Investment Trust Insider - Opening the door to investment trusts

Register to get unlimited access to our investor forum and all editorial content, including our e-zine and weekly email. Registration is free and only takes a minute.

Investment Trust Watch: Henderson's HOT streak

Investment Trust Watch: Henderson's HOT streak

Shares in the Henderson Opportunities (HOT) investment trust have been on a tear over the last month, but investors can still pick up shares in the James Henderson-managed trust relatively cheaply.

The shares are up 13.8% over four weeks, the best return from any UK equity trust. 

A large chunk of that rally has come from a narrowing of the discount, which at the beginning of the month stood at more than 20%.

The shares yesterday closed at a 14.3% discount to net asset value. And while that is lower than the 17.9% average over the last 12 months, the Z-score of 1.3 this gives them is not enough to trouble the list of 'expensive' investment trust shares compiled by Numis Securities.

Just to recap, a Z-score is a measure used by analysts to put a premium or discount on an investment trust into the context of its previous 12 months. Roughly speaking, an investment company or trust with a Z-score of -2 or below is ‘cheap’, while a score of 2 or more is viewed as expensive.

'Cheap' trusts Share price (-discount) to NAV % 12-month average premium (-discount) % Z-score
Blackstone GSO Loan Financing £ (BGLP) -0.7 4.2 -3.6
Invesco Perpetual Select - Balanced Risk (IVPB) -4.3 -1.3 -3.2
F&C High Income - B Shares (FHIB) -10.2 -6.3 -3.1
Residential Secure Income (RESI) 1.0 2.7 -3.0
Empiric Student Property (ESP) -7.3 3.8 -2.9
RM Secured Direct Lending (RMDL) 2.8 4.2 -2.6
F&C UK High Income- Units (FHIU) -10.6 -7.5 -2.4
F&C UK High Income - A Shares (FHI) -9.0 -6.6 -2.4
John Laing Infrastructure (JLIF) 2.9 11.0 -2.4
Masawara (MASA) -40.7 -34.2 -2.2
Sanditon Investment (SIT) -5.0 -0.2 -2.1
Fundsmith Emerging Equities (FEET) -2.1 0.8 -2.1
Hadrians Wall Secured Investments C (HWSC) 2.9 4.2 -2.1
SQN Asset Finance Income C (SQNX) -1.7 4.4 -2.0
NB Distressed Debt - Extended Life (NBDX) -18.6 -11.4 -2.0

Source: Numis Securities 2/11/17

And it's one of the widest discounts in the Association of Investment Companies' (AIC) UK All Companies sector, on one of the sector's best performers.

Over the last year, HOT's share price return is beaten only by that of Manchester & London (MNL), which has been buoyed by the rally in technology stocks and given an added fillip from a tip in the Telegraph's Questor column.

Yet only three trusts in the sector have wider discounts on their shares: Mercantile (MRCM), Schroder UK Mid Cap (SCP) and Artemis Alpha (ATS).

Yet comparing the trusts to its peers does illustrate some of the limitations of relying on AIC sectors. Manchester & London may stand out as the stellar UK All Companies performer this year, but the reality is it shouldn't really be in the sector, with 58% of its assets held in the US.

And before we crown Henderson as the top performer of the year, it's worth noting that Independent (IIT), the top performer in the AIC's Global sector, should really be handed that moniker, with the shares up an astonishing 78.9% over the last month and almost the entirety of its assets held in the UK. It was short-listed for an award in the UK All Companies category in our inaugural Citywire Investment Trust Awards.

While HOT's discount may appear alluring, it is largely the result of the trust's greater focus on smaller stocks, which account for two-thirds of the portfolio. Only two trusts in the sector hold more than this: Artemis Alpha and Woodford Patient Capital (WPCT).

A comparison with the 12.2% average discount in the AIC's UK Smaller Companies sector is probably more instructive. On that basis, while the shares seem to offer value, they are not a screaming bargain.

It doesn't take much digging to unearth some of the stocks helping to drive HOT's strong performance: its top two positions, computer game translator Keywords Studios (KWS) and Blue Prism (PRSMB), which makes robotic automation software for businesses, are up by 280% and 368% respectively over the last year.

Blue Prism is becoming a regular feature of this column, with the Alternative Investment Market-listed stock having also played a key role in the stellar returns from Independent and River & Mercantile UK Micro Cap (RMMC) this year.

Henderson has been an investor in Blue Prism since its stock market debut in March last year, with the shares up 1,718% on its 78p issue price.

He has faced a longer wait with Keywords Studios, a stock he invested in at its July 2013 IPO, which then largely traded sideways in its first two years on the stock market. The rally in the shares has really taken hold over the last two years, which the stock up 652% over the last 24 months.

'Keywords Studios... had an awkward birth as a public company,' said Henderson in HOT's half-year results. 'Involved in language, art and testing services to the global video games industry, good organic growth supplemented by acquisitions in a fragmented industry has produced a stream of profit upgrades.'

HOT is an unusual portfolio, with high octane small cap growth stocks trading on exorbitant price-earnings ratios, or without a PE ratio at all where they haven't yet made a profit, sitting alongside blue-chip stalwarts like HSBC (HSBA), ITV (ITV) and Shell (RDSb).

But it's a mix that has worked, with the shares up nearly 150% over the last five years, beating the returns of Henderson's more conservatively-run Lowland (LWI) and Law Debenture (LWDB) trusts.

That strong long-term performance saw the shares briefly trade at a premium at the height of its rally in the summer of 2014. But any investor hoping the trust's recent resurgence bodes well for a repeat of that performance should probably take heed of the 35% slump in the shares, since recovered, that followed. For some, James Henderson's raciest trust may be too hot to handle.

'Expensive' trusts Share price (-discount) to NAV % 12-month average premium (-discount) % Z-score
Sherborne Investors (Guernsey) B (SIGB) 74.4 -5.6 11.4
Electra Private Equity (ELTA) -12.0 -69.9 4.0
JPMorgan Global Emerging Markets Income (JEMI) 2.2 -3.3 3.5
Alternative Liquidity (ALF) -71.1 -79.6 3.3
AEW UK Long Lease REIT (AEWL) 7.0 2.5 3.1
Biotech Growth Trust (BIOG) -0.4 -6.0 2.9
Fidelity Japanese Values (FJV) -7.5 -14.2 2.6
BlackRock Latin American (BRLA) -10.0 -13.6 2.6
Herald (HRI) -12.0 -18.2 2.6
International Biotechnology (IBT) -1.2 -7.3 2.5
Dunedin Enterprise (DNE) -19.7 -30.1 2.4
Baker Steel Resources (BSRT) -16.1 -29.6 2.4
Dolphin Capital Investors (DCI) -67.5 -75.5 2.3
Allianz Technology (ATT) -2.0 -4.8 2.3
ICG Enterprise (ICGT) -10.8 -15.8 2.3

Source: Numis Securities 2/11/17

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.