Europe has stumbled from one crisis to another since 2008. But as investors have deserted Europe, its equity markets full of world beating companies has witnessed historic lows. Leading manager John Bennett has turned bullish for the first time in several years. We take a close look at his fund Henderson European Focus trust and examine the investment case for Europe.
John Bennett has been running Henderson European Focus Trust (LON:HEFT) since late 2010, when it was known as Gartmore European. Since his appointment he’s radically altered its portfolio, shrinking it to a concentrated collection of 57 stocks.
He’s done this because he thinks it gives him a better opportunity to add Alpha or to beat the market. This can happen because of the greater effect individual stocks have in a more concentrated portfolio by virtue of the fact that they represent a larger overall holding.
It he gets his stock choices right investors will indeed grow wealthier. If he gets it wrong the losses in a concentrated portfolio will be amplified just as much but in the opposite direction from the one he’d planned.
The Net asset value or NAV is up 15 percent since John Bennett took over. Over the past 12 months its up 22 per cent as against 15 per cent for its benchmark.
The discount the NAV is currently 11 per cent, which is below its 12 month average of 13 per cent. This does of course mean that new investors are buying in to the fund at less than the value of the underlying assets. If the discount should narrow investors doubly benefit from a narrowing discount and increasing share price.
The reverse if of course true too if the discount widens and the share price falls.
The fund is yielding 3 per cent.
John Bennett is an alumnus of Ivory & Sime, the once great Edinburgh fund manager where so many good fund managers seemed to have started their careers, and whose remnants are now to be found within F&C asset management. He spent 17 years at GAM, where he successfully managed European portfolios and enjoyed high ratings from analysts.
According to Trustnet he manages or co-manages six European funds at Henderson. Over a 10 year period he has outperformed his peers in his sector in 7 of those years.
The case for Europe
Bad news on Europe is easily found. Whether it be:
- PMI (Purchasing Managers Index) being consistently below 50 (over 50 indicates expansion, below 50 indicates contraction. In October it was 45.7) in even the better performing European economies of late such as Sweden, Norway, UK.
- The fall in car registrations which is severely hitting manufacturers from Fiat, to Peugeot Citroen & Renault in particular.
- Greece has been in recession for 6 years now
- Unemployment in Europe heading towards 12%.
But what has macroeconomics got to do with stock market performance. Well, whilst there is a link and stock markets can and do act unfavourably to very poor economic actions by Governments, stock markets can nonetheless power ahead when the economy is looking less than rosy. We’ve talked before on WhichInvestmentTrust.com about from research by Dimonson, Marsh & Staunton (published by the London Business School in 2005). In their report entitled 101 Years of Investment Returns, they demonstrated through research on markets going back to 1900 a negative correlation between GDP growth and subsequent stock market returns.
Nonetheless, investors have really taken freight in 2011-2012 when it comes to European equities. Although it’s bounced back a wee bit from its low earlier this year the MSCI Europe index is on a P/E (Price to earnings – A measure of the share price in relation to the underlying earnings or profitability per share) of 10.8 as against 12.8 in the US’ S&P 500 index.
The Schiller P/E which many investors prefer because it takes account of the swings-and-roundabouts of the economic cycle and inflation over a 10 year period is 12.3x for Europe and 22x for the US. That is a 45% difference.
It has to be said that the US market is now far above its long-term Schiller P/E of 16x. This usually indicates subsequent years of underperformance, something investors in US equities should be aware of.
Regular readers might be familiar with some of the arguments we’ve put forward for investing in Europe in recent articles (see links further down this page). They are worth repeating and chief amongst them for WhichInvestmentTrust.com is price. Markets in Europe have risen for the past 6 months but from a low base and are still cheap in comparison to peers such as the US market, the UK or the emerging market economies as we’ve illustrated above.
If all of the bad things that might happen in Europe come to fruition, if Spain and Italy truly come under attack in the Bond market then European markets will undoubtedly tumble, and tumble pretty far. But this risk is being negated by the pretty low price you are being charged as an investor to buy in to quality European assets.
History tells us that buying an asset for less than its intrinsic value has the greatest certainty of returns (You can read Vanguard’s analysis of this here). Whilst buying cheap is not a reliable predictor of short term performance it has much greater predictability powers over the medium to long term.
In addition to this, and unique investment trusts, investors can doubly benefit by buying in to a market with both a low P/E, Schiller or otherwise, and where the investment vehicle is trading at a discount to the underlying stocks low P/E.
As stock market performance is not necessarily correlated to economic growth, investors with a long-term horizon should consider whether they are being sufficiently compensated for the risk they are taking by the price of the market and the discount to net asset value they’re being asked to pay.
John Bennett’s world view of Europe has much in common with other European fund managers we’ve covered at WhichInvestmentTrust.com (see links below). His Europe has considerably fewer countries on its map than the one we’re familiar with. 82% of the trusts investments are in the four countries of Germany, Switzerland, France & the Netherlands. Most of the rest of the trusts investments are in the neighbouring northern European countries of Scandinavia.
Healthcare is his biggest theme and makes up almost a quarter of his portfolio. Whilst he is not expecting the most exciting growth to come from this sector he thinks the sector represents good value, with steadily increasing dividend payments and a drug pipeline the market is discounting too severely.
He likes companies with strong family involvement such as the French disposable razor and pen manufacturer Bic or the defence and aerospace company Dassalt. These have returned 45% & 41% respectively year-to-date.
He also likes consumer goods companies such as Nestle, BMW and Anheuser-Busch InBev, and this represents over 22% of his portfolio.
The portfolio has benefited from gearing of 13%. This has been used very selectively to take advantage of what the manager believes is a mismatch in pricing. He took a large position in financials earlier this year, though as he is largely bearish on European financials in the long term this is a position he has largely traded out of again.
Around a fifth of the portfolio is invested in smaller mid-cap stocks where are to be found solid industrial and manufacturing companies, often family controlled or influenced. This marks the fund out from many of its peers with their large cap bias.
Henderson European Focus Top 10 Holdings / Top 10 Countries
|TOP 10 EQUITIES||PERCENTAGE||TOP 10 COUNTRIES||PERCENTAGE|
|Roche Holding AG||6.7||Switzerland||26|
|Henkel AG & Co. KGaA||3.9||Sweden||5|
|Bayerische Motoren Werke AG||2.4||Italy||1
Peer group & Open ended equivalent
John Bennett also manages a similarly named open ended fund ‘Henderson European Focus’, an OEIC. Like the investment trust he’s been manager there for a wee bit less than two years. In the 12 months till the end of November the OEIC had a total return (dividends plus share price growth) of 24.1%. Over the same time frame the investment trust returned 28%. An out performance of almost 4% and greater than can be earned on most bank accounts (Source Henderson asset management).
The OEIC has double the annual management charge and is unable to borrow to invest. These two factors may account for the difference in performance.
Amongst its investment trust peers Henderson European Focus trust also comes out favourably, though it must be stressed this is over a very short time frame.
On a total return basis and over 12 months, Henderson European Focus is second only to Alexander Darwell’s Jupiter European Opportunities fund. Darwell’s fund has benefited from the large 10+ discount becoming a small surplus over this period. The Henderson fund is also slightly ahead of BlackRock Greater Europe investment trust which also has a great track record in the European field.
The directors of the trust very sensibly took the opportunity of a change in management to review the charging structure. Henderson receives a management fee of 0.75% per annum on the value of the Company’s net assets rather than the gross assets it was previously.
An additional management fee, based on performance, would have been payable if the Manager met certain targets for the year. The performance fee could pay out an additional fee of up to 1.0%.
The revised performance fee will be charged when the NAV percentage increase over the year is greater than the percentage increase in the Benchmark Index in sterling and total return terms, plus a hurdle of 1%. The maximum in any event the manager can be paid is 1.75% pa.
We’re not overly keen on performance fees at WhichInvestmentTrust.com but encouragingly, in this case an underperformance will be carried forward and must be made up before any further performance fee can be paid.
Any excess performance will be carried forward and can be set against continued underperformance but not used to earn or enhance a performance fee payment.
We don’t have confirmation of John Bennett’s direct holding in his fund, though we will update this article once we receive it.
The annual report does confirm the interests of the companies’ directors in the trust. And they don’t make for encouraging reading. Only one of the four directors, Alexander Comba has a holding of 5,000 shares, worth around £32,000. Whilst in his case this is a reasonable holding in line with his remuneration for his job it still leaves 3 of his colleagues on the board with no beneficial holding.
Directors of investment trusts have a very important role as independently minded individuals separate from the management company. They have the powers to sack the incumbent and there are many cases where boards of directors have done this (the board of SVM Global is looking in to this right now). They also have the powers to review and set the remuneration package. With this responsibility should in our view come the requirement to have a direct beneficial ownership in the company. The decisions they make should in our view demonstrably affect them and not just the shareholder because we think they should be shareholders too.
John Bennett has been managing Henderson European Focus for a much shorter time than is ordinarily necessary to form an opinion. We can however look to his pedigree as manager of two European funds at GAM where he was frequently a top quartile manager.
Bennett’s style of investing where he will go overweight in his favoured sectors and where he is running a concentrated portfolio of his conviction buys means there will always be periods where he underperforms when the market is looking elsewhere. It is WhichInvestmentTrust.com’s view however that John Bennett has demonstrated consistent outperformance over a long enough timeframe to warrant consideration by longterm investors.
We also highlight the discount to net value that this fund can currently be bought on.
Henderson European Focus trust joins our buy list.
Henderson European Focus Investment Trust Metrics
|Share Price||640 pence||Dividend Yield
||3%||5 year dividend growth p.a. = 8.7%|
|Total/Net Assets/Market Cap (Million)||£143m / £123m / £108m||Gearing||17%||Managed by John Bennett since 12/01/2011|
|AIC Sector/Date Founded||Europe/ 01/01/1947||On-going charge & how much of the charge is the managers fee||0.82% / Managers fee 0.6% of assets p.a.||Managers direct holding non known.
|Discount or Premium to NAV||-11%||12 Month Average Discount or Premium to NAV||-14%||Financial year end:
|Total Return 1, 3, 5 & 10 years||+37%||+56.5%||+17%||+230%|
|AIC Europe Total Return 1, 3, 5 & 10 years||+36%||+35%||+20%||+261%|
|FTSE World Europe ex UK Benchmark Total Return 1, 3, 5 & 10 years||+25%||+11%||+2%||+152%
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