News

Henderson Eurotrust has a tough year

Henderson Eurotrust (HNE) has published its annual results for the 12 months ended 31 July 2022. During the year, which HNE’s chairman, Nicola Ralston, describes as “a tough one for the Company’s investment portfolio”, HNE provided NAV and share price total returns of -13.9% and -19.6% respectively. In comparison, HNE says that its benchmark, the FTSE World Europe (ex UK) Index, returned -7.0% and its AIC peer group returned -12.5%. The lower share price performance versus NAV reflects an increase in the discount to net asset value over the year, from 8.9% to 15.2%. The chairman says that the dramatic switch towards companies benefiting from COVID re-opening and a recovering economy, particularly in the first half of the year, did not generally favour the types of companies held in HNE’s portfolio. With interest rates rising through the period, the more ‘Value’ areas of the market have materially outperformed the index whilst ‘Growth’ and ‘Quality’ companies have underperformed. HNE is a trust with a focus on ‘Growth, Quality and Consistency’ and so it has been a difficult environment for the portfolio’s performance. The chairman says that the more positive news has been that this environment has enabled the manager, Jamie Ross, to buy more of the type of the growth companies that HNE focuses on, whilst they have been out of favour.

Manager’s comments on the macro

“From an investment perspective, the past year has been dominated by two partially linked themes. As the world exited from the acute stage of COVID-19 restrictions, a diverse array of supply bottlenecks emerged which acted to obstruct economic activity whilst simultaneously triggering inflationary pressure. Then, Russia’s increasingly aggressive rhetoric against Ukraine turned into tragic action as they launched their invasion in February 2022. This further complicated global supply chains, caused a notable drop-off in consumer and business confidence, and added to the already growing inflationary environment. Taken together, these two themes resulted in a market where, from a factor perspective, Value significantly outperformed Growth and, within Value, defensive companies significantly outperformed cyclical companies. From a sector perspective, areas such as Energy and Tobacco saw the strongest performances and areas such as Luxury Goods, Technology and Industrials significantly lagged the market. We have struggled to perform well in this environment and over the year, against an index decline of 7.0%, the Company’s NAV fell 13.9% and the share price retreated by 19.6%.”

Manager’s comments on performance attribution

“From a sector perspective, our underperformance during the year was concentrated in two main areas: Consumer Discretionary and Information Technology. Within the Consumer Discretionary sector, our position in Delivery Hero was the most significant detractor from performance, although Adidas and Auto1 also contributed negatively. Delivery Hero, the takeaway delivery platform business, had seen a very strong share price performance during the period of the most intense COVID-19 restrictions, due to a boom in people ordering food to be delivered to their homes. However, as the world ‘reopened’, investors speculated that activity levels on the platform would slow and although there has only been limited evidence that this has been, or will be, the case, the share price has suffered as a result. Although we have not added to the position we remain confident in the company’s long-term prospects and have maintained our holding. Within the Information Technology sector, our positions in the payment providers Nexi and Worldline came under some pressure during the period; this subsector is experiencing a period of rapid technological advancement and competition from newer business models is proving to be disruptive to the established players, we decided to sell both of these positions during the period. It is also worth mentioning Kion, the warehouse automation business, which was our biggest detractor in the Industrials sector. In a way, the underperformance of Kion during the period has similarities to our experience with Delivery Hero. Again, Kion was a big beneficiary of the period of COVID-19 restrictions, with stay-at-home consumer behaviour driving a splurge in spending on warehouse capital expenditure from a wide range of ecommerce companies. This capital expenditure spending has now slowed from very elevated levels and Kion’s shares have come under some pressure; we have maintained our holding.

“We had success with some of our Health Care positions during the year. This was especially the case with our large and longstanding position in Novo Nordisk. We have often used Novo Nordisk as an example of a company where consistent and focused capital allocation has resulted in strong long-term return on invested capital. Over the past twelve months, the company has started to reap the rewards of a multi-year research and development spending program focused on obesity.

“For many years, Novo Nordisk have understood that an important side-effect of their diabetes-focused molecule Semaglutide has been weight-loss in patients. They have now found a way to harness this attractive property in a prescription drug aimed at patients suffering from obesity. Although they have had some teething problems in ramping up the production of this new drug, early demand has been much greater than expected and the long-term potential looks exciting.

“Another strong-performing position worthy of mention is Bawag, another long-standing holding for us, which combines the rare attributes of being a bank with being a company capable of consistently generating an attractive return on equity, well above its cost of capital. As with Novo Nordisk, one of the key attractions of Bawag is a management team focused on long-term returns above all else. They run a lean cost structure, lend in a conservative fashion and have allocated capital exceptionally well over time: this has resulted in a business whose share price performance has significantly outperformed its sector over time.”

Manager’s comments on portfolio activity

“We have been through a tough twelve months, where the environment has not been conducive to our style of investment, which tends to focus on high-quality growth companies. However, there is a silver lining to this: we have been able to buy more of these types of company at lower share prices and valuations. This includes adding to existing favoured holdings and bringing in a select number of new positions. Below I have given three examples of new positions that we have brought into the portfolio in recent months.

“The first example is Airbus. We are of the view that the civil aerospace industry represents an area of the market that is only part-way through a natural post-COVID recovery. We already have an investment in Safran (engines) and have now also added the position in Airbus. Airbus operates in a global oligopoly with Boeing and it has a substantial multi-year backlog of aircraft orders which should provide it with revenue visibility. Given its above-average return on invested capital and strong balance sheet, it trades on far too cheap a valuation in our view.

“Second, we bought a position in Besi, which is a high quality but highly cyclical semi-conductor equipment company. We initiated a position after the shares had fallen by more than 50% from their peak due to concerns over the cycle. We see this as a solid opportunity to start to increase our semi-conductor exposure via one of the best companies in the sector (the other one being ASML, which we already own). People often confuse cyclicality with ‘value’ or ‘low quality’. Besi is cyclical but is a fantastically managed business with well-entrenched market positions in a structural growth sector.

“Third, we initiated a new position in Sartorius. We are very excited by the prospects for Sartorius: a high quality, fast growing bio-pharma equipment company that had significantly derated between October 2021 and when we bought a position. We have long admired Sartorius, but have never managed to invest at a reasonable multiple until now.

“All three companies described above have strong pricing power, healthy market shares, attractive growth drivers and deliver above average return on invested capital through the economic cycle.”

Leave a Reply

Your email address will not be published. Required fields are marked *

Please review our cookie, privacy & data protection and terms and conditions policies and, if you accept, please select your place of residence and whether you are a private or professional investor.

You live in…

You are a…

Exit mobile version