John Bennett: why less is more



John Bennett, Fund Manager for Henderson European Focus Trust, discusses why he believes the concentration of the Trust’s portfolio will not lead to greater risk and how he intends to maintain a diversified portfolio with high conviction.


Q: Hello and welcome to this latest video update for The Henderson European Focus Trust. Today I'm delighted to be joined by John Bennett, the fund manager of the Trust. John, thank you very much for joining me today.

Now firstly can you give us a quick snapshot for the past three months for HEFT, Europe and equity markets generally?

A: I mean three months is always a very short period of time. In some ways it's a shame that our interims fell at the 31st March because March was a particularly weak month, April was a nice strong month. It does show the randomness of three months, six months and even one year numbers. But if we do just look over the last three or so months you've got all the headline stuff that everybody knows about; Brexit, Trump trade wars, actually the one thing I would say about macro is I think the trade war potential impact on global GDP is much, much less than its impact on headlines and even daily gyrations of stock markets. I don't think investors should be too worried about this trade war malarkey.

I think it makes much more sense to keep focusing on where are the earnings going? Where is the cash flow going? Where are the valuations? And where are investors positioned? Investors are positioned in the US, investors are positioned in technology. I don't see an awful lot of people loving or even liking Europe, there's an opportunity there.

Q: You've spoken at length recently about how the HEFT portfolio is going to have a fewer number of stocks in there, it's going to be more concentrated which throws up a few questions. Fewer stocks means greater concentration risk, i.e. you might be more heavily tilted towards certain sectors, is that something that you're going to have to be more mindful of now? Or is it part of the design that you want to be overweight sometimes?

A: I mean it's absolutely correct to say that we have lowered the floor in terms of number of stocks that we will own. And I think that investors should continue to see us focus the list of holdings across all funds that I manage including the Trust. I've articulated the rationale previously for that. And a key part is actually disruption of our investee companies or the universe of investee companies be it banks, be it physical real estate, be it shopping malls, be it physical retailers I think they are dying a slow death and some of them faster than slow. So there are large parts of that index I simply don't want to own.

So if the question is does a more focused list bring more sector risk? Well actually so much of the risk is in what you want to avoid. And just because it's big in an index don't let that make you afraid. So take banks, banks within a financials weighting in Europe of about 19 and a benchmark, banks are sort of in the low teens, I don't want to own them. So you might say that's a risk. Yes it's a risk against the bank sector popping for six months as it often does, three months as it often does. But I don't think it's a risk in terms of tying up investors capital for meaningful periods of time and by that I mean five years plus. I think these industries are facing at best long slow runoff.

Q: Does this approach require a more ruthless stock picking? Are there stricter criteria for the stocks that are included in the portfolio?

A: Well I think just because you're lowering the number of stocks held, by the way we're not at 9 stocks or 18 stocks or 29 stocks, we're still a diversified and will remain a diversified portfolio. So just because you've reduced the number of stocks doesn't mean you're going to change at all your parameters, your investment philosophy, the criteria by which you will own them. It does mean you'll own them in bigger size, all other things being equal you'll own them in bigger weightings, my biggest holding at the moment is a hitherto cement company, which I think is transforming into building a materials company under an outstanding management team. I've got to get that right because it isn't 1% or 2% or 3%, it's 5% plus of my NAV.

But that's the bit I embrace and I enjoy. And it's really playing to our teams strengths rather than having to worry about an index, saying well maybe I should have some banks in case they run or maybe I should have some insurance in case it moves, maybe I should have some big oil in case it moves and I think that's the old style of pretend active management that has gone on in our industry. We want no part of that. I don't think we change what we're looking for. We probably do get even closer to the names that we own, that's not a bad thing.

Q: You've just mentioned that greater concentration being a feature of a shorter portfolio list and in the last few months the top 10 holdings has been a greater percentage of the overall portfolio. Is this a trend that you think is likely to continue?

A: I never have numerical targets you know whether it's, often in your career you get asked arithmetic or ratio type, quant type questions and over 30 odd years I've seen fashion questions at the quant level come and go; what your trainer ratio? What's your sortino ratio? Tracking error I think it's always been a bit of a misnomer personally. Information ratio I understand but the active share is fashionable at the moment, meaningful but rather fashionable.

And similarly concentration in your top 10 holdings, I never have any targets for these things; I target one thing and its alpha. If my top 10 happens to be 25% or 35% or 45% is unlikely to be more than 50% of my NAV because I do have an eye on risk and concentration, sensible pragmatic levels. We would not own more than 10% of NAV in any one stock for example. And that's hardwired in the trust. So I don't see any sort of, as a result of becoming more concentrated neither in the top 10 nor in the broader portfolio, do I see any enormous tilt at a sector level or sort of wild concentration, not at all. If you're in a bandwidth, in my view, of 35 to 45 stocks you're quite diversified.

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Henderson European Focus Trust plc

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