Henderson Eurotrust beats both benchmark and peers

Henderson Eurotrust HNE Jamie Ross

Henderson Eurotrust has published results for the 12 months ended 31 July 2023. Over the period, it delivered an NAV return of 16.7% and a share price return of 19.7% – both ahead of the benchmark return of 16.1% and well-ahead of the peer group NAV return of 14.6%. The dividend was maintained at 3.8p. The board has also decided that, as only a very small part of the company’s revenue is received in the first half of the financial year, going forward the company will pay a final dividend only, and no interim dividend.

The chairman says that stock selection was the driver of the outperformance, and points out that this was an encouraging outcome given that growth stocks on the whole have lagged the market.

The chairman had intended to retire at this year’s AGM but says the search for her successor has taken longer than anticipated. The other directors have asked her to stay on until its completion but no later than the next AGM in November 2024.

Extracts from the manager’s report

What has driven our performance?

The best performing sectors in the financial year tended to be those of a cyclical, interest rate sensitive nature: consumer discretionary, financials, industrials and technology. The sectors that lagged tended to be less economically sensitive: consumer staples, health care, real estate and telecommunications. As has been usual for us, our sector allocations have had little bearing on our relative performance. Stock picking within each sector has been a much more important determinant of performance: we are ‘stock pickers’ not ‘sector pickers’.

Our best performing positions were in three areas: financials, luxury goods companies and semi-conductor equipment businesses.

Within financials, we were particularly well-rewarded for our decision to maintain a large position in UniCredit even through the early days of the Russia-Ukraine conflict in 2022, when investors were concerned about UniCredit’s Russian exposure. We felt that their exposure was small enough to be manageable, even in a worst-case scenario, and that the undervaluation of the company’s shares was far too extreme for us to sell just at the time when higher inflation and interest rates were coming back into the system (typically a good thing for banks, at least initially). UniCredit shares have delivered a total return of more than 150% over the last twelve months and have benefitted from higher interest rates, strong control of the cost base, a benign environment for loan losses and strong capital returns to shareholders. Management have done an excellent job. Munich Re, a longstanding position for us, has been another financial that has performed well in this environment.

We have three luxury goods companies in the portfolio: Hermès and Moncler have been longstanding positions and LVMH was added more recently, in 2021. Luxury goods companies sell aspiration and desirability – intangible characteristics for which people are prepared to pay a high price. The best companies curate their brand allure with decades of consistent investment, avoid discounting and partner with well-known trend-setters. Within the sector, we have taken the approach of owning brands with the strongest and most longstanding cultural heritage. This approach has led us to owning Hermès, Moncler and LVMH; these are three of the more expensive companies in the sector, but we think it is worth paying up for brands of this quality. We were pleased to see our companies perform well in the period, in part due to short-term factors such as recovery in China after Covid restrictions were lifted, but our investment view takes a much longer-term perspective. We continue to see attractive growth prospects for these high margin and high return companies over the medium- to long-term.

The semiconductor industry encompasses businesses of highly variable quality. The industry is exposed to attractive structural growth drivers such as the growing ubiquity of semiconductor usage and powerful technological themes such as machine learning, artificial intelligence and the internet of things. However, not all companies have a sufficiently commanding market position to translate this growth potential into a high margin and high return business. The three semiconductor companies that we own share one key characteristic: they have consistently high market shares in their core technology. ASML has a 100% market share in high end lithography, ASM International has a commanding market share in a packaging technology called Atomic Layer Deposition, while Besi dominate the nascent area of Hybrid Bonding. Strong market shares in niche technologies drive high margins and return on capital for these companies. We have had a longstanding position in ASML and initiated a new position in ASM International during the year and Besi in June 2022, taking advantage of a period when investors seemed overly concerned about a potential short-term cyclical downswing in industry demand. These two positions rallied particularly strongly over the year.

Finally, Novo Nordisk is worthy of mention. Novo is our largest position and a long standing holding in the portfolio. Novo has recently launched an obesity drug in the US and this has attracted a huge amount of media attention. We have been following their progress in this therapeutic area for a number of years and it is pleasing to see the company finally able to bring an efficacious and well-tolerated product to market. We believe that the obesity franchise is extremely well positioned for growth and this reinforces our positive views on the company. We continue to own a large position in Novo even after the strong multi-year share price performance.

Our underperformers have tended to be defensive in nature. When investors want to buy into improving economic sentiment, they tend to avoid steady, consistent, dependable companies such as Roche, Cellnex and Sartorius. We ignore these short-term swings in sentiment and continue to value the long-term compounding nature of these businesses. In addition to this issue of style, there were a small number of companies whose operational performance was not as impressive as we would wish. Allfunds, DSM Firmenich and Kion have each struggled this year.

Allfunds, a business that links up fund houses with fund distributors, is exposed to three major drivers of growth in assets under administration: the onboarding of new clients, inflows from existing clients and long-term growth in market levels. Over the past year or two, market volatility across multiple asset classes has impacted the latter two of these drivers whilst the onboarding of new clients, an area where they have more control, has remained resilient. We retain faith in the ability of this high market share, high margin business to generate significant growth over time, but a period of more benign markets would be welcome. DSM has struggled with a number of issues, some industry-wide and some stockspecific. On the former, there has been some post-Covid unwind with a number of US customers destocking their ingredients inventory. On the latter, DSM has suffered from weakness in vitamin pricing and have had to deal with disruption related to the Firmenich merger and senior management changes. We have maintained our positions in both Allfunds and DSM (now DSM Firmenich). Finally, Kion has suffered from cost overruns in its warehouse automation business as well as signs of slowing demand. We felt that our long-term thesis had been sufficiently challenged to sell out of our position in Kion.

HNE : Henderson Eurotrust beats both benchmark and peers

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