Henderson EuroTrust Fund Manager Commentary – June 2022

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

Macro backdrop

The macroeconomic narrative started to change in June; the month started with lots of discussion of rising bond yields and inflationary pressure and then mid-month bond yields seemed to reach a near-term peak and have declined since. This stalling in bond yield progression brought some relief for growth/quality equities and there are a few commentators now suggesting that we may have reached the peak for interest rate expectations this cycle. The other dynamic this month was further evidence of the weakening environment for consumption. We saw a number of warnings from businesses exposed to consumer discretionary spending, especially in the US. Market valuations now seem to suggest that a recession is likely and sentiment (investor, consumer and business) has taken a big shift down.

Trust performance and activity

After the extreme value outperformance that we witnessed in May, June was better for growth stocks and Eurotrust outperformed the sharp index decline. Given the increasingly challenging macro environment, it is unsurprising to report that sectors exposed to discretionary consumer spending such as autos and retail, and traditionally cyclical sectors such as banks, energy and materials, suffered. We also saw weak performance from information technology, led by a sharp sell-off in the cyclical semiconductor sub-sector.

Better performing sectors included health care, consumer services and consumer staples. This kind of environment suited our holdings since we have an overweight position to quality, growth stocks and an underweight position to the value style. We also have an underweight position to information technology stocks.

June was a quiet month for stock-specific news flow (there were no results announcements for example) and our winners and losers have largely followed the pattern of the sectors described above. Our best performing positions were Novo Nordisk, KPN and Munich Re, and our worst performing positions were Arkema, Bawag and CNHI.

Trading activity was limited in June. We made some small rebalancing trades by reducing Stellantis and CNHI while adding to positions in Sartorius and Safran. We used market weakness towards the end of the month to add to some of our core positions, which brought up leverage by 1-2%, and we initiated one new position in BE Semiconductor (Besi). Besi is a high quality, highly cyclical semiconductor equipment company which historically has seen 60% gross profit margins and a high return on invested capital (ROIC). Its shares had fallen by over 50% since their peak in January due to concerns over the cycle.¹ We saw this as a solid opportunity to start to increase our semiconductor exposure via one of the best companies in the sector (the other being ASML, which we already own). People often confuse cyclicality with 'value' or 'low-quality' and Besi is a cyclical but well-managed business with well-entrenched oligopolistic/monopolistic market positions in a structural growth sector.

Outlook/strategy

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