An investment trust that's well-placed to profit from the rebound

This trust invests in stocks of all sizes and looks well placed to ride a rapid economic recovery

Investment trusts’ average discount to net asset value (NAV) is 6%. But there are plenty of trusts with double-digit discounts. Often, this is the result of persistent poor performance. Sometimes the sector is out of fashion. But occasionally it is because professional investors struggle to pigeon-hole it. The Henderson Opportunities Trust (LSE: HOT), of which I was a director until March, is one of these. With net assets of £80m, it is the smallest of three trusts managed by James Henderson and Laura Foll. 

It invests right across the UK market and is benchmarked against the All-Share index. When smaller companies are doing well, it outperforms but when they lag, as they had last year , this tends to get left behind. For most professional investors, this characteristic, and the trust’s small size, are off-putting – but it should appeal to opportunists. 

The obvious answer to the ebb and flow of  smaller companies’ performance would be for the managers to switch out when small caps are riding high and jump back in when they are depressed, but this is easier said than done: small caps rarely look expensive even at the top of their cycle. More importantly, Henderson and Foll have a firm bias towards value in large-cap stocks but this has been a dismal place to invest for 20 years.

The stars align

Four factors now make HOT attractive. Firstly, its shares trade on a generous discount of 18% while yielding over 3%. Secondly, UK large and mid-cap value stocks are looking appealing. Thirdly, sustained underperformance makes smaller companies look cheap, especially those on Aim. Finally, the team combines Henderson’s well-deserved reputation as a contrarian happy to buy out-of-favour stocks with Foll’s diligent analysis and discipline in cutting poor performers.

“We have a value bias,” she says, “but we don’t buy just anything on a low valuation, and avoid companies with flat or falling sales.” Many investors conflate value with income but “there is very little overlap. The best value opportunities are now in the companies that have suspended their dividends.” 

While their share prices have fallen sharply, the long-term prospects of many larger companies that have been forced to restructure have improved, providing contrarian opportunities for the fearless.

Meanwhile, UK small caps offer “exciting opportunities, notably in technology, to which there is little exposure among large caps.” Portfolio examples include Blue Prism, a pioneer in robotic process automation, RWS, a leader in providing translation and localisation services, Learning Technologies, an e-learning provider, and Ceres, a pioneer in fuel-cell technology. 

Serica, responsible for 5% of the UK’s gas production, has been a good long-term investment. In the mining sector, large cap is preferred, notably Rio Tinto with “low-cost mines, good cash-flow generation and a strong balance sheet.”

Britain is due a quick rebound 

Foll and Henderson are optimistic about both the UK economy – “we are positioned for a relatively quick recovery” – and the market but a trust such as this depends far more on their skill than on a rising tide. Though allocation between size segments held performance back last financial year, “stock selection was a positive contributor in each segment; large caps, mid caps, small caps and Aim.” 

Moreover, “the greatest opportunity lies in the smallest companies and Aim stocks, currently held back by liquidity concerns which have caused open-ended funds to sell…we expect a catch-up.” The pandemic may have delayed this by six months but with small caps down 25% this year and large caps only 15%, the potential is greater than ever.Such is their conviction that the trust is geared with borrowings of 15% of net assets to finance extra investment. Given their focus and their record, that confidence looks justified.

Recommended

The after effects of the gas-price shock
Economy

The after effects of the gas-price shock

In the wake of the recent spike in the natural gas price, we can expect slower growth, an industrial recession – and a newly assertive Russia, says Ma…
17 Oct 2021
The charts that matter: bond yields slip while bitcoin tops $60,000
Economy

The charts that matter: bond yields slip while bitcoin tops $60,000

Cryptocurrency bitcoin soared to over $60,000 this week, while government bond yields fell back. Here’s how that has affected the charts that matter m…
16 Oct 2021
Whistleblower allegations – where now for Facebook?
Tech stocks

Whistleblower allegations – where now for Facebook?

The social-media giant has come in for some fierce criticism following revelations from a former employee. Just how much damage has been done?
16 Oct 2021
Inflation, energy crisis, strikes – have we gone back to the 1970s?
Investment strategy

Inflation, energy crisis, strikes – have we gone back to the 1970s?

Merryn and John talk about rising prices, productivity and the state of the labour market, plus are bond investors really the adults in the room, and …
15 Oct 2021

Most Popular

Why the world’s most important economic data release has unnerved markets
US Economy

Why the world’s most important economic data release has unnerved markets

The US added only 194,000 jobs in September, far shorter than the 500,000 that were expected. John Stepek explains why markets didn't react as they no…
11 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021
Inflation is still one of the biggest threats to your personal finances
Investment strategy

Inflation is still one of the biggest threats to your personal finances

Central bankers and economists insist inflation will be gone by next year. We're not so sure, says Merryn Somerset Webb. So if you haven’t started to …
1 Oct 2021