The £71m Henderson EuroTrust portfolio invests predominantly in large and medium-sized companies whi...
The £71m Henderson EuroTrust portfolio invests predominantly in large and medium-sized companies which are perceived to be undervalued, either in relation to future growth prospects or on account of significant management changes.
The investment trust's aim is to achieve a superior total return for a portfolio of high quality stocks. Tim Stevenson, who has managed it since 1994, talks about the portfolio with Jenne Mannion. The Henderson EuroTrust recently won the Investment Week Investment Trust awards of 1999, in the split cap category.
What benchmark do you use and how closely do you stick to it in terms of asset allocation?
The benchmark I use is the FT/S&P World Europe (ex UK). I do not stick to it at all. We are totally stock driven and have little regard for geographical weightings. I could not tell you off the top of my head what my geographical weightings are. The portfolio is driven by where the opportunities are in Europe.
We are predominantly mid to large cap investors, we will not go more than 20% into small cap, because that area is already covered extremely well by Stephen Peak in the TR European Growth Investment Trust, which is primarily a small cap fund.
The Henderson EuroTrust is complementary to that. Many investors should be looking to hold both these trusts in their portfolios because that means they are holding the small cap excitement but also the large and mid cap stocks in Europe through the Henderson Euro-Trust.
How many stocks do you hold in the portfolio?
It is a concise portfolio of 55 holdings. I like to sum up the trust as being invested in the top 55 investments in Europe at any one time. By having a focused list of holdings there is no room for companies which do not come up to scratch.
What is your investment philosophy?
Within the investment trust we have always looked for longer-term investment opportunities in preference to cyclical opportunities.
Primarily I go for growth but I am wary of growth and value labels, because I look for companies with good growth prospects but where the market isn't pricing this potential into the stock market.
Many of my growth companies I prefer to call value companies because there is strong predictability on their growth path, yet the market takes this too short-term-a-view. If doing a proper long term investment, these offer extremely good value over five years.
These undervalued growth stocks have served us well in the past. At the end of the day however, I would class myself as a growth manager.
How do you select stocks and how long do you hold them for?
Stocks are selected without particular reference to country.
I look for long term growth potential and companies are regularly reviewed to assess the quality of management, strength of the balance sheet and growth prospects.
The portfolio invests primarily for the long term. If we discover a good quality investment we tend to stick with it. However, if something is underperforming, it's out.
For example, we recently sold Hochtief, the German construction company. That was sold late summer because we felt the business was struggling.
How has investing in growth companies been affected by recovery in Europe?
We missed a trick earlier this year by not putting more money into commodity, chemical, steel and paper companies, where earnings volatility is high.
This was not because we didn't believe the economy was recovering, rather because it is very difficult to get the timing right.
People buy these stocks thinking about when they are going to sell them, rather than holding them as a long-term investment. We missed a lot of them but our performance has been good regardless. We have stayed underweight in oils and other cyclicals but done well from some of the quality companies which had been undervalued, like technology and outsourcing.
Does that mean that recovery in Europe is not a strong theme within the portfolio?
European recovery is not an important theme in the investment trust. The economy is recovering and there are a few investments which will benefit from this recovery.
These are things like Metallgesellschaft, an engineering company in Germany and Lufthansa Airlines which is very cheap these days at 15 times current earnings and EVEBITDA (Enterprise Value to Earnings, before Interest, Tax, Depreciation and Amortisation) of 3.5.
This is a much more dynamic company today. Obviously as economy recovers, there is more cargo being moved and more people travelling, so Lufthansa will experience a lot of earnings growth.
Where are some of the major current growth opportunities in Europe?
Technology has come a long way but relative to its US peers, it is still cheap in Europe.
We are heavily overweight in telecoms and technology, where Europe had been criticised for being a laggard but is now catching up.
Companies which are poised to benefit from the outsourcing theme have very strong growth potential, yet are still relatively cheap. We have three companies in the outsourcing area.
These include ISS International, a cleaning services group, Securitas, a security firm and Sodexho, a catering company.
These are good quality companies with good visibility and good cash generation.
Technology businesses are being valued on what they might make in 2005 or 2007 but if you put some of these quality outsourcing companies on to a multiple of what they could make in 2005 or 2007, you begin to realise how cheap they are.
ISS is currently trading on a PER of 22 times historic earnings, Securitas is on 27 times historic earnings, and Sodexho has just released its annual results which were much better than was expected with a recurring net increase of 23% in local currency terms.
What is the main sector in the portfolio?
The biggest portion of the fund, at 44%, is tec
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