For the 12 months ended 31 July 2021, Henderson Eurotrust generated a share price total return of 25.8% and an NAV total return of 22.3%. These lagged the return on the company’s benchmark, the FTSE World Europe (ex UK) Index which returned 26.6%. The dividend is being maintained at 25.0p using £1.8m (based on the current issued share capital) of the remaining dividend reserve.
Share split
At the AGM, approval from shareholders will be sought to effect a sub-division of each existing ordinary share. The price of the existing shares has almost trebled over the last 10 years. To assist monthly savers and those who reinvest their dividends or are looking to invest smaller amounts, the directors believe that it is appropriate to propose the sub-division of each existing ordinary share into 10 new ordinary shares. The directors believe that the sub-division may also improve the liquidity in and marketability of the company’s shares, which would benefit all shareholders.
Extract from the manager’s report
“It is worth pointing out that the relative underperformance all came in the second half of the year, i.e. after we had seen positive efficacy data from the Pfizer vaccine (and vaccines from other companies) and during a period of time when investors were buying companies that they deemed to be “reopening beneficiaries”. There are a few factors, mostly stock-specific, that serve to explain the Company’s investment performance during this period.
First, the gaming industry has had a torrid time in recent months; this is an area in which we had significant exposure. At the start of 2021, we had a 4.8% position in Prosus (which is exposed to gaming via Tencent), 3.6% in Embracer and 1.6% in Stillfront. Prosus has been hit by the ongoing regulatory clampdown in China which has impacted the shares of its largest portfolio company Tencent. In addition, all three gaming companies are suffering from the perception that they were significant beneficiaries of COVID-19 restrictions and so should have a tougher year in 2021. I have taken action here and reduced our Prosus position from 4.8% to around 2.7% prior to the recent regulatory headlines and have since taken it down further to 1.5%. I think that Prosus and Tencent are both deeply undervalued, but there is a lack of clarity on Chinese regulation and this has made me less willing to have a large exposure to the company. A few months ago, I also reduced our weighting in Embracer from a position of approximately 3% to 1.5% to reflect uncertainty over near-term numbers and the potential indirect impact from tighter Chinese regulatory scrutiny. These trades have limited the impact that our prior position in gaming would have had on performance.
Second, positions in Grifols and Brockhaus have materially underperformed, both for stock specific reasons. Grifols collects blood, fractionates it and sells the plasma proteins which are extracted via this process. The collection of blood requires people to be willing and able to leave their home and walk into a collection centre. Over the course of the COVID-19 pandemic, with restrictions on movement and social interaction, plasma collection was materially impacted and this has had a knock-on impact on Grifols’ ability to meet demand. I see this as being a transient issue and I have retained a position. Brockhaus is a German holding company focused on buying fast growing, high margin German “Mittelstand” companies and owning them for the long term. At the moment, Brockhaus has two portfolio companies and is in the process of adding a third. Of the two existing holding companies, Palas is involved in the high-precision measurement of the smallest air particles and IHSE is a global technology leader in the area of KVM (keyboard, video, mouse) solutions used in mission-critical applications such as air traffic control and hospitals. The third company which they are in the process of acquiring is a business-to-business bike leasing platform in Germany (similar to “Bike 2 Work” from a UK context). I like the economics of all three businesses, but over the past year or so, IHSE has been significantly impacted by the ongoing travel restrictions. As with Grifols, I see this as a transient issue.
Third, and more macro-related rather than stock-specific, European equity markets have been very strong, led largely by cyclical businesses; we have only limited cyclical exposure and this has been a drag on performance. Historically, the Company has fared less well in environments of strong cyclical recovery due to a longstanding bias towards higher quality businesses with defensive earnings streams; and this again has been the case over the last 12 months. I had shifted the portfolio towards some more cyclical businesses in October/November 2020, which I will describe in more detail below, but this was not enough to completely protect the portfolio from underperformance in the months that followed. Another way to look at this is that during the year to 31 July 2020, a very successful year for performance, we had benefitted from owning a significant number of “COVID-beneficiaries” and by not owning many “COVID-losers”, whilst during the last twelve months, the opposite has been true.
There are many cyclical companies in the index, a majority of which I would be unlikely to own due to my concerns over weak structural features of their business models. A number of these companies have staged extreme recoveries and not owning these companies has been detrimental to performance. A lack of exposure towards areas such as mining, steel, chemicals and capital goods adversely impacted performance relative to the index.
The areas of the portfolio that have performed strongly have largely been those that have cyclical sensitivity. This includes positions such as Hermès, Moncler and Partners Group; companies that we would describe as “quality cyclicals”, and also includes companies such as CNH Industrial and Dialog Semiconductor; companies that we see as lower quality cyclicals but capable of significant improvement.”
HNE : Henderson Eurotrust will split its shares