Buffeted globetrotter trims its sails

Fund Strategy - 6 Feb 2012 | By Shaun Cumming

Investors in the Henderson Opportunities Trust have endured a volatile year and the latest annual financial report reveals that its manager is trimming the £47.6m trust’s portfolio to stem losses.

Performance figures over one and three years contrast spectacularly. Over one year to February 1, the trust is ranked 18 out of 19 funds in the UK Growth sector, making a loss of 22.1%, according to FE Trustnet. Over three years to the same date, however, it is ranked first out of 18 funds, returning 107.9%.

James Henderson, the manager, says 2011 was a difficult year for the types of company held in the portfolio, but there were improvements at the end of the year.

“I run the trust with Colin [Hughes], who has been involved for a very long time,” he says. “At the moment, the portfolio is split, with 9% in the FTSE 100, 25% in the FTSE 250, 28% in smaller companies, and the balance in the Alternative Investment Market [Aim]. (Investment trusts continues below)

With most of the fund invested in smaller companies, performance suffered in the harsh economic conditions of the past year. “We find the best value is in smaller companies,” he says. “When you get firms [with turnover] below £100m, price-to-earnings ratio is substantially lower than in any other types of market.”

This fits well with the trust’s overall goal, which is value and long-term growth rather than income. Henderson adds: “[The fund] has not been very dividend orientated. It is about looking for capital growth.”

According to its latest factsheet, the trust is trading at a discount to net asset value of 28.3%, which Henderson says is because of the liquidity of small companies. “And also because the trust is quite small,” he adds. “There has been a move towards large, liquid trusts.”

The trust’s performance was affected in 2011 by two very different sets of market conditions, according to Henderson.

“The first six months of the year were good for the fund,” he says. “People were talking about a recovery, and it helped. But during the second six months people became risk averse, and went for liquidity.

“It was in August and September that there was a major sell off, and that particularly hurt the small cap area.”

Although the past few months have brought a slight recovery, there is no guarantee that 2012 will be any better, generally, than 2011. Henderson says there is a chance of having “quite a good year”, as long as prolonged global recession is avoided.

He adds: “If the global economy grows, and even if there is dull headline growth in Britain, it would be good for the fund. But we are hoping there is no severe recession. The key is for the global economy to grow reasonably well.”

Of course, whether times are good or bad, picking the right stocks is always important. “If [firms] can provide a service that is competitive, they will do well. It is interesting that global trade is growing at twice the rate of global [GDP]. The good [small companies] are benefiting from the global economy.”

”We are hoping there is no severe recession. The key is for the global economy to grow reasonably well”

If the global economy were to go into recession, this would severely hurt the two most common types of company in the Henderson Opportunities portfolio – industrial and technology firms.

“A global recession would be a big hit for the growth of manufacturing and in technology. I am obviously worried about the eurozone, but Europe is only 15% of the global economy,” Henderson says.

With 37.4% of the portfolio held in industrials and 14.5% in technology, this represents significant conviction in the outlook for these sectors, but Henderson reckons they are abundant with good companies, producing in-demand products and services.

“Even through the last few years, firms that provide a good service that the global economy needs, have done well,” he adds. “But they really need a unique proposition in each area. In engineering and technologies there are more of these types of firms.”

Though there are consumer names in the portfolio, Henderson says that “the wind is very much in the consumers’ face”, so it is particularly important to him to choose the right type of firm in this area. “We do not have many consumer stocks,” he says. “What we do have is specialist niche firms – for example, Majestic Wine, which is niche enough to weather the different trading environments.”

Many investors have benefited from the recent success of luxury consumer brands, many of which have been supported through strong sales in emerging markets. However, Henderson says valuations are now a problem. “We missed out on the likes of Burberry – valuations have got too high on that side of things.”

Yet there is another advantage of investing in industrial and technology names, according to Henderson. “A third of the companies in the portfolio have net cash on their balance sheets, which is unusual,” he says.

He points to Fidessa as a firm that has been a long-term holding because it is cash generative, providing trading floor software for financial services firms. But in an environment where financial services firms are making redundancies, says Henderson, its valuation drops.

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