Henderson EuroTrust Fund Manager Commentary – May 2022

Jamie Ross, Portfolio Manager of Henderson EuroTrust, delivers an update on the Trust highlighting the key drivers of performance over the month of May.

Macro backdrop​

May was a balanced month for performance where the Trust returned 0.1% and the FTSE World Europe Ex UK TR index returned 0.2%. It was a very extreme month for the value style’s outperformance versus growth with the MSCI Europe Value Index returning 2.2% and the MSCI Europe Growth Index returning -3.6% – a spread of 5.8% in one month alone.¹ Some strong stock-specific factors managed to offset this powerful style drag and in the context of the Trust’s growth/quality bias, we were pleased with performance in May.

Trust performance and activity​

The best contributions came from our more value-tilted names (such as banks, oil and telcos) while the worst performance came from our more growth-orientated names (such as Roche, Nestle and Pernod Ricard). Even though we are biased towards growth and quality, the Trust held up reasonably well in May for two reasons. First, one of the strongest performing value areas of the market were energy and financials, and these are the two value areas of the market where we have any meaningful exposure; financials rallied 2.5% during the month and energy rallied 11.2%, while our holdings within these sectors performed very strongly – Total was up 19% and UniCredit was up 24%, for example.¹ Second, the hardest hit areas of growth were either long-duration growth or technology (with these two areas not mutually exclusive). We have cut down heavily on the Trust’s long-duration growth exposure during the past 12 months and have also reduced the technology exposure, and these actions protected us during May.​ May was another month of strong operational results from our portfolio companies with the vast majority of our holdings reporting better-than-expected results. In general, we have been very happy with how our portfolio companies have performed operationally over the past few months. Other than results, there was one meaningful corporate event during May which was the announcement of a merger between DSM and the Swiss (privately listed) flavour and fragrance company Firmenich.¹ This is a very meaningful deal for DSM and was announced alongside the disposal of DSM’s last materials business. This marks the completion of the journey from DSM being a fast-commoditising chemicals company to a 100% flavour and fragrance company. We remain invested and following the deal we saw DSM as being 10% cheaper than even the lowest-rated ingredients peer. We were also very happy to see that the current management team at DSM will continue to lead the new entity – management continuity is extremely important here.​ We did very little trading during May. Essentially, the only things we did were to reduce the positions in Roche and Nestle, add to positions in SIG and Grifols, and initiate a new position in Sartorius. We are very excited by the prospects for Sartorius which has been a very high quality, fast growing bio-pharma equipment company that has de-rated from 60x price-to-earnings (PE) in October last year to 30x PE by the time we bought a position. Growth and quality have been relentlessly sold over the past 12 months and some very interesting long-term investments are starting to present themselves to us.¹ We have long admired Sartorius but have never managed to invest at what we saw as a reasonable multiple until now.​

​Outlook/strategy​

We will continue to retain balance in our exposures by considering two types of business for investment; those where we see potential for high and sustainable returns that we think are undervalued by the market and those companies where we can see a material improvement in medium-term business prospects.​

¹Source: Bloomberg as at 31 May 2022

Glossary Expand Stock duration – The duration of a stock is the average of the times until its cash flows are received, weighted by their present values. The most popular model of duration uses dividends as the cash flows. In vernacular, the duration of a stock is how long we need to receive dividends to be repaid the purchase price of the stock​ 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. ​ Price to earnings (P/E) ratio – A popular ratio used to value a company’s shares. It is calculated by dividing the current share price by its earnings per share. In general, a high P/E ratio indicates that investors expect strong earnings growth in the future, although a (temporary) collapse in earnings can also lead to a high P/E ratio.​ Quality investing – Quality investing is an investment strategy based on a set of clearly defined fundamental criteria that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft (e.g. management credibility) and hard criteria (e.g. balance sheet stability).​ Spread – A spread can have several meanings in finance. Generally, the spread refers to the difference between two prices, rates, or yields. In one of the most common definitions, the spread is the gap between the bid and the ask prices of a security or asset, like a stock, bond, or commodity. ​ 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. ​ Valuation metrics – Metrics used to gauge a company’s performance, financial health and expectations for future earnings e.g. price to earnings (P/E) ratio and return on equity (ROE).