Benchmarks are vital in the world of investing. However, investors who slavishly follow the benchmark restrict the future potential returns of their portfolios, effectively leaving money on the table. In this article, we discuss how, Laura Foll and James Henderson, Co-Portfolio Managers of Henderson Opportunities Trust, utilise the Trust’s flexible ‘go anywhere’ mandate and ‘bucket’ approach to differentiate it from the benchmark and its peers.
Benchmarks fulfil a vital role in the world of investing. Firstly, they serve as a standard against which the performance of an investment can be measured relative others within the same peer group or category. Secondly, they guide investors regarding the broad investment strategy being pursued by the portfolio manager. They are essentially a guide for investors, therefore, rather than a shackle for managers on the basis that the primary objective for the manager is to outperform the benchmark rather than mirror it.
Consider Henderson Opportunities Trust, part of the investment trusts range managed by Janus Henderson Investors. Its objective – and hence its benchmark – is capital growth in excess of the FTSE All-Share Index (All-Share) from a portfolio of UK holdings. The All-Share is made up of the FTSE 100, FTSE 250, and FTSE SmallCap indices, encompassing 600 or so companies listed on the main market – reserved for larger, more established businesses - of the London Stock Exchange (LSE). Meanwhile, 800 or so businesses are found within the Alternative Investment Market, or AIM, a sub-market of the London Stock Exchange launched in 1995. AIM has developed into the world's most successful and established market for younger, dynamic, high-growth companies. While the average market capitalisation (market-cap) of AIM businesses is circa £80 million, for those businesses within the All-Share Index, the average market cap is much higher, at almost £4bn. The All-Share Index also represents around 98% of the market capitalisation of all UK listed equities.1
Despite the prominence of larger-cap stocks, the broader universe of all UK quoted stocks has consistently proven to be a happy hunting ground full of exciting opportunities for Laura Foll and James Henderson, co-managers of Henderson Opportunities Trust. The Trust's flexible, 'go anywhere' mandate ensures that the managers are not constrained by the benchmark in terms of sector or market capitalisation. In addition, the ability to invest in larger companies found on the FTSE 100 down to those smaller companies listed on AIM, allows the managers to expand their investible universe substantially. Unsurprisingly, therefore, the portfolio differs materially from its index, with sector weightings showing a marked divergence from the All-Share benchmark in several key areas, as illustrated by the table below.2
|All Share (%)||HOT (%)|
Amongst the reasons for this divergence are to take advantage of the UK’s positive economic backdrop and rapidly changing investment landscape, whilst exposing investors to a diverse range of exciting opportunities across a broad range of sectors. In recent months, the managers have increased their exposure to financials which should benefit from the UK’s better-than-expected economic recovery. This has primarily been driven by the reopening of the economy following the successful rollout of Covid-19 vaccines and the release of pent-up consumer demand. Meanwhile, the exposure to industrials is to take advantage of the UK’s cyclical recovery and the rich seam of smaller companies within the sector.
Longer term, the managers are also considering the UK’s rapidly changing investment landscape, with the move towards decarbonisation a prime example. The transition to a low-carbon economy presents a significant opportunity to invest in a multi-year structural growth trend, while also helping to tackle an existential crisis. As a result, the Trust is overweight to the alternative energy sector, holding companies including AFC Energy, Ceres Power and ITM Power, which in James and Laura’s view, have the potential to be among the future market leaders in areas such as fuel cells and electrolysers.
In addition to the substantial sector divergence, the portfolio has significant exposure to small-cap stocks, particularly within the AIM market, as shown in the table below3. This differentiation from both the All-Share benchmark and the Trust's peers has been one of the main drivers behind the Trust's performance, with UK small-cap stocks outperforming their domestic large-cap peers over the last 12-months. This has largely been driven by the recovery in cyclical stocks - from last year’s covid-induced slump - as the UK economy has continued to reopen. Smaller companies tend to be more domestic in their exposure and more cyclical. Therefore, by investing across all sizes within the small-cap space, James and Laura are not only giving themselves greater choice in their stock selection, but they are also gaining diversification from exposure to a broader range of industries.
|Portfolio weight (%) *||Benchmark weight (%)||Active weight vs. benchmark|
Source: Janus Henderson and Factset, as at 31.08.21
To ensure that the Trust is exposed to a diverse range of growth and value drivers across the different market caps and sectors mentioned above; the managers utilise a ‘bucket’ or ‘sleeve’ approach to managing the portfolio – another key differentiator for the Trust. The portfolio is divided into seven classifications, each with an indicative exposure range (nonbeing larger than 40% of the total). The buckets are constructed as follows:
- Small- and mid-cap compounders (20–40% of the portfolio): good quality, usually well-established companies with strong management teams, offering the potential for long-term compounding of returns as they grow earnings.
- Growth small cap (20–40%): earlier-stage than the ‘compounders’, these are companies that are at an earlier stage of their life cycle with the potential for higher sales and earnings growth
- Large cap (10–30%): familiar names that nevertheless offer operational quality and long-term growth potential; these can increase the liquidity of the overall portfolio and also pay, on average, a higher dividend yield
- Early stage/university spinouts (0–20%): although these may be unproven and can be risky, their prospects are largely uncorrelated to market moves and they may offer significant commercial potential as assets are commercialised.
- Natural resources (5–15%): positioning will depend on the commodity, but these cyclical stocks can add portfolio diversification.
- Recovery (0–20%): contrarian value opportunities.
- Special situations (0–10%): distinct from recovery stocks in that they offer a specific catalyst for change, such as a restructuring, rather than simply being out of favour.
The current portfolio exposure by 'bucket' is shown in the chart below3:
The managers believe this approach provides 'true' diversification; in that different ‘buckets’ may perform well in different market environments. This was evident last year as the managers rotated away from some early-stage companies that did well in 2020, to more recovery and natural resources names that could benefit from the reopening. While almost 60% of the portfolio is currently represented by early-stage AIM companies, the managers also take full advantage of the opportunities present within other buckets, which might mean a move up the market cap scale. The 'Recovery' bucket, for example, consists predominantly of more established older and/or larger businesses that are having to reinvent themselves due to the trends exacerbated by Covid-19. Marks & Spencer constitutes a good example; last year’s Ocado deal was instrumental in boosting its online presence in food.
While the Trust’s flexible investment mandate and ‘bucket’ approach differentiate it from the benchmark and its peers from an allocation perspective, they have also set it apart from a performance standpoint. The Trust's unconstrained mandate helped it ride out the pandemic-related market volatility and post strong returns both prior and subsequent to the positive news on vaccines that emerged in late 2020. On a total return basis, the Trust's net asset value (NAV) and share price are both well ahead of the benchmark over one, three, five and ten years. Performance has been particularly strong over the last 12 months: the NAV and share price have both increased by 64% and 57%, respectively, compared to the benchmark return of 27%. Relative to its peer group: the Trust is the top performer within the UK All Companies sector over both one and two years.4 The Trust also offers a 2% dividend yield and can boast a 10-year unbroken record of dividend growth.5
The speed of change within the UK’s investment landscape means that some industries will continue to face disruption, while in other areas, large new companies will emerge. Some of the companies that are major constituents of the index today will be replaced by new generation companies. The speed of this change could be more rapid than in the past. Such an environment provides Laura and James – who are unconstrained by the benchmark – with significant opportunities to substantially add value over an index-oriented approach to portfolio management.
1 Source: FTSE Russell, FTSE All-Share Index factsheet, as at 30.07.21
2 Source: Janus Henderson and Factset, as at 31.08.21
3 Source: Janus Henderson and Factset, as at 31.08.21
4 Source: Janus Henderson, as at 21.09.21
5 Source: Henderson Opportunities Trust factsheet, as at 31.08.21
|Discrete year performance % change (updated quarterly)||Share Price||Nav|
|30/06/2020 to 30/06/2021||73.2||63.7|
|28/06/2019 to 30/06/2020||-16.8||-16.2|
|29/06/2018 to 28/06/2019||-7.1||-7.4|
|30/06/2017 to 29/06/2018||22.3||21.9|
|30/06/2016 to 30/06/2017||27.3||27.8|
|All performance, cumulative growth and annual growth data is sourced from Morningstar|