Imagine a world in which you do not need to queue at the supermarket. Goods are printed with 'smart' barcodes that are automatically 'checked out' as you leave the building.
Carclo, the obscure small-cap company whose technology might make this vision of the future a reality, accounts for nearly 5 per cent of the Lowland Investment Company. But James Henderson, a member of the Henderson clan who has managed the £230m trust since 1990, stresses he is not a tech investor. Carclo has become his largest holding somewhat by accident.
"It was a fortunate buy," he confides. "I bought it at 25p-30p because I thought it was a manufacturer of moulded plastics that was on the wrong rating, with a tough management team that would do alright."
That was in 2002, when Carclo was forced into an emergency rights issue after years of restructuring. Now it still makes most of its cash from the plastics business, but the blue-sky potential of its sideline in printed electronics has pushed the shares up to 295p - 37 times earnings estimates for the year to March 2011. They leapt 21 per cent on a single day last month, after stock market pundit David Schwartz pointed out the technology's potential to revolutionise the iPhone market in FT Money, our sister publication.
This has benefited Lowland and its investors, but it doesn't sit easily with the manager's description of himself as an "income, value-orientated guy". Is it time to sell Carclo and buy a less sexy story?
Mr Henderson is in two minds. "What you'd normally do as an investment manager is take the top off a holding when it gets to 3 per cent," he says. But in this instance he is making an exception, because of the latent potential in Carclo's electronics business. "I think I've got scope in the portfolio to have one of two sleepers. This is complete mixer for me - everywhere else it's about visibility of earnings and cash generation."
James Henderson
Carclo's blue-sky technology arm may be the exception in Lowland, but its plastics division is the rule. Industrials account for a full third of Mr Henderson's portfolio - compared with 7.3 per cent of the FTSE All-Share. The most recognisable names are in aerospace - Rolls-Royce and BAE Systems - but Mr Henderson also likes engineers like Weir and IMI, both recently promoted to the FTSE 100 index. He balances this cyclical exposure against a very low position in mining.
"The theory is that the global economy is growing, but the way to catch that for an income-orientated investor like me is more in industrials than in mining. These are differentiated products that will hopefully add value over and above the movements in commodity prices," he reasons.
Mr Henderson bought most of his industrial holdings years ago, when they were classic value plays like Carclo - companies that had fallen out of fashion after years of patchy financial performance. He saw them as recovery plays that would rebound under decent management, as long as their products were sound. "Most of the time I'm looking for low margins in the belief that management will be able to improve them," he says.
This doesn't always work: the manager admits that "a lot of recovery stuff doesn't recover". Yet it has worked unusually well over the past two years. As industrials typically offer exposure to global rather than domestic growth, and corporate rather than consumer spending, they have suddenly become popular with UK investors, who are fearful that government cuts will sap consumption at home.
Mr Henderson is naturally delighted at the engineering sector's consequent re-rating. But as an income investor, he now faces a headache. "The problem for a value guy is that you're always selling too early. It's so tempting to sell at this stage in the cycle, because the yield is sub-market for a lot of these companies," he says ruefully.
| James Henderson CV |
|---|
| James Henderson started his career at the accountancy firm Binder Hamlyn, having studied economics. He joined Henderson Global Investors in 1984 as a trainee fund manager. He now manages three investment trusts - Lowland Investment Company (since 1990), Henderson Opportunities Trust (since 2006) and the Law Debenture Corporation (since 2003). He also runs an open-ended fund Henderson UK Equity Income. |
Yet the manager has decided to hold his nerve. He remembers the recovery runs after two previous downturns - in 1992 and 2001 - and wishes he had maintained his cyclical positions for much longer after both. "I should have not come to work in 1993-94 and just let them run," he recalls.
He is determined not to fall into the same trap this time round. "As long as the dividend growth is going to be as good as or better than anticipated I can keep my industrial holdings," he says. Even after a year that has converted all but the most recalcitrant bears, he thinks engineering analysts are still "behind the curve" in their earnings predictions.
Mr Henderson has beaten the market by some margin since 2009. But that followed an atrocious 2008. He says it was not his taste for industrials that hurt him - he'd already reduced his exposure - but buying the banks back "way too early". Having not owned Royal Bank of Scotland, he participated in its ill-fated capital-raising in May 2008 and went on to build up other positions. He sold out after the collapse of Lehman Brothers, but at heavy losses.
Like most value managers, he fared much better in the 2001-02 bull market, and over 10 years he has outperformed the FTSE All-Share index by well over a half. But that followed a period of weaker performance, when he avoided optimistically priced tech stocks in the first internet bubble. That may also explain why Mr Henderson is still holding on to Carclo. Ultimately, history trumps methodology.
A complete list of holdings in the Lowland portfolio can be found here.
