IC Top 100 Fund Lowland Investment Company (LWI) has distinguished itself with outstanding long-term returns, which leave its UK Equity Income peers trailing in its wake, albeit with some extreme short-term volatility. The difference is due in part to manager James Henderson's aim to diversify the holdings away from the traditional mega caps that most equity income managers favour.
"Other income funds have huge commonality but 60 per cent of our holdings differentiate us," he says. "A protection against macro worries is diversity in what you hold, although that should not stop you focusing on good companies."
The trust has 26 per cent of its assets in industrials but also has exposure to financials such as insurer Hiscox (HSX). "This has a totally different cycle to engineers," says Mr Henderson. "The broad spread of underlying activities in the companies held acts as a means of reducing risk in a period of economic volatility, while even the industrial exposure comprises companies with very different end markets."
Around 7 to 8 per cent of Lowland's portfolio is in Alternative Investment Market (Aim) shares, which Mr Henderson says "differentiates us to other income stories. You can have substantial businesses on Aim but in terms of corporate governance, you have to keep your eyes open."
James Henderson CV James Henderson has been manager of Lowland Investment Company since 1990, Law Debenture Corporation (LWDB) since 2003 and Henderson Opportunities Trust since 2007. He also runs Henderson UK Equity Income & Growth Fund (GB0007493033). He has worked at Henderson since 1983 and began his career in 1982 as an accountant. He has a degree in economics from Cambridge University. |
Lowland has a mid- and small-cap focus with normally not more than half its assets in the FTSE 100. Mr Henderson believes that mega-cap stocks are often in areas of structural decline. The trust focuses on both capital and income growth to avoid problematic higher-yielding shares. Both this and one of the other funds he manages, Henderson Opportunities Trust (HOT), invest in large, medium and small caps.
"I don't feel I have to own anything," he says. "In terms of smaller companies, the move has happened, and good investments will come in all sizes. Last year, for example, ITV (ITV) added the second most value to Henderson Opportunities' portfolio. It is wrong to have a particular bias now."
Engineers such as Lowland's top holding Senior (SNR), 4.1 per cent of assets, have done well for the trust, which paid around 40p for the shares that now trade at around 297p. However, this and other larger holdings such as GKN (GKN) have been trimmed to balance the portfolio.
"Their shares remain good value but the cash raised allowed us to add some new names to the list such as Conviviality Retail (CVR), whose main trading subsidiary is Bargain Booze," he explains. "Under a new management team this convenience store operator is making impressive progress in a challenging retail environment.
But the opportunity for industrials continues. Senior's cash generation is phenomenal and its debt has fallen quickly despite two acquisitions. The industrial companies we own have a greater control of their destiny. If they remain focused and competitive they will continue to prosper."
Cash generation among UK companies in general is strong at the moment.
"Some now pay excess cash as special dividends," he says. "Their price-earnings ratios are quite a bit higher but companies are in a very good place and what matters at this level is good value."
Both Henderson Opportunities and Lowland look for internationally competitive companies that offer global growth exposure, and under-appreciated value in under-analysed areas, taking a contrarian approach.
For example, plant-hire business Ashtead (AHT), with 90 per cent of business focused on the US, has continued to see both market share gains and cyclical recovery, and has produced a series of earnings upgrades. This was bought at around £1.10 but now trades at around 891p, although the holding in this has been trimmed a bit. "People held back from that because it had debt but that was the business model," says Mr Henderson.
He believes selected small- and medium-sized companies can rise further, but says: "Some of the opportunities have played out and we need to refresh, and one promising area is technology. We have a good relationship with IP Group (IPO) which is on the front foot of commercialising relationships with start-ups via relationships with UK universities, and now has some links with US universities. We hold some of the listed spin-outs in Henderson Opportunities' portfolio."
Examples include Retroscreen Virology (RVG) and TRACSiS (TRCS).
Henderson Opportunities also holds WANdisco (WAND), a small UK software tools developer, which listed in 2012 and to whose prospects the market has warmed.
"We have had a long bias to technology and don't jump around a lot - we typically hold things three to five years and try to run things as long as we can," Mr Henderson explains. "Technology has been good for us but we are not wedded to it forever and will hopefully find value across the board."
An out of favour area has been oil and gas.
"BP (BP.) remains troubled by the aftermath of the Macondo disaster but things are changing," he says. "Similarly, Royal Dutch Shell (RDSA) has also been shunned by investors and we have started a position here as well. But it is unlikely we will ever own an index weight in stocks such as these unless we believe there is an opportunity to add significant value.
"However, there is considerable value in oil exploration companies. We are buying in a gentle way on lower prices in that area. We know we are probably buying too early, but are buying proven reserves. Big oil companies are not mopping them up so they are throwing up value opportunities. Premier Oil (PMO), Faroe Petroleum (FPM) and Serica Energy (SQZ) have all been challenged one way or another.
"Premier Oil, for example, has not hit production forecasts but has proven reserves.
"Faroe Petroleum had a poor year with the drill bit and found no new material oil fields. It also had to revise down its production outlook. In a sector already out of favour with investors, this hurt the share price but the company remains self-funded and the 2014 exploration programme remains significant for a company of its size."
