Henderson Opportunities Trust – Q3 Commentary 2022
Laura Foll and James Henderson, Portfolio Managers of Henderson Opportunities Trust, deliver an update on the Company, highlighting factors currently impacting UK smaller companies, the key drivers of performance, and recent portfolio activity.
4 minute read
Investment Environment
The third quarter was a weak period for UK equities. Sustained high rates of inflation continued to pressure the finances of UK households, while political uncertainty (particularly towards the end of the quarter) led to a sharp rise in government bond yields (falling prices) and a fall in sterling. While a fall in the value of sterling can translate to earnings benefits for much of the FTSE 100 Index -where many companies generate the majority of earnings overseas -it is likely to be an earnings headwind for many of the more domestic-focused smaller companies which import some of their inputs in US dollars. This difference in currency impact, combined with weaker investor sentiment more broadly towards the UK economy, meant that the more domestically exposed FTSE 250 and FTSE Small Cap indices underperformed the FTSE 100. During the quarter, the FTSE 250 index fell 7.3% while the FTSE Small Cap (ex investment trusts) Index fell 9.1%. This compares to the FTSE 100 Index which fell 2.8% (all figures are total return in sterling terms).¹
Portfolio Review
The Company underperformed its FTSE All-Share Index benchmark during the quarter as its net asset value fell 9.3% relative to a 3.4% fall in the All-Share Index. Over the same time period, the company’s AIC UK All Companies peer group fell 6.9%.¹
As at the end of the third quarter, we held 28% of the portfolio in the FTSE 100, with the majority of the portfolio (53%) listed on AIM. This overweight position in smaller companies reflects where we see the greatest potential for earnings growth over the long term. However, in the short term, our significant smaller company weighting has been a headwind to performance.
At the stock level, the best performers during the quarter included oil and gas companies SericaEnergy and Jersey Oil & Gas, which have been benefiting from the rise in commodity prices this year. Zoo Digital, which provides subtitling and dubbing services to content producers, also performed well. As platforms such as Disney+ are rolled out globally, there is increasing demand to localise content and Zoo Digital has been benefiting from this trend.
The worst performers during the quarter tended to be companies exposed to consumer spending, such as Scottish housebuilder Springfield Properties, car retailer Vertu Motors or low-cost gym operator Gym Group. In all cases, the shares performed poorly given concerns that the current pressures on household disposable income will impact consumer spending.
The portfolio always holds a blend of what we call ‘tomorrows leaders’, or companies which in our view have the capacity to grow significantly over the long-term, and ‘stabilisers’ -larger companies and natural resource companies that aim to add diversification to the portfolio and that might perform well at different points in the economic cycle. This year has seen the ‘stabilisers’ outperform and we have been taking profits in this area, particularly in natural resources where we recently sold the position in Shell and reduced the position in SericaEnergy. We have been rotating the proceeds of these sales into ‘tomorrows leaders’ which have recently underperformed. Examples include SME services provider K3 Capital, media agency Next Fifteen Communications and flexible office rental provider Workspace.
Manager outlook
Sentiment towards UK equities has been poor for a number of years, as illustrated by net flow data, the widening valuation differential versus overseas peers and sentiment indicators (such as fund manager surveys). This weak sentiment has, if anything, been exacerbated in recent months because of additional political uncertainty and therefore a greater ‘risk premium’ associated with UK assets. While it is frustrating to see much of the portfolio de-rate, the scale of the valuation falls we have seen could be viewed as an opportunity to add to positions at significantly below their long-run average valuations. In many cases the companies we are adding to are market leading businesses, with strong balance sheets and experienced management teams.
¹Source: Bloomberg as at 30 September 2022
Balance sheet – a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure.
Bond yield – The level of income on a security, typically expressed as a percentage rate. For a bond, this is calculated as the coupon payment divided by the current bond price. Lower bond yields means higher bond prices.
De/re-rate – A stock rerating is when a company’s valuation changes, therefore investors will be willing to pay a higher or lower price for the stock.
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.
Leverage – The use of borrowing to increase exposure to an asset/market. This can be done by borrowing cash and using it to buy an asset, or by using financial instruments such as derivatives to simulate the effect of borrowing for further investment in assets.
Net asset value (NAV) – The total value of a fund’s assets less its liabilities.
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).
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
Marketing Communication.
Important information
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 that is diversified across more countries.
- Some of the investments in this portfolio are in smaller company shares. They may be more difficult to buy and sell, and their share prices may fluctuate more than those of larger companies.
- 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.
Specific risks
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