Henderson EuroTrust Fund Manager Commentary – October 2022
Jamie Ross, Portfolio Manager of Henderson EuroTrust, delivers an update on the Trust highlighting the key drivers of performance over the month and recent portfolio activity.
4 minute read
From January, Henderson EuroTrust’s Commentary will be merged into the Factsheet. The new, and improved, merged Factsheet document will still be accessible via the ‘Quicklinks’ and ‘Documents’ sections on Henderson EuroTrust’s webpage.
As has been the theme over the past three months, value stocks outperformed again in October. It was only July when we wrote about US 10-year bond yields reaching 3% and they have now hit 4%, with a 50-basis point (bps) rise in October alone. The western world remains in a monetary tightening cycle which looks set to continue until there are firm signs that inflation is under control. Although we have started to see some evidence of things that may start to dampen further inflation -economies slowing, some commodity prices have eased, and some supply-chain bottlenecks have improved -we are not yet at the point at which central banks feel able to ease off. This continued to present challenges to growth and quality factors within equity markets and in October, the MSCI Europe Value Index returned 8.0% against a return of 4.6% from the MSCI Europe Growth Index, bringing the year-to-date returns to around -3% and -19%, respectively. Obviously, this remains a challenging environment for the company.
Style was clearly a factor in the Company’s mild underperformance during October. At the stock specific level, UniCredit was the best performing position during October.
The company has been through a tumultuous 12 months with a very positive Capital Markets Day back in December 2021, a heavy share price sell-off due to the company’s small exposure to Russia and, more recently, political upheaval in Italy. In recent months, its shares have started to recover; the bank has an obvious positive gearing to interest rates, has been overcapitalised and thus in a position to return cash to shareholders, and was still trading at a low valuation in our view. We have maintained a large position and remain slightly overweight versus the index in our overall banks’ exposure.
We also had some success with our aerospace positions during October. One of the key attractions of our holdings in Safran and Airbus is the relative historical predictability of earnings growth over the medium term. For Safran, this comes from its revenue-linkage with flight hours which have been recovering as flight patterns return to a more normal level following the Covid-19 pandemic. Airbus has been providing some predictability through its all-time high order backlog (again partly related to issues that arose during Covid) which should convert into deliveries and revenues over the next eight years. In addition, both companies reported strong third quarter earnings in recent weeks.
Negative contributors included Sartorius and DSM. Both companies have been seeing somewhat of a greater-than expected unwind post-Covid. Sartorius has observed normalising ordering patterns from its biopharmaceutical customers in recent months -more so than it had expected at the start of the year. DSM benefited from stronger-than normal demand for vitamins and supplements during the Covid-19 pandemic and has been seeing this demand slow meaningfully. We have trimmed the position in Sartorius due to our concern that 2023 consensus estimates may have been too high, while we maintained a large position in DSM. Taking a longer-term perspective, we remain comfortable with both positions.
We sold two positions during the month and made no new purchases. The positions sold were Enel and CNHI. Enel is an integrated Italian renewable energy company. We have been patient with this position for two and a half years, but we became increasingly frustrated with poor operational performance, government interference and the company’s unwillingness/inability to reduce its debt levels. With CNHI, the tractor company that we purchased towards the end of 2020, we have made significant gains. But now we have become increasingly concerned by falling farmer confidence levels in the US –often a leading indicator for tractor demand. This can be a very cyclical business and we do not want to overstay our welcome in what has been a successful investment.
We will continue to retain a balance by considering two types of business for investment; those where we see the 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.
Bond yield – Bond yield is the return an investor realises on a bond and can be derived in different ways. The coupon rate is the annual interest rate established when the bond is issued. The current yield depends on the bond’s price and its coupon, or interest payment. Additional calculations of a bond’s yield include yield to maturity (YTM), bond equivalent yield (BEY), and effective annual yield (EAY).
Cyclical stocks – Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies.
Gearing – Gearing is the measure of a company’s debt level. It is also the relationship between a company’s leverage, showing how far its operations are funded by lenders versus shareholders. Within investment trusts it refers to how much money the trust borrows for investment purposes.
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. See also value investing.
Inflation – The rate at which the prices of goods and services are rising in an economy. The CPI and RPI are two common measures. The opposite of deflation.
Tight monetary policy – Tight, or contractionary monetary policy is a course of action undertaken by a central bank such as the Federal Reserve to slow down overheated economic growth, to constrict spending in an economy that is seen to be accelerating too quickly, or to curb inflation when it is rising too fast.
Valuation metrics – Metrics used to gauge a company’s performance, financial health, and expectations for future earnings eg, price to earnings (P/E) ratio and return on equity (ROE).
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. See also growth investing.
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- If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio that is diversified across more countries.
- The Company may have a particularly concentrated portfolio (low number of holdings) relative to its investment universe - an adverse event impacting only a small number of holdings can create significant volatility or losses for the Company.
- Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
- This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
- Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
- The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
- Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
- The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.