Change, uncertainty and volatility in stock market prices are the ingredients that Henderson Opportunities Trust (HOT) thrives on. The Trust is relatively small with net assets of around £100m at the end of April, spread over a diverse list of companies. Our size enables us to move quickly when we see opportunities.
Equity markets around the world have experienced greater volatility in 2018. Change is a constant feature of the political and economic landscape, and this change is epitomised by the situation in the UK. Here, digital and technological innovations are challenging established business models, while the country’s political leaders negotiate leaving the EU and begin to forge new partnerships in a globally competitive economy.
The Trust has the flexibility to go up and down the spectrum of companies in terms of size to find attractive opportunities. Currently, the HOT list holds approximately 15% in the FTSE 100, 9% in the FTSE 250, 13% in the FTSE Small Cap and 63% in non-FTSE All Share. The weight in FTSE AIM (alternative investment markets) has increased in recent years because we have tended to find more attractive opportunities within this space. These are typically young, high growth companies that are unencumbered by legacy issues.
An example of a successful FTSE AIM investment in the portfolio is robotic process software company, Blue Prism. Since its purchase in March 2016, the share price has appreciated 237%, owing to high demand for their robot process automation software. The software addresses a key pain point for enterprises – poorly integrated back-office systems – by enabling companies to automate interactions between legacy software applications. This allows companies to redistribute labour and save costs. For example, banks can use the software to process orders for new debt/credit cards, while insurance companies can use it to streamline insurance claims by checking internal data and producing a suggested pay-out.
Adding value in digital transition
We are in a time of macro-economic and political uncertainty, and the digital shift is changing the shape of companies and the way in which people interact with them. Through this, we have focused on identifying companies that provide some sort of value add to help them control their own destiny. For example, we have shied away from holding Marks & Spencer, despite the shares trading on optically attractive valuations at times. The company is grappling with repositioning itself to address the structural growth in online sales, as well as the fragmentation of the market in their key categories. Barriers to entry have come down within the retail space with anyone able to create a brand from their living room without the need for large investments into stores or marketing.
Where we have invested into retailers, it has been in companies that have a niche within the market, which somewhat insulates them from the large structural shifts described above. We hold Joules, a premium family fashion brand, which has positioned itself well across online and offline channels. The brand is relatively immature and thus has a long run way for growth both in the UK and Internationally. We think the Joules brand, which addresses a niche within the expanding lifestyle apparel category, is attractive in the current environment. Indeed, Joules continues to see sales growth far outstrip new store space. This is driving an increase in profitability as management leverages their cost base.
The Trust has the ability to borrow money (gearing) to help grow its underlying net asset value, which is limited by the Trust’s board to a maximum of 25% of the company’s net assets. At the end of April, gearing stood at 13% of the portfolio and we expect to continue to utilise gearing to invest into differentiated and attractively valued companies with long term growth prospects to drive shareholder returns.
HOT has been trading at a discount of about -15% relative to the net asset value, which typifies investor sentiment towards UK equites generally. There is a growing consensus that the worst of Brexit – i.e. the worst possible outcome – has already been priced into UK equities, which could mean valuations have plenty of room to grow as we move towards a conclusion of the Brexit negotiations.
These are certainly interesting times for the UK and we are excited by the number of opportunities to buy companies with good businesses at attractive valuations and are adding value in a changing economy.