Uncertainty over Brexit means UK market sentiment is currently low. But James Henderson, co-manager of Henderson Opportunities Trust (HOT), is not worried. “Even if there is a hard Brexit, a lot of new opportunities will arise,” he says. “Negative sentiment also means that shares are cheap.”
Mr Henderson is finding many new opportunities in the UK. He and co-manager Laura Foll look for seven different types of companies to invest in. These include small-cap growth and early-stage companies, and established small- and mid-caps whose long-term returns compound as they grow. This leads to a preference for stocks quoted on the Alternative Investment Market (Aim) – London Stock Exchange’s market for smaller growing companies.
This is because “they are a next-generation opportunity and good to buy when people are bearish and markets are down", explains Mr Henderson. "We use downturns in the market to find new areas of growth. Oil exploration companies have done really well recently and this has compensated for poor performance among industrials.”
Serica Energy (SQZ), for example, was the [trust's] best-performing stock last year due to acquisitions.
The trust had 26.6 per cent of its assets in industrials at the end of May, and 8.7 per cent in oil and gas companies. “The idea is to get balance because sectors will do well and go down over time,” he says. "Natural resources are typically cyclicals that are viewed as value stocks. [But] investors shouldn’t be afraid to be contrarian."
Mr Henderson takes a value-based approach and thinks there are good opportunities – particularly in the UK technology and healthcare sectors.
“It doesn’t matter what happens in the UK or with Brexit because people will continue to fall ill and demand for drugs – especially drugs that tackle long-term problems such as Crohn's Disease – will always be in high demand," he explains.
An example of such a stock held by Henderson Opportunities Trust is 4D Pharma (DDDD) which works on early-stage drug development, studying the human gut in the hope of finding bacteria that can have a therapeutic effect on specific diseases.
Despite tech being typically viewed as America’s forte, Mr Henderson believes the UK has good potential. He points to Blue Prism (PRSM), a company that produces robotic process automation software. “Robotics in the workplace is a huge growth area,” he says. “We bought shares in Blue Prism at 78p in March 2016 and in September last year, and it achieved a peak price of £25.78. Consumer tech is quicker than pharma so has been better for us, but pharma just needs time. People say you should have a strong conviction and a shortlist of stocks, but nothing is inevitable – there’s just a possibility. But there’s a strong likelihood, for example, that Blue Prism will be the winner of office automation. I also don’t like stock shortlists because you have to be very specific – you can only buy stock at an exact moment, otherwise you lose out.”
And this approach has worked: over 10 years the trust's net asset value total return is 353 per cent, while its benchmark, the FTSE All-Share index, returned 149.4 per cent.
Because this trust invests in smaller, higher-risk companies investors should hold it for the long term and consider its performance over such periods. And in order for his approach to work, Mr Henderson doesn't buy and sell stocks frequently but gives them time to grow, so investors in Henderson Opportunities Trust have to be patient.
“I have struggled in the past to know when to sell, so with some stocks we sell a little bit at a time,” he admitted. “It is too risky for funds to hold stocks indefinitely. It’s better to change between companies in a sector and sell when you can.”
Risk management is also important because Mr Henderson is acutely aware of the trust’s volatility – something wealth managers dislike. So he has taken steps to reduce this by diversifying its holdings, and the trust is invested in 96 stocks across the market cap spectrum.
“The idea of having a multi-cap portfolio is to [be able to benefit from] Aim growth but without too much volatility," he says. "It also allows us to move up and down the whole range of market capitalisations to find the right opportunities."
A multi-cap approach can also help to smooth returns in difficult periods. For example, the trust’s largest holding is Blue Prism, a small business that Mr Henderson believes is a tech disruptor, but which could be volatile. However, the trust's 10 largest holdings also include HSBC (HSBA), an established FTSE 100 bank.
Mr Henderson says: “We have a flexible approach to growth investing and invest in a diverse list of companies that are expected to grow substantially.”
James Henderson CV
James Henderson is director of UK investment trusts at Janus Henderson and co-manager of Henderson Opportunities Trust. He is also co-manager of Janus Henderson UK Equity Income & Growth (GB0007493470) and Lowland Investment Company (LWI), and manager of Law Debenture Corporation (LWDB). He joined Henderson in 1983 as a trainee fund manager and has managed a number of investment trusts since 1990. He has over 30 years’ investment experience.
Mr Henderson graduated with an MA (Hons) in economics from Cambridge University.
