Laura Foll, Co-Fund Manager of Henderson Opportunities Trust, explains why the investment trust structure means the Trust can hold more illiquid assets, as opposed to open-ended funds; and provides some information on portfolio activity in recent months
Q: Hello and welcome to this latest video update for the Henson Opportunities Trust. I'm delighted to be joined by the co-fund manager Laura Foll. Laura, thank you very much for joining me today. Now first of all what can you share with us about your activity on the portfolio in the past three months?
A: So the overwhelming aim of HOT is to take the really exciting growth companies that you get on the AIM market in the UK, but just to take out some of the volatility of that. So recognising that there will be periods where people get a bit overexcited about small companies and some of the valuations get a little bit high. So with that in mind what we've been doing recently is just gently reducing some of the growth companies where we feel the valuations are getting just a little bit high.
So this would be names like Blue Prism, which is a robotic process automation software. We've just been taking a little bit out of those names; RWS would be similar. Not a huge amount, but just taking a little bit out, recognising that for portfolio balance reasons we don't want the portfolio to be overexposed to any one company.
So for sells, we tend to take out a little bit of the companies that have performed well and then at the other end we've been tending to add to companies where we think the market has gone the other way. So being too pessimistic and actually the fundamentals of some companies, perhaps Zoo Digital which does dubbing and Subtitling for the likes of Netflix, I think people have gone overly negative on a company like that. And so we've been adding to those types of names while reducing those names that we feel the valuation is just a little bit high.
Q: Now there's a lot of media scrutiny at the moment about the liquidity profile of actively managed funds. The Henderson Opportunities Trust portfolio is typically biased towards smaller companies listed on the Alternative Investment Market, which is quite well known for being illiquid compared to companies that are listed on the FTSE 250. So what might you say to someone who has some concerns about the liquidity profile or the Henderson Opportunities Trust?
A: I think it's right to say that sections within the Henderson Opportunities Trust portfolio would be illiquid and we're quite happy with that. The great thing about an investment trust structure is that we will never be a full seller. So we buy some of these companies knowing full well that they are small; the market caps would, in many cases, be below £100 million. Recognising that these companies are illiquid but we have the capability within HOT to be a very long term investor.
And if we don't want to be we will never be forced to sell that position. So I think we need to recognise that the investment trust vehicle is a brilliant one if you want to hold these types of illiquid companies. So liquidity is definitely something I think about, but I think for a trust like HOT it actually can be an opportunity for us and we need to take advantage of that.
Q: Lastly, the share price of the Trust is trading at quite a large discount to its net asset value by about 18%. So first of all is that concern for you? And is there anything you can feasibly do about that?
A: It's definitely a frustration that we're trading at an 18% discount. If you went back and looked at our 10 year performance, it's something that we're quite pleased with. So it's frustrating to see that actually that discount is at a higher point than it would be versus history. And I think all that we can do about that really is perform. It has to come down to long term performance at the end of the day. And I think if we want to improve it we need to show that we can perform or outperform consistently.
So what we've tended to do historically is when performance has looked good but it's tended to be quite volatile and that to a degree will always be the case with smaller company investing. These smaller companies should grow, they won't grow in a straight line and there will be periods where people get overexcited and it will swing the other way and there will be periods like in the fourth quarter of last year where people got overly negative.
What we can do as portfolio managers is use the flexibility of HOT. So when we see people getting overexcited, use that flexibility, go up to the FTSE 100, the larger companies, and reduce the smaller company end; and I think we need to do more of that in future and show that we can really use that flexibility to get the benefits of being in the AIM [market] and get that smaller company exposure, just without the volatility that comes with that. I think if we can prove that that works, I would hope that the discount could come in.
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment.
Liquidity: The ability to buy or sell a particular security or asset in the market. Assets that can be easily traded in the market (without causing a major price move) are referred to as ‘liquid’.