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Access early-stage growth at a discount via Henderson Opportunities

Henderson Opportunities Trust offers exposure to early-stage growth and can be bought at a wide discount.
April 22, 2015

This week saw the launch of Neil Woodford's second fund, Woodford Patient Capital Trust (WPCT), which will focus on early-growth companies, including unlisted ones. If you missed out on the initial public offering (IPO) the shares are already trading at a premium to net asset value (NAV. And many advisers say this trust may be too high-risk for a number of investors.

IC TIP: Buy at 900p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Exposure to early-stage growth companies
  • Strong performance
  • Wide discount to NAV
  • Complements mainstream UK equity exposure
Bear points
  • Volatility

If you want a lower-risk alternative that can be bought at a discount, you could consider Henderson Opportunities Trust (HOT). This doesn't invest in unlisted companies, lowering its risk profile, and, as it is a multi-cap fund, only some of its assets are in smaller companies. But with about 17 per cent of its assets in university start-ups or spinouts it provides meaningful exposure to early-stage growth areas.

The largest portfolio holding, accounting for 5.4 per cent of assets, is 4D Pharma (DDDD), which is developing a new class of drugs to treat Crohn's disease, ulcerative colitis and Arthritis. Henderson Opportunities bought this at IPO last year and it was the trust's top performing stock over its last financial year.

Henderson Opportunities' second largest holding, Oxford Pharmascience (OXP), is reformulating drugs such as aspirin and ibuprofen. Another top 10 holding is specialist clinical trial company hVIVO (HVO), previously known as Retroscreen Virology.

Analysts at Winterflood point out that this is a relatively new area for Henderson Opportunities and that these are inherently higher-risk investments. However, the overall risk is reduced by the trust's portfolio diversity. Its largest sector exposure is industrials, which account for about a quarter of assets, and some of these are large energy users so should benefit from the fall in the oil price.

Winterflood adds that Henderson Opportunities is not a mainstream UK equity portfolio so could be complementary to more traditional UK funds.

The fund can also be bought at a very wide discount to NAV of more than 14 per cent, in contrast to its 12-month average of 5.6 per cent. This is one of the wider levels at which it has traded in the past year, despite good performance, although over one year its NAV return of 14 per cent beat its benchmark, the FTSE All-Share, its share price return is just 1 per cent. This disparity is partly down to the trust's reluctance to undertake share buybacks and investor preference for large stocks and the funds that invest in these.

Over three and five years both Henderson Opportunities' NAV and share price return beat its benchmark by a considerable margin, as well as the average for the Association of Investment Company (AIC) UK All Companies sector.

Henderson Opportunities has nearly a third of its assets in Aim shares and also beat this index by a considerable margin over one, three and five years.

The trust has a performance fee of 15 per cent of any outperformance of the NAV over the benchmark. But total management and performance fees in any one year are limited to 1.65 per cent of the average value of the net assets during the year. Although the fee was incurred in the trust's last financial year, the ongoing charge is 1.24 per cent, which is not unreasonable for a fund that provides access to specialist areas.

The trust has traded at wider discounts for extended periods. However, when sentiment turns and investors recognise its strong performance, the discount could tighten or even move back to a premium. So if you can accept discount volatility and short-term share price underperformance, now could be a good time to get into some interesting growth opportunities with the potential for strong performance at a low price. Buy.

 

HENDERSON OPPORTUNITIES TRUST (HOT)

PRICE900pGEARING18%
AIC SECTOR UK All CompaniesNAV1,043.7p
FUND TYPEInvestment trustPRICE DISCOUNT TO NAV14.16%
MARKET CAP£72.1mYIELD1.39%
No OF HOLDINGS91*ONGOING CHARGE1.24%
SET UP DATE24-Jan-07MORE DETAILSwww.hendersonopportunitiestrust.com

Source: Morningstar, *Henderson Global Investors.

 

Performance

 1-year share price return (%)3-year cumulative share price return (%)5-year cumulative share price return (%)
Henderson Opportunities Ord1.0118.0158.6
FTSE All Share TR GBP10.840.852.1
FTSE AIM All Share TR GBP-8.5-1.17.7
FTSE Small Cap Ex Invest Trust TR GBP3.074.193.1
AIC UK All Companies sector average3.145.756.7

Source: Morningstar as at 20 April 2015

 

TOP 10 HOLDINGS (as at 31 March 2015)

Holding%
4d pharma5.4
Oxford Pharmascience Group3.1
Johnson Service Group2.8
Ricardo2.7
Senior2.6
hVIVO2.5
E2V Technologies2.4
St Modwen Properties2.2
Royal Dutch Shell2.2
Rio Tinto2.2

 

Sector breakdown

Sector%
General industrials25.3
Consumer services18.6
Healthcare15.9
Finance - general14.2
Technology8.3
Materials6.7
Oil & gas6.4
Consumer goods4.6