Seeking quality at a wide discount: Henderson EuroTrust

Henderson EuroTrust (HNE) has now been under the stewardship of Jamie Ross, who took over as sole fund manager in February 2019, for three years. Jamie has remained committed to the quality-growth style of investing that has long characterised HNE. Jamie’s investment process is based around a proprietary scoring system, described in the Portfolio section, which analyses stocks around three broad factors: valuation, quality and momentum.

While today’s markets have been very difficult for quality-growth-focussed styles, Jamie remains optimistic on the long-term potential for the companies in HNE’s portfolio. This optimism is reflected in his recent transactions, where he has been investing in a handful of new ideas and adding to existing companies that he has most confidence in so as to increase the overall quality of HNE’s portfolio. These purchases have been partially funded by the use of Gearing, which has begun to creep up from its previous un-utilised state.

While HNE’s performance since Jamie took over has been ahead of that of its peers and benchmark, it has underperformed over the last 12 months. This is largely a consequence of the trust’s slant towards quality-growth companies, which have been deeply out of favour over the past year, and especially so in 2022 (as we describe under Performance). This same headwind has also caused HNE’s Discount to widen. It currently stands at 14.2%, which is wider than both its peer group’s average discount and its own five-year average.

Being a quality-growth investor has been a difficult job amid headwinds for companies of this type, but Jamie has stuck to his principles and not allowed his clearly defined investment process to be warped by these short-term pressures.

We are encouraged by his recent trading activity, with the end result likely to make HNE an even more attractive prospect for any quality factor-minded investor. He has used the sell-off to improve the overall quality and growth metrics of HNE without having to compromise his valuation discipline.

HNE’s appeal to long-term investors is amplified by the potential opportunity presented by the trust’s discount. The historically wide discount HNE currently trades at is not surprising given the headwinds facing quality-growth-biased strategies, but it means that HNE has become an ever cheaper way to access Europe’s highest-quality stocks. Jamie believes that high-quality companies are better positioned to survive periods of economic hardship and we tend to agree, making this a potentially attractive entry point for long-term investors.

While Jamie follows an entirely bottom-up approach to constructing HNE’s portfolio, investors do nonetheless need to grapple with the economic outlook for Europe. While the region is facing the same inflationary pressures as other Western nations, there is some silver lining in that regard, as much of the pain Europe has faced has been the result of the Ukrainian conflict, an external factor rather than a structural issue with Europe’s economy. If investors believe that the conflict is potentially a resolvable issue, then they should also believe that there could be a corresponding alleviation of inflationary pressures in Europe, which could presage a major bounce in the region’s equity markets. Conversely, investors who remain less optimistic around Europe’s recovery may find solace in Jamie’s adjustment of the portfolio, positioning it further towards high-quality companies and away from those sensitive to an economic downturn.