Following the bounce from the February lows equity markets were beginning to struggle in making further headway, not surprising given the challenging corporate earnings environment, confirmed by the first quarter corporate reporting season. It strikes us that 2016 thus far has been all about investor positioning (and subsequent unwinds). In that respect it is perhaps no surprise that the overwhelming “sell in May” consensus paved the way for a tradeable bounce. June provided a roller coaster ride for European equity investors as indices gyrated both before and after the Brexit event. As has been the case since the 2008 financial crisis, how an investor views the immediate aftermath of the UK referendum will very much depend on his or her currency base: a dollar or yen investor will not be feeling quite as sanguine as the sterling-based investor. Indeed it is somewhat mystifying that so much of the media and financial market commentariat continues to ignore this basic point. Who would have thought that one week after the unnecessary plebiscite, UK-based investors in European equities would be totting up gains instead of nursing the widely forecast bruising losses. As we have learned through experience, markets exist to make fools of us (or at least those who forecast).
The fund returned 4.2% in the second quarter, in line with the benchmark index*.
Key sector decisions have been important drivers of performance this quarter as top performers in the fund included healthcare companies Novartis and Roche. We added to these holdings and to our weightings in Sanofi and Fresenius over the quarter. It has been a noisy time for the sector due to US electioneering and scrutiny on pricing issues, however we believe the noise factor is at odds with the fundamentals and that there will be no meaningful change in the pricing landscape for our holdings in the next five years. As recent meetings with the companies we hold have confirmed, innovation will continue to command pricing power.
Having reversed our underweight to the oil sector in the course of the year we are encouraged that our contrarian investment thesis on the sector is beginning to play out. BP and GALP Energia were amongst the positive contributors. The financials sector was hit hard in June and the fund benefited from its underweight stance. We believe that the banking sector in Europe is in no fit state to deal with recession: capital buffers in the sector are, in our view, insufficient. This has been the single biggest reason for our long term caution towards banks. We increased our exposure to insurance names through the addition of Axa and Allianz. The materials sector lagged as Bayer launched a bid for US agricultural producer Monsanto. Having expressed our views against the transaction to the company when the deal was rumoured we significantly reduced our weighting in the stock following confirmation of the deal, which we perceive to be an expensive u-turn strategy. Elsewhere, Autoliv detracted as the auto sector has underperformed following Brexit due to initial fears of weaker global demand.
|Discrete year performance
||Henderson European Selected
Opportunities Fund (%)
|FTSE World Europe
(ex UK) Index (%)
|1 year to 30/06/16
|1 year to 30/06/15
|1 year to 30/06/14
|1 year to 30/06/13
|1 year to 30/06/12
|* Source: Morningstar, at 30 June 2016, nav-nav, net income reinvested, net of fees, Class A Acc shares, in Sterling. Past performance is not a guide to future performance. Prices can go up and down and you may not get back the amount originally invested. NAV = net asset value.
Fund activity review
After meeting with management and identifying an attractive entry point we added L’Oréal given improving organic operating momentum and the catalyst into 2017 of the stake buyback. We also initiated a position in Swedish truck maker Volvo as we believe new management will not disappoint. We reduced our holding in French telecom company Orange following its abandoned attempt to acquire the phone business of Bouygues. We also trimmed our weightings in Deutsche Telekom and Telecom Italia, and sold BT Group.
Fund positioning and manager's outlook
We have resisted the temptation to join the post-Brexit bull market in the use of superlatives. The fact is nobody knows quite how this will play out, neither in the UK nor in the rest of Europe. Our view is that we should focus on two potential impacts: the risk of economic recession has risen, both in the UK and across Europe; the risk of renewed stress in the periphery of Europe has risen. Neither of these outcomes is guaranteed. Nevertheless it is wise to bear in mind that the UK has a safety valve, which it has a history of using, (and has just done so again): it is called currency devaluation. The problem for Continental Europe, especially in the periphery, is that it has run out of valves. We can but pray for European reform, though holding one's breath is not recommended. Meantime we continue to make all of our judgements and decisions based upon stocks and sectors, their cash flows and their valuations.
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Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.
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Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. Ref: 34U
The views and opinions contained herein are third party and may not necessarily represent views expressed or reflected by Willis Owen.