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Peel Hunt picks Henderson European as value tip for 2020

21 January 2020

John Bennett’s Henderson European Focus joins broker's list of six ‘value’-style investment trusts it believes are primed for success.

Peel Hunt has added Henderson European Focus (HEFT) to its list of ‘value’-style investment trust plays after strong performances from its picks last year.

Value investment trusts are those whose fund managers look for cheap, out-of-favour stocks, as opposed to 'growth' investors who are prepared to buy more expensive stocks growing faster than the market.

In practice, the value vs growth split is more fluid than is often suggested, with 'growth at a reasonable price' a frequent compromise among professional investors.

Nevertheless, funds and trusts with more of a growth outlook have undoubtedly done better than their value counterparts in the past 10 years.

However, that may have started to change last year with value trusts rebounding in the fourth quarter of 2019.

In retrospect, Peel Hunt investment company analysts Anthony Leatham and Priyan Rayatt timed their punt very well a year ago.

Their choice of AVI Global (AGT), the former British Empire; Law Debenture (LWDB), which my editor Gavin Lumsden bought for his Sipp after the electionFidelity Special Values (FSV); Aberforth Smaller Companies (ASL); Temple Bar (TMPL) and Polar Capital Global Financials (PCFT) - all in some ways either overlooked or feeling out-of-sync with markets - beat their stockmarket benchmarks and, with their share prices re-rating, generated impressive shareholder returns of between 18% and 40%.

Not surprisingly, after such gains, the analysts have overhauled the list, retaining Aberforth and Temple Bar and adding Henderson European Focus, Gabelli Value Plus (GVP), a US smaller companies trust that faces an uncertain future after a bruising clash with wealth manager and shareholder Investec; Jupiter Emerging and Frontier Income (JEFI), which our columnist Ian Cowie recently bought for his pension, and Seneca Global Income and Growth (SIGT).

‘After numerous false dawns, we are convinced it is a case of when not if the value style stages a recovery,’ they said.

After struggling to compete with highly-rated growth stocks and “bond proxies”, the prospect of a material rebound remains across a number of regions. We highlight six trusts we believe have portfolios primed to benefit from this journey.’

HEFT focus

We are focusing on HEFT because of the four additions, it is the only one that is not a corporate broking client of Peel Hunt.  

The £288 million portfolio is managed by John Bennett, who Leatham described as ‘pragmatic’ in style able to switch between value and growth in search of the best opportunities.

Bennett is shifting to a higher conviction strategy by reducing the number of stocks in the portfolio to take bigger bets. He currently holds 46 stocks, towards the bottom of his previous 40-60 range, but is looking to stick within a tighter range of 30-40 in future, with positions of around 5% of assets more common than the former 2-4% average.

Performance bounced back last year with 24.3% growth in the underlying net asset value (NAV), 4 percentage points ahead of the FTSE World ex-UK index, underpinning an even better 31.5% total return for shareholders. That made up for a bad 2018 when the shares fell 20.8%.

Bennett has run HEFT for nine of its past 10 years and so can take most of the credit for the 11.4% average annual growth in NAV since 2010, which beats the 8.5% of its benchmark and ‘exemplifies the manager’s stock-picking skills’.

Although, its 179.6% total shareholder return over 10 years is below the Europe trust sector average of 200.5%, Leatham believed the trust's 9% discount - wider than its sector average of 7% - offered good value for a high quality portfolio overweight in large industrials, consumer goods and healthcare stocks, at the expense of financials, where he avoids banks due to the competitive threat from new challengesrs.

‘The equity market has been perceived as broadly unloved but in sterling terms the European index has recovered strongly from a damaging 2018,’ said Leatham.

‘HEFT provides investors with exposure to a new European equity story and is currently trading at an attractive discount,’ the analyst said.

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