Change brings op­por­tu­nity

James Hen­der­son, Fund Man­ager for Hen­der­son Op­por­tu­ni­ties Trust, ex­plains why this pe­riod of change and un­cer­tainty is a good op­por­tu­nity for ac­tive UK stock pick­ers.


Change, un­cer­tainty and volatil­ity in stock mar­ket prices are the in­gre­di­ents that Hen­der­son Op­por­tu­ni­ties Trust (HOT) thrives on. The Trust is rel­a­tively small with net as­sets of around £100m at the end of April, spread over a di­verse list of com­pa­nies. Our size en­ables us to move quickly when we see op­por­tu­ni­ties.

Eq­uity mar­kets around the world have ex­pe­ri­enced greater volatil­ity in 2018. Change is a con­stant fea­ture of the po­lit­i­cal and eco­nomic land­scape, and this change is epit­o­mised by the sit­u­a­tion in the UK. Here, dig­i­tal and tech­no­log­i­cal in­no­va­tions are chal­leng­ing es­tab­lished busi­ness mod­els, while the coun­try’s po­lit­i­cal lead­ers ne­go­ti­ate leav­ing the EU and be­gin to forge new part­ner­ships in a glob­ally com­pet­i­tive econ­omy.

The Trust has the flex­i­bil­ity to go up and down the spec­trum of com­pa­nies in terms of size to find at­trac­tive op­por­tu­ni­ties. Cur­rently, the HOT list holds ap­prox­i­mately 15% in the FTSE 100, 9% in the FTSE 250, 13% in the FTSE Small Cap and 63% in non-FTSE All Share. The weight in FTSE AIM (al­ter­na­tive in­vest­ment mar­kets) has in­creased in re­cent years be­cause we have tended to find more at­trac­tive op­por­tu­ni­ties within this space. These are typ­i­cally young, high growth com­pa­nies that are un­en­cum­bered by legacy issues.

An ex­am­ple of a suc­cess­ful FTSE AIM in­vest­ment in the port­fo­lio is ro­botic process soft­ware com­pany, Blue Prism. Since its pur­chase in March 2016, the share price has ap­pre­ci­ated 237%, ow­ing to high de­mand for their ro­bot process au­to­ma­tion soft­ware. The soft­ware ad­dresses a key pain point for en­ter­prises – poorly in­te­grated back-of­fice sys­tems – by en­abling com­pa­nies to au­to­mate in­ter­ac­tions be­tween legacy soft­ware ap­pli­ca­tions. This al­lows com­pa­nies to re­dis­tribute labour and save costs. For ex­am­ple, banks can use the soft­ware to process or­ders for new debt/credit cards, while in­sur­ance com­pa­nies can use it to stream­line in­sur­ance claims by check­ing in­ter­nal data and pro­duc­ing a sug­gested pay-out. ADDING VALUE IN DIG­I­TAL TRAN­SI­TION We are in a time of macro-eco­nomic and po­lit­i­cal un­cer­tainty, and the dig­i­tal shift is chang­ing the shape of com­pa­nies and the way in which peo­ple in­ter­act with them. Through this, we have fo­cused on iden­ti­fy­ing com­pa­nies that pro­vide some sort of value add to help them con­trol their own destiny. For ex­am­ple, we have shied away from hold­ing Marks & Spencer, de­spite the shares trad­ing on op­ti­cally at­trac­tive val­u­a­tions at times. The com­pany is grap­pling with repo­si­tion­ing it­self to ad­dress the struc­tural growth in on­line sales, as well as the frag­men­ta­tion of the mar­ket in their key cat­e­gories. Bar­ri­ers to en­try have come down within the re­tail space with any­one able to cre­ate a brand from their liv­ing room without the need for large in­vest­ments into stores or mar­ket­ing.

Where we have in­vested into re­tail­ers, it

has been in com­pa­nies that have a niche within the mar­ket, which some­what in­su­lates them from the large struc­tural shifts de­scribed above. We hold Joules, a pre­mium fam­ily fash­ion brand, which has po­si­tioned it­self well across on­line and off­line chan­nels. The brand is rel­a­tively im­ma­ture and thus has a long run way for growth both in the UK and In­ter­na­tion­ally. We think the Joules brand, which ad­dresses a niche within the ex­pand­ing life­style ap­parel cat­e­gory, is at­trac­tive in the cur­rent en­vi­ron­ment. In­deed, Joules con­tin­ues to see sales growth far out­strip new store space. This is driv­ing an in­crease in prof­itabil­ity as man­age­ment lever­ages their cost base.

The Trust has the abil­ity to bor­row money (gear­ing) to help grow its un­der­ly­ing net as­set value, which is lim­ited by the Trust’s board to a max­i­mum of 25% of the com­pany’s net as­sets. At the end of April, gear­ing stood at 13% of the port­fo­lio and we ex­pect to con­tinue to utilise gear­ing to in­vest into dif­fer­en­ti­ated and at­trac­tively val­ued com­pa­nies with long term growth prospects to drive share­holder re­turns.

HOT has been trad­ing at a dis­count of about -15% rel­a­tive to the net as­set value, which typ­i­fies in­vestor sen­ti­ment to­wards UK eq­ui­tes gen­er­ally. There is a grow­ing con­sen­sus that the worst of Brexit – i.e. the worst pos­si­ble out­come – has al­ready been priced into UK eq­ui­ties, which could mean val­u­a­tions have plenty of room to grow as we move to­wards a con­clu­sion of the Brexit ne­go­ti­a­tions.

These are cer­tainly in­ter­est­ing times for the UK and we are ex­cited by the num­ber of op­por­tu­ni­ties to buy com­pa­nies with good busi­nesses at at­trac­tive val­u­a­tions and are adding value in a chang­ing econ­omy.

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