board used its powers to buy back a small number of shares during the period. Chair Vicky Hastings said: “The swift recovery has not been without its nuances. At the time of writing, the market is in the throes of a ‘defensives vs cyclicals’ tug of war, as markets struggle to contend with a potential recession. We are cognisant of the near-term risks to our ‘quality cyclicals’, but we must not take our eye off the long-term opportunities for those with the luxury of long-term capital to deploy – ‘global champions’ that live in Europe. This includes companies which are highly competent in providing tangible goods and services which have taken on renewed strategic importance in an increasingly multi-polar world: clean-energy generation, onshore digital automated factories, smart infrastructure, and their myriad components and raw materials. These are companies and investment opportunities which, critically, in the eyes of our valuation-conscious Fund Managers, come at reasonable valuations. As they elucidate in their commentary [in the 31 March 2023 half-year results report], if the last decade was about owning ‘asset-light’, the next will be ‘asset-heavy’. Mean reversion is alive and well.”
Kepler View
As the Henderson European Focus Trust (HEFT) chair notes, European equities outperforming US equities seemed almost unthinkable a year ago, with significant capital flows out of Europe and into the traditional safe haven of the US. but the propensity for equities to return to long-term average valuations, or ‘mean reversion’, is something at the front of Fund Managers Tom O’Hara and John Bennett’s minds at the moment, and European equities reached an extreme valuation discount to US equities in the last quarter of 2022. Patient investors have since been rewarded with a strong recovery and outperformance which is perhaps the beginning of that mean reversion process.
Tom and John believe the next ten years are unlikely to be a repeat of the last ten years, and as investors lick their wounds and try to learn the lessons of another banking crisis and take stock of a world where factors such as low-cost borrowings and globalisation don’t seem like they will be back any time soon, their approach seems well suited to a changing environment. What’s just as important as their long-term strategic view is their flexible approach that can adapt as the evidence changes. One of the things the team believes will help performance in the coming years is a focus on companies that ‘make stuff’, which is in sharp contrast to the asset-light model that stock markets have favoured for the last ten years, and this is already showing through in the strong performance of a number of companies highlighted above.
The chair also notes the board’s frustration at HEFT’s discount, which at time of publication was 12%. With that in mind, we quote the three-year NAV and share price figures in the summary above in part to highlight how much discount narrowing can contribute to an investor’s performance. In HEFT’s case, the idea that the discount could narrow further is not theoretical, as it has in the past traded above net asset value for some time.
Adding to the appeal, HEFT has quietly developed a good track record of increasing dividends each year, and in the last ten years has only held the dividend once, during the pandemic. This means that with the current discount HEFT has quite a useful yield of c.2.7%. The interim dividend has seen a substantial 8% increase, although the Board notes some rebalancing of the interim dividend is underway. In 2022 HEFT took out very low-cost long-term borrowing at a blended interest rate of 1.57% in two tranches of 25 and 30 years’ duration, comfortably below portfolio yield. While HEFT currently makes modest use of gearing, which at present sits at c.7.0%, this spread between the cost of borrowing and the portfolio yield will be a positive for performance over time.
Overall we view HEFT as a core European equity trust, with a long and short-term track record of adapting to different market cycles, and of identifying long-term investment themes before they become mainstream. We think an attractive discount of c.12%, and yield of 2.7%, potentially makes for a good long-term entry point.
