Trust TV: Value investing in Europe with Henderson European Focus Trust
Whilst COVID-19 has undoubtedly brought its unique challenges, value has been predominantly out of favour since well before the emergence of the virus, and for most of the last decade. Right now, it’s rarely been cheaper … and the premium applied to growth never higher.
Adversity brings opportunity. Has the pandemic ushered in an era where we can confidently anticipate some meaningful re-ratings of these historically cheap valuations?
Janus Henderson investment trusts is delighted to welcome Tom O’Hara, portfolio manager of the Henderson European Focus Trust.
Watch Tom in the Trust TV studio as he discusses his approach to determining ‘value’, the themes he is currently pursuing, the sectors which would seem to offer strong re-rating potential, large vs small cap stocks, whether the return of dividends will act as a catalyst for unlocking the latent value in continental equities, and other themes relevant to the value-seeking investor.
Trust TV – what would you ask a professional investor?
Consumer price index (CPI)
A measure that examines the price change of a basket of consumer goods and services over time. It is used to estimate ‘inflation’. Headline CPI or inflation is a calculation of total inflation in an economy, and includes items such as food and energy, in which prices tend to be more prone to change (volatile). Core CPI or inflation is a measure of long-run inflation and excludes transitory/volatile items such as food and energy.
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.
A decrease in the price of goods and services across the economy, usually indicating that the economy is weakening. The opposite of inflation.
How far a fixed income security or portfolio is sensitive to a change in interest rates, measured in terms of the weighted average of all the security/portfolio’s remaining cash flows (both coupons and principal). It is expressed as a number of years. The larger the figure, the more sensitive it is to a movement in interest rates. ‘Going short duration’ refers to reducing the average duration of a portfolio. Alternatively, ‘going long duration’ refers to extending a portfolio’s average duration.
The fluctuation of the economy between expansion (growth) and contraction (recession). It is influenced by many factors including household, government and business spending, trade, technology and central bank policy.
Fiscal stimulus Fiscal stimulus is action by the government to encourage private sector economic activity by engaging in targeted, expansionary monetary or economic policies, to boost the economy. An economic stimulus is commonly employed during times of recession. Policy tools often used to implement economic stimulus include lowering interest rates, increasing
government spending, and quantitative easing, to name a few. Idiosyncratic risk
Idiosyncratic risk is a type of investment risk that is endemic to an individual asset (like a particular company’s stock), or a group of assets (like a particular sector’s stocks), or in some cases, a very specific asset class. Idiosyncratic risk is also referred to as a specific risk or unsystematic risk. Therefore, the opposite of idiosyncratic risk is a systematic risk, which is the overall risk that affects all assets, such as fluctuations in the stock market, interest rates, or the entire financial system.
Mergers and Acquisitions – M&A
Mergers and acquisitions is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
The total market value of a company’s issued shares. It is calculated by multiplying the number of shares in issue by the current price of the shares. The figure is used to determine a company’s size, and is often abbreviated to ‘market cap’.
Monetary stimulus describes actions to manage an economy’s money supply. Actions that make it easier to get cash and loans, to increase the supply of currency or reduce the interest charged by lenders, all fall under the umbrella term monetary stimulus. It is generally managed by a country’s central bank.
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.
When the market price of a security is thought to be more than its underlying value, it is said to be ‘trading at a premium’. Within investment trusts, this is the amount by which the price per share of an investment trust is higher than the value of its underlying net asset value. The opposite of discount.
Price-to-book (P/B) ratio
Companies use the price-to-book ratio (P/B ratio) to compare a firm’s market capitalisation to its book value. It’s calculated by dividing the company’s stock price per share by its book value per share (BVPS). An asset’s book value is equal to its carrying value on the balance sheet, and companies calculate it netting the asset against its accumulated depreciation. Book value is also the tangible net asset value of a company calculated as total assets minus intangible assets and liabilities.
A valuation discount refers to the deficiency in value that a buyer estimates for a company compared to its peers in the same industry. Buyers will typically review comparable transactions as part of their due diligence prior to completing an acquisition.
Please read the following important information regarding funds related to this article.
- If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio diversified across more countries.
- The Company may have a particularly concentrated portfolio (low number of holdings) relative to its investment universe and 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 which are denominated in currencies other than the base currency then 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 in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this Company.
- Active management techniques that have worked well in normal market conditions could prove ineffective or detrimental 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 as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incured by the Company can be greater than those of a Company that does not use gearing.