European financials may not be flavour of the month but "when people sell off whole sectors, regions and countries, that's often when you get the baby thrown out with the bath water and when you find something interesting," argues Ben Lofthouse, manager of Henderson International Income Trust (HINT). "That's what happened this year in European financials."
Financials make up almost 20 per cent of the investment trust's portfolio and despite debates about the impact negative interest rates will have on bank earnings, Mr Lofthouse thinks there are interesting opportunities to be found in European financials. The fact that European banks have increased their capital levels means they are in a much better position than they have been in the past, he argues.
The trust's holdings include French multinational insurance firm AXA (CS:PAR) and it has recently bought its first bank in several years, Dutch bank ING (INGA:AEX).
Mr Lofthouse says: "We haven't had a European bank for years - it's just increased its dividend by 500 per cent because it was coming almost from nothing! It's got a 6 per cent yield and it trades below book value. There are lots of interesting opportunities like that which have been sold off in the last year."
However he says the trust has deliberately bought at the safer end of the European banking market and is not, for example, considering buying Spanish or Italian banks.
The trust also holds include Swiss pharmaceutical stocks Novartis (NOVN:VTX) and Roche (ROG:VTX), German companies Deutsche Telekom (DTEX.N:GER) and Bayer (BAYA:GER), and French real estate company Nexity (NXI:PAR).
"Europe over the past year-and-a-half has underperformed but actually the economic growth is coming through," says Mr Lofthouse. "Growth is improving but the market has fallen. It shows that people don't believe in it or they got a bit too excited about growth, and now they're a bit less excited about it.
"We're always looking to see the value differentials and whether they're justified, and I think at the moment for Europe they're not necessarily justified."
Mr Lofthouse takes a bottom-up, value focused stock-picking approach, with the aim of providing a high and rising level of dividends and capital appreciation.
HINT has nearly half of its assets in Europe, with 33 per cent in North America (mostly the US) and 20 per cent in Asia Pacific including Australasia. Mr Lofthouse says HINT's developed markets focus is a reason it has fared better than some of its peers which chose to invest heavily in emerging markets and have been battered by recent currency volatility in that area.
Currency risk is one of the reasons why Mr Lofthouse is not too keen on investing in China right now, particularly its financial companies. The trust has recently sold China Life (2628:HK) and Bank of China (3988:HKG).
"We feel less comfortable with financial exposure in China than we have done and we reduced a lot last year when the market spiked," he explains. "It's certainly a cheap market but the change in the currency last year, and the questions of where and what it was pegged to, make it a bit harder for UK investors to invest there. I don't think it's going to fall a lot but I don't know. We could find some great stocks there but then we could be completely undone by the currency."
Sectorwise, Mr Lofthouse believes pharmaceuticals, telecommunications and technology offer opportunities, and has been buying European stocks in these sectors in particular as he thinks the region is looking especially cheap.
| Ben Lofthouse CV Ben Lofthouse joined Henderson in 2004 as an investment analyst on the equity income team. He became a fund manager in 2008 and currently manages Henderson Global Equity Income Fund (GB0031263899), Henderson Horizon Global Equity Income Fund (LU1061745631) and Henderson International Income Trust. Prior to joining Henderson, Mr Lofthouse trained as a chartered accountant with PricewaterhouseCoopers where he started his career in 1998. He graduated from Exeter University with a BA (Hons) in Business Economics and is a CFA charterholder. |
Last month HINT doubled its assets under management to £194m after receiving £95m from the voluntary liquidation of Henderson Global Trust, which wound up in April following a period of poor performance. But Mr Lofthouse is unconcerned about managing twice the number of assets as he used to, saying he will not be making any changes to the trust's strategy.
"We're not a small cap strategy, we could potentially be at a billion pounds and it wouldn't change the strategy," he says.
But HINT's greater size will mean that its fixed costs will be spread over a wider investor base, and to reflect this the trust has reduced its annual management fee from 0.75 to 0.65 per cent. Its ongoing charge has already fallen from 1.39 to 1.11 per cent and Mr Lofthouse expects it fall further by next year - to around 0.85 per cent.
Last year the trust largely traded at a slight premium to net asset value (NAV) but this year has moved to a discount, at one point was as wide as 9 per cent. This has since narrowed to about 3 per cent.
"The bigger we can be, the more marketable we can be, and the better chance we can have of maintaining a premium to net asset value," says Mr Lofthouse. "This will help liquidity a lot and that helps the ability to protect the premium of the stock over the long term."
