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

Imperial Brands has an 8.3% yield – but what’s the catch?
Share tips

Imperial Brands has an 8.3% yield – but what’s the catch?

Tobacco company Imperial Brands boasts an impressive dividend yield, and the shares look cheap. But investors should beware, says Rupert Hargreaves. H…
20 May 2022
What's behind Sri Lanka’s crippling debt crisis?
Emerging markets

What's behind Sri Lanka’s crippling debt crisis?

Sri Lanka has been hit by a triple whammy of economic shocks and has gone to the IMF for a bailout. It may just be the first domino to fall in a globa…
20 May 2022
Investing in drugmakers: uncommon profits from curing rare diseases
Share tips

Investing in drugmakers: uncommon profits from curing rare diseases

Treatments for medical conditions with only a small number of sufferers can still be very attractive for pharmaceutical companies and investors becaus…
20 May 2022
Share tips of the week – 20 May
Share tips

Share tips of the week – 20 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 May 2022

Most Popular

The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Aviva: a share for income investors to tuck away
Share tips

Aviva: a share for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
18 May 2022
Despite the crypto crash, bitcoin still has a bright future
Bitcoin & crypto

Despite the crypto crash, bitcoin still has a bright future

Cryptocurrencies have crashed hard, with bitcoin down by more than 50% from its peak. But, says Dominic Frisby, bitcoin still has a future – it is the…
19 May 2022