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Experienced Investor

Fund of the Fortnight: Henderson European Focus

Cherry Reynard
Written By:
Cherry Reynard
Posted:
Updated:
10/12/2014

Victoria Chernykh, Senior Research Analyst at Tilney Bestinvest analyses the Henderson European Focus fund.

Investors in the European equity market have been nervous in the past few months. Following the rally of the 2013, the market lost its steam during the second quarter of this year amid fears of the faltering economic recovery on the continent. We would, however, agree with John Bennett, manager of the Henderson European Focus fund, that “the great thing about the (current) awful macro narrative is that is what provides bottom-up (stock) bargains”. Indeed, it is a well-known fact that share price performance is not directly a reflection of whether a company or economy is strong or not, but identifying viable businesses that are able to prosper in different and difficult economic conditions, is a good start.

Europe is culturally, politically and economically diverse and is home to many quality businesses that originated in Europe but are now truly global in scope. These businesses have been successful throughout good and tough times, and through the evolution of Europe’s political and economic structures. Undeniably, Bennett knows a lot about finding best companies, having been selecting the European winners for 27 years. His bottom-up stock picking approach within the identified strategic themes is clearly defined and well established. He spent 17 years at GAM, where he built a strong track record, before moving to Gartmore in 2010 which was acquired by Henderson in 2011.

Bennett’s track record at Henderson is enviable as well. Since the manager took the fund over at the start of 2010, it has been a consistent performer, sitting among the top quarter of all funds within the sector over one to four years’ time horizons to date, having also outperformed its FTSE World Europe ex UK benchmark by healthy margin.

Investing is for Bennett, among other things, an avoidance game. Avoiding potentially detracting stocks populating the index is one of the unwritten rules he follows. It is a bit like being on the road when your satnav directs you to avoid a jammed route, allowing you to reach a desired destination in good time and ahead of other drivers, who are less selective and get left behind in the traffic jam. Since 2010, avoiding “structural detractors”, such as airlines or until recently, most banks, has benefited the fund’s performance.

Furthermore, being the European team leader at Henderson, Bennett ensures that each member’s responsibilities tilt towards their strengths, so the individual contribution maximizes the team effort.

The team-based investment process begins from identifying stock or sector themes that will generate growing customer demand over multi-year phases. Within these themes, the team seeks to invest in established companies that are trading at a discount to what the manager considers fair value. The team looks for structural changes within a business that provide a potential catalyst for a change in valuation. Regular company meetings are an essential part of the investment process, allowing Bennett to gain insights into the businesses he invests in. These meetings serve either to validate or change Bennett’s investment thesis on a company. Strategic thinking is combined with tactical asset allocation, and earnings momentum also allows the manager to top or tail his holdings.

The fund continues to be heavily weighted to Switzerland, Germany and Northern Europe, with pharmaceutical and healthcare stocks remaining the major theme, representing close to 30% of the fund. In building this position Bennett believed that many pharmaceutical companies were undervalued and their strong free cash flow generation made them attractive investments. Since the second half of 2013 this theme has somewhat evolved, and is now centered around the numerous new product developments and launches within the pharmaceutical world. Top ten holdings list a number of pharmaceutical giants, including Novartis, Bayer, Roche, Novo Nordisk and Sanofi. Each of these businesses are global in nature and not really a play on the economies of the Eurozone.

It is not all about pharmaceuticals though. Other current themes are “smart cars”, “utilities” and the one that seems to be controversial on first glimpse – “Come back to Europe”. The melting economic recovery and high government debt level does not obviously create the best investment environment. Bennett explains the latter theme primarily by attractive valuations. The Eurozone has emerged from its’ longest-ever recession, lasting six quarters, from the end of 2011 through to the second half of 2013. Although there are plenty of worries about the viability of recovery and withering inflation, Bennett expects European companies’ earnings to trend upwards. Remaining an acute stock picker, he has come back to different European stocks he previously did not like. Total, ENI, RWE, E.On, Nokia and Peugeot – stocks that lost a lot of value from a number of sectors in the past few years – have all now entered the portfolio.

Over the long-term the manager has delivered investors solid outperformance and attractive total returns. Having no illusions about Europe, Bennett has also put his own money into the fund, aligning his interests with those of investors. We are convinced by Bennett’s cautious optimism and believe in the long-run time will again prove this expert investor right.