Forget new paradigms, John Bennett, manager of top-performing Henderson European Focus Trust (HEFT), is cautiously sipping a Carlsberg as he waits for markets to correct.
Bennett, who famously warned he wouldn't make investors money at the start of last year, is not talking down the fund but in its latest annual report has returned to his favourite topic of 'mean reversion', which holds that lofty asset prices eventually revert back to their historic average.
Rerring to a recent report by Alliance Bernstein, the fund management group, which claimed that mean reversion had not functioned since the 2008 crisis because of central banks pumping money into markets, Bennett said: ‘Were we to engage in debate over this topic we would undoubtedly fall on the side of those who believe that mean reversion has been delayed rather than cancelled.’
The fund’s investment in Carlsberg (CARL-A) this year demonstrates this belief. Bennett invested after seeing the brewer was ready to focus on profits rather than revenue.
‘Taken from the company's recent Capital Markets Day, Carlsberg's margins are a shadow of its competitors’. This is where the mean reversionist gets interested. It is not necessary to believe that Carlsberg can approach the eye-watering profitability of Anheuser-Busch InBev,’ said Bennett.
‘Indeed, the key reason that we have avoided owning ABInBev is that it sports optimised profit margins and a valuation to match,’ he added.
Instead, Bennett takes comfort that Carlsberg has a decent chance of nearing the profitability of another competitor, Heineken (HEIA), under the new management team in place.
‘Unlike investors in “unicorns”, bitcoin or Tesla the investor in Carlsberg is not required to believe in new paradigms. And unlike such apparently alluring stories, beer is an industry that is unlikely to face existential or technological shocks,’ he added.
Perhaps the biggest challenge for mean reversionists is to remain patient, Bennett (pictured below) added.
‘We shall enjoy a glass of Grimbergen, a monastery beer dating from the year 1128 and now owned by Carlsberg, while we wait,’ he joked.
Over the 12 months to the end of September, the trust grew its net asset value (NAV) by 21.7%, slightly below the 22.7% from the FTSE World Europe ex-UK index.
Following a strong year for dividends, the board raised the trust's full-year dividend by 11.7% to 29.5p per share and recommended a special payment of 1.4p to pass on to shareholders a tax refund from France.
2017 has seen a bounce back in performance. Although 2016 was nowhere near as bad as Bennett warned, with NAV advancing nearly 18% in the calendar year, the Brexit vote upset shares in the £293 million trust, with investors seeing just a 4% total return.
This year has reversed the picture, however, with the NAV up 14.7% and the shares on track to gain over 27%, having shed the wide discount they fell to after the referendum to stand on a 1% premium.
Over five years to 6 December, the £290 million trust leads the seven-strong AIC Europe sector with a share price rise of 147.9%, ahead of the 111.4% average return.