Henderson European Focus Trust Fund Manager Commentary – January 2022

In the throes of the Omicron panic, the final weeks of 2021 saw an acute acceleration of a theme broadly consistent since the second quarter – namely the market shunning stocks not possessing the “expensive quality” or “momentum” factors. This made for a difficult Christmas for the fund and in an attempt to console ourselves, we held out hope that the movements had been a non-fundamental case of risk-off into year end, with the 31 December being the point of measurement for annual industry remuneration.

January did indeed bring reprieve, only in a more dramatic fashion than we had anticipated. The fund’s stark underperformance through December was regained in its entirety, helped by overweight positions in contrarian sectors such as materials and energy, as well as an underweight position to the crowded information technology (IT) space. If a blended fund like ours – which is not aggressively tilted towards any particular investing style – has experienced such an extreme boomerang-like movement in a matter of weeks, it goes without saying that the more style-extreme peer group has been left shell-shocked; growth managers and ESG managers (or “growth by proxy”) have been left reeling, while value managers are resurgent.

Against a backdrop of ever-more hawkish comments from central banks, the financial community now debates whether this really is the end of the growth-at-any-price investing era. We have no idea whether this will prove to be the case. We have witnessed many straw-fire value rotations and as such we refuse to construct a portfolio that requires a particular macroeconomic outcome. We do, however, continue to believe in economic reopening and the potential for “stronger-for-longer” inflation. This gives the fund an overall tilt, in line with our bottom-up stock picking.

Recent activity included refining our consumer/reopening exposure by adding to positions in air-travel technology company Amadeus and Gucci-owner Kering. Correspondingly, we disposed of some apparel and autos positions on the basis that cost-of-living pressures are most likely to affect mass-market brands. The reopening of air travel and leisure is only just getting going and will likely be less affected than mass-market physical retail by inflation shrinking disposable incomes (see gas and energy prices). We also bought semiconductor stock BESI, where we are increasingly excited by the firm’s innovative product development. The semiconductor industry is transitioning from ‘Moore’s Law’ to ‘More than Moore’ as chip scaling is becoming ever more difficult and expensive. BESI’s core competencies in 3D stacking and multi-chip architecture offer new solutions to these problems.

Bottom-up – Bottom-up fund managers build portfolios by focusing on the analysis of individual securities, in order to identify the best opportunities in their industry or country/region.

ESG – Environmental, social and governance are three key criteria used to evaluate a company’s ethical impact and sustainable practices.

Growth investing – Growth investors search for companies they believe have strong growth potential. Their earnings are expected to grow at an above-average rate compared to the rest of the market, and therefore there is an expectation that their share prices will increase in value.

Moore’s Law – Moore’s Law refers to Gordon Moore’s perception that the number of transistors on a microchip doubles every two years, though the cost of computers is halved. Moore’s Law states that we can expect the speed and capability of our computers to increase every couple of years, and we will pay less for them. Another tenet of Moore’s Law asserts that this growth is exponential.

More than Moore – Characterized by the functional diversification of semiconductor-based devices. These non-digital functionalities do contribute to the miniaturization of electronic systems, although they do not necessarily scale at the same rate as the one that describes the development of digital functionality

Value investing – Value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase. One of the favoured techniques is to buy companies with low price to earnings (P/E) ratios.