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Investing is never black and white

James Henderson, manager of Lowland Investment Company, talks to Moira O’Neill about his unusual approach to income investing.
December 17, 2014

Lowland Investment Company (LWI) is unusual in taking a contrarian approach to equity investing while running a long list of stocks – 121 at present. "You're meant to have conviction and slam the table and look someone in the eyes," says James Henderson, Lowland's fund manager. "But it is never black and white. It's always about probabilities. Will the value play out? People want a certainty that isn't there."

Lowland's recent foray into Tesco (TSCO) shares should be viewed in this context. Mr Henderson bought Tesco shares on the morning of 9 December as they plunged 15 per cent following the supermarket's third profit warning in four months. He says that he has faith in the management, led by new chief executive David Lewis. And although he has put 0.5 per cent of Lowland's assets into Tesco, he says he could take the position to 1 per cent.

Lowland Investment Company is an IC Top 100 Fund and won best income fund at the Financial Times and Investors Chronicle Investment Awards 2014.

Over the past 10 years Mr Henderson has grown Lowland's dividend from 18p per share to 37p. However, he says the trust's capital has grown quicker than income. "The first focus of an income fund is to grow the capital. If we get the dividend up to 41p this year it will get the capital and income into line," he says.

"If you aim for absolute yield there's a tendency to start convincing yourself you are right. It is better to go for dividend and capital growth."

He says that he learnt this lesson from managing private client portfolios in his early days at Henderson. "I saw the rich become poor by chipping away at shares," he says. "They would say 4 per cent income is not enough. Then they would sell 10 per cent of their portfolio to get the income higher and be able to pay their bills. But once you sell 10 per cent of your shares you've lost them forever. Income over time retreats as the market falls. Capital is sacrosanct. Everything must grow. It's not just about income."

James Henderson CV

James Henderson has worked at Henderson since 1983 where he has managed a range of both closed and open-ended funds. He began his career in 1982 as a trainee accountant. After filling various roles at Henderson he was appointed manager of Lowland Investment Company in 1990. He also runs Henderson Opportunities Trust (HOT) and Law Debenture Corporation (LWDB) investment trust.

Mr Henderson graduated with an MA (Hons) in Economics from Cambridge University.

Lowland is different from other UK equity income funds in that it has 37 per cent exposure to smaller companies, including a significant allocation to Alternative Investment Market (Aim) stocks.

Mr Henderson says that this multi-cap approach helps him to identify new areas of growth and avoid areas of structural decline. "2014 has reinforced our view that business cycles are getting shorter – we have seen a number of high profile examples of this such as Tesco. Within IP Group (IPO), for example, there is an early stage company developing nuclear fusion technology that could (on a 20-year time frame) be disruptive for traditional energy companies. Our smaller company holdings can also help give an early indication of which larger companies are returning to growth – Horizon Discovery (HZD), for example, a provider of drug screening technology, signalled to us that AstraZeneca (AZN) was becoming more innovative in its approach to research and development."

The largest bias in Lowland';s portfolio is to the industrials sector. "The UK has good manufacturing businesses, particularly in aerospace," says Mr Henderson.

Senior (SNR), which designs, manufactures and markets high technology components and systems for the aerospace industry is the second largest holding in Lowland's portfolio.

"Aerospace is an area of excellence in the UK and where we have a competitive advantage," he continues. "Air miles will grow faster than gross domestic product (GDP) growth," he says.

University spinouts account for 5 per cent of portfolio. "There used to be a lack of ambition at universities to fund projects and take them forward in UK," he explains. "Universities used to sell out to America. But now there is money in London, for example, Neil Woodford has been investing."

His big mistake in the past year was buying small oil companies, albeit a small part of the portfolio. "What worried me this time last year was what would happen if Israel and Iraq blew up, so I was buying small oil companies," he says. "There is now a perfect storm happening – the oil price has fallen and there is no capital coming in. Discovery assets are now looking less viable.

It shows how things can change in a year. It also raises the question of how to face up to mistakes. People say you should cut them but it isn't so simple. There will be buyers of selective oil portfolios. You have also got to run winners. We have three to four small oil companies and if one goes right it will pay for the others."