Strong absolute performance from Henderson Eurotrust despite challenging markets

Henderson Eurotrust HNE Jamie Ross

Henderson Eurotrust (HNE) has announced its annual results for the year ended 31 July 2020, during which it has delivered strong absolute performance in both share price and NAV total return terms, despite challenging markets and has also materially outperformed its AIC Europe sector peer group. During the year, HNE net assets rose by 10.4% on a total return basis, while its share price total return rose by 9.0%, reflecting a modest widening of the discount. In contrast, the trust says that the return on its benchmark, the FTSE World Europe (ex UK), was a fall of 2.8%. The share price total return of 9.0% was ahead of the 1.1% return for the peer group. HNE’s manager says that, on a NAV basis, HNE outperformed a strong market during the first half of the year, then suffered a less severe fall than the market in February and March 2020 before also outperforming during the recovery period over the balance of the year.

New dividend policy

HNE’s chairman, Nicola Ralston, says that, at the interim stage the board did not have visibility on the final amount of dividends from HNE’s portfolio constituents, as many European companies declare their dividends at around the time of the trust’s half-year results announcement in March. At that stage, therefore, the board decided to keep the interim dividend unchanged. In the event, total dividend income for the year fell by nearly a quarter, from £6.1m in the previous year to £4.7m.

The chairman says that, in the last two Annual Reports, she has flagged that the pace of dividend growth produced by HNE was likely to moderate. This was a reflection of the fact that the growth companies of the future often choose lower dividend payout ratios in order to invest more cash in profitable growth. However, due to the economic and political impact of COVID-19, the anticipated lower payout ratios from HNE’s portfolio companies has coincided with cuts in dividends that were not contemplated a year ago.

While some commentators take the view that the dividend cuts are optional for investment trusts, due to the power to pay dividends out of capital, HNE’s board is of the opinion that, for a trust which focuses on delivering a superior total return, rather than on income, such an approach does not make sense and would also impose adverse tax consequences on many of the individual shareholders. The board has therefore decided to move from targeting a progressive dividend to a strategic policy of paying out substantially all of the dividend income generated by the Company in the financial year. Reflecting the fact that the Company currently has a significant revenue reserve, the Board is proposing to smooth the transition to this new policy by paying out the majority of the current revenue reserve over the next three to four years. The board has therefore proposed a final dividend for the year of 17.0p which compares with 23.0p for the year ended 31 July 2019. This brings the total dividend for the year to 25.0p (year ended 31 July 2019 – 31.0p). In order to pay this amount, HNE will be using £0.637m from its revenue reserve.

Comments from Jamie Ross, HNE’s manager, on investment process and portfolio activity

I have spoken and written extensively on our investment process in the past. We place a very high degree of importance upon depth of research, producing an Investment Thesis, a Model and a Ranking Framework score for each potential investment. By doing this, we ensure consistent, thorough analysis as well as providing a means to debate and discuss what to own and in what size. We will generally consider trading when our analysis of a potential investment points to a company that is more attractive than some businesses that we already own and thus has a higher Ranking Framework score, or when a material event happens which significantly impacts our view, and hence Ranking Framework score, of an existing investment. The discipline and rigour of this process has proved to be beneficial during the volatile market conditions that we have witnessed during this period.

During the early part of 2020, when it was becoming clear that the COVID-19 virus was going to have a significant global impact, we made several Ranking Framework-driven trading decisions. A good example is the sale of our position in the French airport operator ADP. Our original Investment Thesis had been based on two primary things. First, we liked the exposure to steady, structural growth in air traffic volumes, and second, we felt that a privatisation of the company at a high valuation was a strong possibility. COVID-19 forced us to reassess both views and our refreshed analysis of the company resulted in a significant deterioration in our Ranking Framework score, and as a result, we decided to sell the position towards the end of February 2020; the shares are now significantly lower than when we sold them.

Moving onto the extreme market falls of February and March 2020, the discipline of our Investment Process helped in two major ways. Firstly, by forcing us to focus on the cold, hard facts of our analysis, it played a role in preventing us from trading ‘on emotion’ and from letting behavioural factors influence our decision making. This is a primary aim of our approach; we want to minimise subjectivity and maximise objectivity. Secondly, in the teeth of the crisis, our analysis identified several potentially attractive investment opportunities that produced very high Ranking Framework scores. Confident in the rigour of our analysis, we initiated positions that went on to produce very strong returns for the Company. The three positions were AMS (where we reinitiated a position in April 2020 at approximately CHF10 per share, having sold our holding in February 2020 at approximately CHF40-45 per share), Enel and Kion (which we bought in May); these positions have since rallied 51%, 25% and 45% respectively. The major point here is that without the rigour of our analysis, we may not have had the confidence to buy positions in cyclical business at a time when ‘others are fearful’.

There are several other companies that we bought or sold during the past twelve months and the table below shows the ten largest investments and divestments made.


New Investments Divestments
Company name Position size at year end (% of the portfolio) Company name Position size at start of year (% of the portfolio)
Telecom Italia 3.8 SAP 4.2
Prosus 3.3 Koninklijke Philips 4.0
Delivery Hero 3.2 Deutsche Telekom 3.4
Worldline 2.8 Orange 3.0
Zur Rose 2.7 RELX 2.9
Unicredit 2.7 Equinor 2.8
Embracer 2.6 Legrand 2.6
Nexi 2.5 Brenntag 2.5
Scout24 2.5 Linde 2.4
Alstom 2.4 Crédit Agricole 2.2

Comments from Jamie Ross, HNE’s manager, on performance attribution

This has been a successful period for performance. The table below shows a breakdown of our gross NAV outperformance by sector (using the Janus Henderson European Equities Team’s estimates). The column entitled ‘Sector allocation effect’ shows how our sector positioning has contributed to outperformance and the column headed ‘Stock selection effect’ shows how our stock picking within each sector has contributed to our outperformance. The ‘Total effect’ column is these two columns added together. What is clear from looking at the table below is that the vast majority of our performance has been driven by stock-picking. This is intuitive since we do not target sector weightings, nor do we concern ourselves too much with them so long as we are sensibly diversified across a range of sectors. Our Ranking Framework-driven approach is aimed at picking the right stocks; the success of this over the past 12 months is reflected in this performance attribution.


Average portfolio weight (%) Attribution Analysis1
Company Index Relative Sector allocation effect Stock selection effect Total effect
Consumer Discretionary 7.8 10.3 -2.5 0.2 3.6 3.8
Communication Services 13.9 4.5 9.4 -0.8 3.6 2.8
Financials 18.1 16.8 1.3 -0.6 2.9 2.3
Information Technology 12.2 7.8 4.4 1.6 0.7 2.3
Consumer Staples 5.7 13.0 -7.3 -0.1 1.5 1.4
Industrials 16.6 14.6 2.0 0.1 1.3 1.4
Materials 8.1 6.3 1.8 0.1 1.2 1.3
Real Estate 0.0 1.9 -1.9 0.2 0.0 0.2
Energy 4.7 3.8 0.9 -0.3 0.4 0.1
Health Care 14.3 15.9 -1.6 0.0 0.0 0.0
Utilities 3.5 5.1 -1.6 0.0 -0.2 -0.2
Total 104.92 100.0 4.9 0.4 15.0 15.4

1 Estimates are based on a daily buy and hold approach, gross of all fees and costs

2 Total for the Company includes gearing

Source: Bloomberg

Our strongest performing individual companies over the period included Cellnex, Delivery Hero and Novo Nordisk. Cellnex, the Spanish towers company, has become the consolidator of choice in Europe. Telecommunication companies are increasingly predisposed to selling their tower infrastructure to realise valuations that are far in excess of their group-wide valuation multiples. There is also industrial logic in these tower assets being owned by independent companies who can then more fully utilise the towers by bringing in additional tenants. Cellnex has delivered solid operational earnings progression as well as a number of deals during the period. Delivery Hero, the German food delivery platform business, has had a strong twelve months. They have made moves to consolidate their loss-making South Korean operations and have seen extremely strong order growth trends across their core markets. Having been through a period of intense competition from loss-making logistics platforms, funding appears to be drying up and the easing competitive environment is beginning to show itself in improved economics for Delivery Hero. Novo Nordisk, the Danish diabetes focused company, is shifting its product exposure away from insulin and towards Glucagon-like peptide-1 products. Growth is reaccelerating and the area of obesity represents a very exciting future growth opportunity for Novo’s semaglutide molecule.

Amongst our biggest single stock detractors from performance were Crédit Agricole, Telecom Italia and Equinor. We have cut down on our banks’ weightings during the period, but Crédit Agricole (which we sold in April) was still a major detractor from performance. All European banks have suffered from the low interest rate environment, weak economic conditions and investor apathy exacerbated by the ECB-mandated dividend ‘holiday’. Telecom Italia has performed poorly in the face of an ongoing tough competitive environment in its domestic market, but we continue to see significant upside potential and near-term potential catalysts; we have continued to increase the size of this position. Finally, Equinor, an oil company that we sold in February, has since suffered from a weak environment for the oil price and from decreasing interest from investors in carbon-heavy businesses.

Comments from Jamie Ross, HNE’s manager, on the long-term impact of COVID-19 and current positioning

This has been a major topic of debate for us over the past six months. In many ways, we see many of the lasting impacts of COVID-19 as involving an acceleration in existing structural trends. There are many areas that will be materially impacted by this crisis, but I have singled out the three most important themes that we are investing in.

Studying generational differences in social behaviour reveals a clear pattern of more and more social interaction taking place virtually. The rise of social media, the increase in time spent gaming, the decline in traditional working patterns and the increased usage of dating apps all support this premise. The trend towards virtual social interaction was in place well before COVID-19, but has seen an acceleration during the crisis. We expect this shift in behaviour to continue. Within the portfolio, we own Prosus, a Dutch holding company that owns a large stake in Tencent which in turns owns the social communication app WeChat. WeChat facilitates communication, shopping, payments, gaming and other services for its over 1 billion monthly active users. Its usage is fast growing both in terms of user numbers and the variety of functions that can be performed on the platform. We also own two specialist gaming companies which both happen to be Swedish; Embracer and Stillfront. Both companies are experiencing strong demand growth as the younger generations increasingly choose to entertain themselves and interact with one another through gaming platforms. I have previously referred to the change in working patterns as the ‘virtualisation of business life’. As with other forms of social interaction, business was moving online long before the onset of COVID-19 but this existing trend has been dramatically accelerated over the past few months as lockdown measures have taken hold. In the UK for example, prior to the crisis, approximately 1.7m people (5.2% of those in employment) reported mainly working from home, while during the recent lockdown period, 49.2% of adults in employment were working from home (source: Office for National Statistics). Over time, we expect that the percentage of employees working from home or working remotely will continue to increase meaningfully. This has several implications, ranging from negative ramifications for city-central commercial and residential property to positive signs for companies that provide telecommunications services and infrastructure. Within the portfolio, we have a large position in Telecom Italia which we expect to benefit from this trend as well a position in the Spanish towers company Cellnex which should also be well placed. In addition, we have an investment in the IT services company Atos, a company moving increasingly towards cyber security.

It is not just social interaction and working practices that are moving online. Consumer purchasing habits and the whole process of browsing and comparing products is heading in the same direction. Again, this is a well-established trend that can be witnessed across many product verticals. In the US for example, 63% of books, music and video are now consumed online, 48% of toy and hobby products and 37% of apparel (source: eMarketer). During the recent period of lockdown, many consumers have discovered, by necessity, the benefits of ecommerce and many of these habits will stick. Within the Company’s portfolio, we have positions in a number of platform businesses (please refer to ‘The misunderstood powerhouses of innovation’ article on the Company’s website www.hendersoneurotrust.com for further details). We see these businesses as prime beneficiaries of the trend towards ecommerce. We hold a position in a business that owns the German equivalent of Rightmove, Scout24; we hold a position in Delivery Hero, one of the largest global players in takeaway food delivery; and we have a position in Zur Rose, the Swiss listed business with a market leading position in mail order prescriptions in Germany at a time when that market is opening up to digital prescriptions.

The other way that we are investing in rising ecommerce volumes and card/mobile payments taking market share from cash-based transactions (another trend that has accelerated due to COVID-19) is through our holdings in two payment companies. At the start of 2020, we bought a position in the French payments company Ingenico. That company was soon bought by Worldline (this is a fast consolidating industry) and we established a large position in the acquirer. We have since added a position in the Italian payments company Nexi which we see as equally well placed to benefit from the trends described above. These businesses have certainly benefitted from the accelerating shift from cash to cashless payments that we have seen during COVID-19. Another area that we are exposed to within this broad theme is music content. The music industry saw its revenues roughly halve between 2000 and 2015 as the purchase of physical music declined. But since 2015, the industry has returned to growth, led by the rising penetration of streaming and by the devices that encourage the uptake of streaming such as wireless headphones, speakers and smartphones. We own a position in Vivendi which in turn owns one of the ‘big three’ music content businesses, Universal Music Group (UMG). We view this content owner as very well placed given the continued shift in consumption patterns that we are witnessing across the world; the opportunity in the developing world is especially compelling.

One of the less obvious impacts of this crisis will likely be a growing awareness of the environment around us and the realisation that how we treat our environment is inextricably linked to the future prospects for our species. For a number of years, companies have been increasingly aware of this point, and governments (especially across Europe) have been pushing them further in this direction. Investors clearly have their part to play here too and investing in companies that behave in a sustainable way has become an increasing investment focus for us. Within the portfolio, we own a position in Koninklijke DSM, the Dutch-listed food ingredients company, the renewable energy companies Vestas, Enel and RWE (a business transitioning from thermal to renewable generation), the recyclable packaging company SIG and several healthcare companies including diabetes-focused Novo Nordisk and the blood plasma company Grifols. We believe that investing in these kinds of businesses makes financial (as well as moral) sense; simply put, companies with a sustainable approach will, over time, attract an increasingly low cost of capital from investors, and the opposite can be said for those companies who refuse to think about the world outside their narrow (short term) commercial focus. In the near future, we will be disclosing more about our approach to sustainability and the themes that we are exposed to within the portfolio.

In previous years, we have split the portfolio into three investment categories for presentational purposes; Compounders, Improvers and Special Opportunities. Over the past twelve months, I have increasingly felt that there are blurred boundaries between the latter two categories, so much so that I now feel it is unhelpful to maintain a distinction between these two categories. The table below shows how the portfolio is split between Compounders and Improvers and gives you some idea as to the characteristics of these two components of the portfolio.

Classification of holdings as at 31 July 2020


  Compounders Average Improvers Average Company Average Index Average
Market Capitalisation (£m) 65,388 19,631 45,950 62,430
Price/book (x) 3.4 1.1 1.8 1.7
Trailing 12 month dividend yield (%) 1.8 3.4 2.5 3.0
Trailing 12 month price/earnings (x) 26.0 14.9 19.8 21.3
Forward 2021 price/earnings (x) 20.4 13.1 16.5 15.7
Historical 3-year earnings per share growth per annum (%) 11.2 8.9 10.2 7.4
Return on equity (%) 22.0 6.1 15.3 14.4
Operating margin (%) 21.0 9.0 15.9 16.3
Long term debt to capital (%) 29.1 36.4 32.2 32.2
Number of securities 26 18 44 501
Weight (%)1 59.5 44.0

Cash is omitted in the summary table. The weight percentages include gearing.

Source: Factset/Fundamentals in Sterling using arithmetic averages.

Our split between these two investment categories over the past twelve months is shown in the chart below (see chart in the 2020 Annual Report). We maintain a bias towards Compounders, although we ended the period with a lesser bias to this investment category than when we started the period. This is intuitive since, as a general rule, the valuation multiples of our Compounders have expanded when compared to our Improvers, therefore all else being equal, our Ranking Framework approach should have naturally moved us more towards the latter at the expense of the former; there is a certain countercyclicality embedded within our investment process.

Comments from Jamie Ross, HNE’s manager, on Outlook

I am not one to spend much time trying to assess the economic outlook for Europe nor the prospects for the broad European equity market. Instead, I spend the vast majority of my time assessing the operational progress of the companies that I hold in the portfolio, the prospects for those companies’ share prices to increase over the medium-to-long term as well as looking for new ideas to ‘compete for capital’. I am very comfortable in our current positioning and even after a strong period of performance, I feel that a number of our positions (especially so for our largest holdings) remain materially undervalued by the market. I also feel that we have a good selection of interesting ‘watch-list’ ideas competing for a position in the fund and this, combined with the fact that it is increasingly difficult to find anything to sell when I am keen to initiate a new position, fills me with confidence for the year ahead. We will continue to adhere to our strict investment process and will strive to build upon what we have learnt during this extraordinary year.

Top ten contributors to and bottom detractors from absolute performance

Data illustrating the top ten contributors to absolute performance is set out below:


Cellnex 1.99
Delivery Hero 1.96
Novo Nordisk 1.56
Roche 1.52
AMS 1.43
Embracer 1.18
Zur Rose 1.16
Prosus 1.02
Scout24 0.88
SIG 0.85


Data illustrating the bottom ten detractors from absolute performance is set out below:


ASSA Abloy -0.36
Bawag -0.39
Deutsche Telekom -0.41
Koninklijke Philips -0.47
Legrand -0.47
ING -0.75
UniCredit -0.78
Total -1.07
Crédit Agricole -1.09
Telecom Italia -1.22


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