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Woodford sell-off turns up heat on James Henderson’s HOT

8 July 2019

Fund manager James Henderson is feeling pressure from a sell-off in some of the early-stage and recovery smaller companies his Henderson Opportunities Trust shares with Neil Woodford who is battling to raise cash for his suspended equity income fund.

Fund manager James Henderson is feeling the pressure from a sell-off in some of the early-stage and recovery smaller companies he holds in Henderson Opportunities (HOT), as a result of Neil Woodford’s equity income fund suspension.

Henderson said he wished he had sold more of his holding in 4D Pharma (DDDD), an Alternative Investment Market-listed (AIM) pharmaceutical company developing drugs from gut bacteria, last noted as a 1.4% position in the £80 million trust.

Since the end of March 4D shares have dropped by a third from 137p to 91.5p, reducing the company’s market value to £61.5 million. The fall reflects mounting concern that Woodford, the firm’s biggest investor with nearly 27% of the shares according to Refinitiv data, will look to sell the shares. 

Most of Woodford’s holding is through the Woodford Equity Income fund in which trading was suspended on 3 June following a surge in investor withdrawals. The suspension is designed to give Woodford time to liquidate holdings in order to raise cash for exiting investors.

Invesco - Woodford’s former employer - is the second largest investor on 14%, adding to the lack of liquidity in the stock.

‘Nothing has actually gone wrong with this business…It just gets overhyped, it's got Neil and Invesco on the register, and this means there is selling pressure on some of these shares at the moment,’ said Henderson, who also holds 4D in the Lowland (LWI) investment trust and Janus Henderson UK Equity Income & Growth fund he runs with co-manager Laura Foll.

‘The problem is at the moment is that area has seen quite a lot of selling because people are worried about liquidity and this is an opportunity to quietly add to [some in this area],’ he said.

This included IP Group (IPO), a 0.7% position in HOT and 3% of Woodford Equity Income,  though Woodford reduced his stake in the business from 19% to 14% after the fund’s suspension.

One of the intellectual property firm’s most successful investments was unlisted biotechnology business Oxford Nanopore, also a 3% position in the Woodford fund.    

Henderson said the trouble with these early-stage biopharma companies was that development of products was slower but they still needed continuous capital along the way.

‘I've never participated in an Oxford Nanopore fundraising but obviously Neil and people have and now they can’t monetise that,’ he said. ‘But it’s still a very, very good company.’

However, he still backed the long-term potential of these companies and said he planned to up the early-stage portion of the trust from 6% to 10% of the portfolio.

‘No excuses’

Henderson acknowledged the trust's large weighting to smaller companies had led to more volatile returns, one of the reasons for the shares trading 17% below their net asset value which had fallen 8% in the past year . 

Over five years shareholders have seen a total return of just 18%, below the 50.6% average of trusts in its AIC UK All Companies sector.

The picture is better over 10 years with a total return of 331%, placing it third out of 12 trusts in the sector and ahead of the 261% average return. 

Henderson said this reflected the impact of HOT’s bet on stocks on the junior Alternative Market Investment (AIM) exchange, which account for 59% of the portfolio.

With 90 stocks HOT is the most concentrated of the trusts and funds Henderson manages, although the manager believed there was still sufficient diversity to dilute the risk of stocks going wrong, such as the collapse of Bargain Booze-owner Conviviality (CVRC) last year, which his value-style of buying companies were out of favour exposed him to.

‘[In HOT] we've got no excuses not to perform and I'm really feeling that at the moment,’ said Henderson.

Henderson was speaking to journalists last week after publication of the trust’s half-year results showed a total return on net assets of 5.6% in the six weeks to 31 April, behind the FTSE All-Share return of 6.4%. This masked volatile swings with the AIM market plunging 21% in the fourth quarter of 2018 before rebounding at the start of 2019.

Specialist translator RWS Holdings (RWS) was the portfolio’s best performer as the market rewarded its good margins and consistent performance. Its worst performer in the period was Zoo Digital (ZOO), a provider of dubbing and subtitling services whose legacy DVD business fell more sharply than expected. Henderson said he had added to the position believing it offered compelling value and had been rewarded with a 16% rally since the half-year end.

Revenue from the portfolio jumped to over £1 million from £797,000 a year ago helped by £224,000 from lending stock to short-sellers making bets that share prices would fall. Revenue per share of 13.4p up from 10p last year comfortably covered a 7p interim dividend raised from 6.5p. The trust yields 2.2%.

The latest issue of the Investment Trust Insider e-zine contains an in-depth feature on Law Debenture (LWDB): read a UK Equity Income giant wakes.

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