Henderson European Focus Trust Fund Manager Commentary – July 2022
Tom O’Hara and John Bennett, Portfolio Managers of Henderson European Focus Trust, provide an update on the Trust highlighting factors that impacted European equity markets in July and outline recent portfolio activity.
4 minute read
European equities rose 7.5% in July which brought the damage so far this year back to under 10%. The dominant narrative was the US Federal Reserve (Fed) pivot on its narrative around interest rates, and yield curves inverting as the bond market priced in both a recession and the anticipation of incrementally dovish rhetoric from central bankers in their attempt to tackle runaway inflation. Investors, still imbued with a strong muscle memory for what has worked over the last decade, were triggered to buy growth-style equities and avoid value-style equities. Investors bought back in to quality growth companies -for whom multiple compression from higher interest rates was no longer a worry -and the likes of banks were discarded for good measure. Technology stocks outperformed the market with the sector up over 13%.¹
Trust performance and activity
We further added to the Trust's positions in TotalEnergies and Safran (the latter a position we had initiated in June) and trimmed the position in Novo Nordisk (although it still remains a large holding). We selectively added to semiconductor-exposed positions and other short-cycle companies where we felt the share price trough could be near following dramatic declines in anticipation of a recession.
It is notable that the Trust's sector underweight positions were the biggest determinants of outperformance in July. We lost alpha to the technology rally in which we did not fully participate, but this was more than offset by our continued avoidance of banks and telecoms. It is also noteworthy that these sector positions have been relatively consistent for us over time and could be regarded as almost structural -at least as much as is possible for a style-agnostic, valuation-conscious strategy. We tend to find these sectors unfairly priced; technology due to lofty absolute multiples relative to what we see as their economic prospects, banks because we see them as generally poor-quality businesses with an unrivalled history of giving investors a hard time, and telecoms for similar reasons but with added capital intensity.
¹Source: Bloomberg as at 31st July 2022
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