Henderson Global Growth Fund Q2 2017 update
Posted by Liz Rees in Fund and industry updates category on 07 Aug 17
Fund Performance review
The Henderson Global Growth Fund outperformed its benchmark, the MSCI All Country World Index, over the quarter, returning 2.5% versus 0.6% respectively. From a sector perspective, the fund’s holdings in the information technology, industrials and consumer discretionary sectors most positively contributed to performance, as did the lack of holdings in the energy sector. Holdings in the consumer staples sector contributed negatively in the period.
The fund’s largest positive contributor during the quarter was Irish-listed Icon. It is one of the largest listed Contract Research Organisations (CROs) - companies that help pharmaceutical and biotech clients launch new drugs by managing the clinical trial process on their behalf. The complexity of running clinical trials has increased markedly in the last 20 years, with regulators requiring more data and longer treatment periods to prove the safety and efficacy of drugs. The resulting increase in costs has encouraged the outsourcing of more and more of this work to specialised CROs, but with the addressable market less than 50% penetrated, and with the top five firms only accounting for 40% of this, this is a long-term trend we expect to continue for many years to come. Icon sets itself apart within its industry by having an exceptional track record of operational performance, an innovative approach to adopting new technologies, and a balance sheet that provides significant financial flexibility.
Another of the fund’s largest positive contributors over recent months has been Cooper Companies, a US healthcare company that is the third largest global manufacturer of contact lenses. This is an attractive and growing market, with the worldwide contact lens market having grown at a steady 4-5% CAGR over the past 10 years. It is also a market that is heavily concentrated, with the top players controlling about 97% of global sales, providing the companies a market structure in which they can build and grow strong and profitable franchises. The growth has been driven by the wider adoption of higher priced silicone Hydrogel lenses, the switch to daily use lenses, and an expanding wearer base as children enter earlier and presbyopes stay on lenses longer. Cooper differentiates itself primarily by offering a broader selection of lenses (spherical, toric and multifocal) and by marketing solely to the optometrist rather than the end customer. These strategies have proved successful over the last few years, with Cooper growing market share, raising its margins, and improving its ability to generate significant free cash flow. This has resulted in a much higher share price, and with the valuation now significantly higher, we reduced the fund's position in the stock towards the end of the quarter.
Latin American ecommerce company MercadoLibre has also enjoyed a period of strong performance. The company is the market leader across Latin America, an ecommerce market that still has enormous growth potential, with current penetration rates of only 3% relative to a global average of twice that, and where some of the most mature markets are showing mid-teens penetration. The significant scale and network effects in ecommerce can create formidable barriers to entry and competitive advantages, and MercadoLibre have successfully positioned themselves as a modern online marketplace that also offers payment service, shipping and advertising. As adoption rates improve, and the company’s monetisation strategies take-hold, the pace of revenue growth is actually accelerating, leading to a strong performance in share price.
|Discrete year performance
||Henderson Global Growth Fund (%)
||MSCI AC World Index (%)
|1 year to 30/06/2017
|1 year to 30/06/2016
|1 year to 30/06/2015
|1 year to 30/06/2014
|1 year to 30/06/2013
* Source: Morningstar, at 30 June 2017, 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
The most significant new investment during the quarter was in Xylem. This US company is a global leader in the design, manufacture and service provision into the water and wastewater equipment industries. The market for water infrastructure solutions is being driven by the need to upgrade aging water systems in the developed world, and by the pressing requirement to expand the supply of clean drinking water and sanitation in developing nations. The company was spun-out of the large industrial conglomerate ITT in 2011, and has gone on to cement its market leading positions across its key product areas. New management since that spin-out have shown a greater focus on improving the company’s cash conversion rates and its operating margins, both of which we believe will show further improvement over the coming years.
We also increased the fund's holding in Continental AG, the German auto parts and tyre manufacturer, which currently trades at a much more compelling valuation. Although the global car market is a fairly mature one, there are strong growth trends within the industry towards lower emissions, better safety and increased digitisation of the in-car “infotainment” offerings. Continental AG are disproportionately exposed to these trends and its ability to outgrow the overall auto end market stems from a mix of business which is heavily biased to these higher growth elements. Around 40% of the company's chassis and safety business is designed around the more technologically advanced Electronic Stability Program, (ESP), around 65% of its Power Train business is CO2 reducing fuel injection and turbo charge systems, and a large percentage of its interior segment is in areas such as telematics. Additional growth should come from share gain as the larger players take share from smaller players, driven by global product sourcing and standardisation by OEMs. The combination of this attractive growth opportunity, the strength of the company’s products and brands, and an attractive valuation, led the team to increase the fund’s position in the stock.
Fund manager's outlook
Our strategy is to avoid making major macroeconomic calls, and to instead focus “bottom-up” on finding companies with underappreciated growth and high barriers to entry at attractive valuations. Through purchasing undervalued securities that are exposed to strong secular tailwinds of growth, we aim to generate significant absolute and relative returns over the longer term.
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