Buy strong performance at a discount with Henderson European Focus

IC TIP RATING

Tip style: GROWTH

Risk rating: HIGH

Timescale: LONG TERM

Due to the investment trust's strong performance, its discount to NAV had steadily tightened over the past few years, so that during a lot of 2015 it traded at a premium to NAV. But, more recently, the trust has moved down to a discount, currently about 3.4 per cent.

The discount widening comes at a time when investment trusts in general have experienced this, including most Europe sector trusts, some of which have fallen from a premium to a discount. This partly reflects a turbulent time for European equities, particularly in the financials space.

"John Bennett has a significant private investor following and this perhaps explains why Henderson European Focus has seen its rating fall slightly more than the European peer group average as investor sentiment, particularly among private investors, has waned," adds Kieran Drake, analyst at broker Winterflood.

As a result, over one year the trust's share price has underperformed its NAV.

But if investor sentiment changes the share price could do better and the discount could come in. "We suspect that sentiment may reverse in the event of a decisive vote for the UK to remain in the European Union," says Mr Drake. "We continue to rate John Bennett highly and view Henderson European Focus as a good option for exposure to European equities."

Monica Tepes, director, investment companies research at Cantor Fitzgerald, adds: "Long- and medium-term performance is very strong, it is only since the beginning of this year that the NAV return has been lagging the benchmark. The current discount is certainly a more attractive entry point than the premium that Henderson European Focus had been trading at in 2015."

Henderson European Focus could also benefit from a turn in fortunes for value stocks, as Mr Bennett screens for attractively-valued stocks, and then looks for a catalyst that will drive growth and a re-rating of the stock through careful business analysis. He then holds them for long periods which allows them to appreciate.

Henderson European Focus has traded on a discount as wide as 17 per cent in the past five years, and this could widen out again as it does not have an explicit floor in place and there is no guarantee its share price performance will improve.

It also charges a performance fee: manager Henderson is entitled to 15 per cent of the NAV outperformance of the benchmark above a 1 per cent hurdle. The performance fee increases the trust's ongoing charge from 0.89 per cent to 1.57 per cent, in contrast to Henderson European Focus Fund's 0.86 per cent ongoing charge.

But Mr Drake points out that "shares have been bought back in the past, albeit at discounts wider than 10 per cent, and we would also expect John Bennett's reputation and track record to partially alleviate discount risk."

And Henderson European Focus Trust has outperformed Henderson European Focus Fund over three and five years, and gives the opportunity to buy into assets at a discount with the potential to tighten. Its fees are also capped in any one year at 1.3 per cent of net assets at the period-end.

So if you want to try and take advantage of discount tightening, tap into European value and buy what has been a strong-performing trust while on a discount, Henderson European Focus looks like a good option. Buy.

Source: Winterflood, *Henderson, **AIC using Morningstar.

Performance

Source: Winterflood as at 26 April 2016

TOP 10 HOLDINGS as at 31 March 2016 (%)

Top 10 geographic exposures (%)