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Henderson Opportunities caught by growth sell off

Lowland has a disappointing year

Henderson Opportunities caught by growth sell off – Henderson Opportunities reports a -5.6% NAV return for the year to 31 October 2018. That was 4.1% behind its benchmark and 3.0% behind its chosen peer group. The discount was unchanged (16.1%) and the share price return was -5.3%. The dividend was upped from 20p to 21p.

The chairman says that the problem was in the trust’s exposure to the AIM index which fell sharply towards the end of the period (and by more since).

The managers talk about the sell-off in growth stocks saying “The core of the portfolio will always be ‘small and mid-cap compounders’ and ‘growth small cap’. The portfolio as it stands has a high allocation to ‘growth’ small cap as we are finding a number of exciting early stage companies on AIM that could, in our view, become some of the large UK companies of the future. The path to becoming a large company will not, however, always be smooth and it was this ‘growth’ area that performed particularly poorly in October. This weakness was not, in our view, a result of any changes to the fundamentals of these businesses but rather reflected that in some cases share prices had moved too far too fast, and a retrenchment was necessary.”

Positive contributions came from Serica Energy (+3.3%), Blue Prism (+1.1%), GRC International (+0.9%), Learning Technologies (+0.9%) and Faroe Petroleum (+0.7%). They say “Serica Energy is a North Sea oil and gas producer. Following the oil price fall in 2014 and 2015, oil majors such as BP looked to reduce capital expenditure substantially and this led to them divesting a number of smaller fields at attractive prices. Serica Energy was one of the acquirers of some of these divested assets.”

The biggest hit to returns came from the holding in Conviviality, the drinks retailer/wholesaler that went bust during the year. this cost the fund 2.5%. Other detractors included 4D Pharma (-1.7%), Clinigen (-0.8%), MIcro Focus (-0.8%) and Mirriad Advertising (-0.7%). They say “4D Pharma was purchased at IPO in 2014 for GBP1. It is an early stage pharmaceutical company, aiming to develop drugs targeting a wide range of (large) end markets including Crohn’s disease, cancer and IBS. The novel aspect of 4D relative to other pharmaceutical companies is that it is using bacteria that naturally occur in the gut as a drug. In theory this should mean a better safety profile because the bacteria are already in the gut of healthy individuals.

Shortly after IPO there was a lot of excitement in the area and the shares performed strongly. However, drug development often takes longer than expected and the shares have pulled back. The fundamentals of the company remain encouraging in our view. Clinical trials, where they have reported, have looked promising and 4D recently signed a development agreement with Merck for their cancer product. On share price strength we reduced the position so our ‘entry cost’ (combining IPO, a placing and a recent addition on weakness) is GBP1.9m and we have taken GBP2.2m out of the position so far. The remaining value of the holding at year end was GBP1.7m.”

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