Henderson Opportunities Trust — Riding the next wave with stabilisers

Henderson Opportunities Trust (LSE: HOT)

Last close As at 17/05/2024

GBP10.10

10.00 (1.00%)

Market capitalisation

GBP80m

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Research: Investment Companies

Henderson Opportunities Trust — Riding the next wave with stabilisers

Henderson Opportunities Trust (HOT) is unusual in that its unconstrained mandate means it can buy into very small companies and hold them no matter how large they get. Managers James Henderson and Laura Foll explain that the investment trust structure enables them to own micro-caps (sub-£50m), which can be very illiquid and therefore unsuitable for an open-ended fund. For example, AIM-listed Serica Energy (the top holding at c 3.6% of the portfolio) now has a market cap of c £900m but it was only c £48m when HOT first invested in late 2013. Meanwhile, the trust’s all-cap nature means that, unlike a dedicated smaller companies fund, it can also own mega-caps such as Shell (£172bn) and HSBC (£101bn). HOT has underperformed the broad UK stock market in recent months after a very strong FY21, but has a compelling longer-term track record, ranking first in the AIC UK All Companies sector over three, five and 10 years.

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Henderson Opportunities Trust

Riding the next wave with stabilisers

Investment trusts
UK multi-cap equities

26 May 2022

Price

1,217p

Market cap

£97m

AUM

£131m

NAV*

1,409.2p

Discount to NAV

13.6%

*Including income. At 13 May 2022.

Yield

2.3%

Shares in issue

7.9m

Code/ISIN

HOT/GB0008536574

Primary exchange

LSE

AIC sector

UK All Companies

52-week high/low

1,570.0p

1,100.0p

1,676.3p

1,359.6p

*Including income.

Gearing

Gross gearing*

16%

Net gearing*

15%

*As at 30 April 2022

Fund objective

Henderson Opportunities Trust aims to achieve capital growth in excess of the broad UK stock market from a portfolio of UK investments. Stock selection is not constrained by the benchmark and there are no limits by sector or market.

Bull points

HOT is arguably the only ‘UK All Companies’ fund that is truly an all-cap UK portfolio.

The breadth of the opportunity set and the clear portfolio construction parameters should allow the managers to continue to meet the brief.

Significant recovery potential in growth small-caps could help drive a re-rating from the current wide discount.

Bear points

Fears over a UK and global recession could set back the timing of a small/micro-cap recovery.

Strong commodity prices – a key support of recent performance – may not persist.

Earlier-stage companies inherently have a higher risk of failure.

Analysts

Sarah Godfrey

+44 (0)20 3077 5700

Mel Jenner

+44 (0)20 3077 5700

Henderson Opportunities Trust is a research client of Edison Investment Research Limited

Henderson Opportunities Trust (HOT) is unusual in that its unconstrained mandate means it can buy into very small companies and hold them no matter how large they get. Managers James Henderson and Laura Foll explain that the investment trust structure enables them to own micro-caps (sub-£50m), which can be very illiquid and therefore unsuitable for an open-ended fund. For example, AIM-listed Serica Energy (the top holding at c 3.6% of the portfolio) now has a market cap of c £700m but it was only c £48m when HOT first invested in late 2013. Meanwhile, the trust’s all-cap nature means that, unlike a dedicated smaller companies fund, it can also own mega-caps such as Shell (£176bn) and HSBC (£106bn). HOT has underperformed the broad UK stock market in recent months after a very strong FY21, but has a compelling longer-term track record, ranking highly in the AIC UK All Companies sector over one, three, five and 10 years.

Buckets of opportunity: HOT’s portfolio breakdown by category

Source: Henderson Opportunities Trust, Edison Investment Research, at 30 April 2022.

Why consider UK equities now?

UK equities have been out of favour with international investors since the vote to leave the EU in 2016 and, with Brexit worries continuing over the Northern Ireland protocol, the market remains at a substantial P/E discount to the world and other developed regions. But despite the uncertain inflation backdrop and cost-of-living squeeze, the UK market continues to offer both world-class companies and niche domestic leaders. Indeed, while most eyes are focused on the US and China, the UK equity market has outperformed all major regional indices ytd in 2022 (to end-April). Investors may wish to consider whether its mix of more defensive qualities with pockets of higher growth could represent an attractive contrarian opportunity.

The analyst’s view

HOT’s small size and eclectic portfolio – with c 50% in AIM stocks – may not make it a ‘core’ holding for many, but it offers a truly diversified portfolio of UK companies from across the market cap spectrum, with a blend of growth drivers and end-markets, designed to offer good long-term returns. The managers continue to work on articulating the investment proposition and, in our view, a better understanding among investors of the trust’s mix of ‘tomorrow’s leaders’ and near-term ‘stabilisers’ could help to narrow a discount that we feel is persistently and unwarrantedly wide for a trust that is a strong performer in its sector over one, three, five and 10 years.

The managers’ view: Strength in diversity

To help investors make sense of the trust’s broadly diversified, all-cap portfolio, HOT’s managers have moved past the basic distinctions of small-, mid- and large-cap, instead classifying their holdings into one of six ‘buckets’: early stage, small-cap growth, small- and mid-cap compounders, large-cap growth, recovery/special situations and natural resources (see chart on page 1 for weightings). To clarify the process even further, Henderson and Foll now group the buckets under two broad headings: ‘tomorrow’s leaders’ (the three small/mid-cap buckets and recovery/special situations) and ‘stabilisers’ (large-caps and, currently, natural resources). Each bucket has an indicative weighting range and, while HOT may choose to have no exposure to early-stage or recovery situations, it is a feature of the trust that natural resources must always be represented. Henderson and Foll argue that this is an important discipline, since the highly cyclical nature of energy and materials stocks means it is not always immediately clear when the ‘wrong’ time to own them becomes the ‘right’ time, adding that in the current environment of high commodity prices, it is essential to be exposed to the producers, and not just the consumers, of such resources.

Looking at HOT’s top 10 holdings (Exhibit 1), natural resources companies (currently marginally over the 5–15% indicative range) are well represented, with large-cap mining stocks Anglo American and Rio Tinto (share prices each up c 10% so far in 2022) playing second fiddle to AIM-listed oil and gas operator Serica Energy (up c 36% year to date), currently the largest position. Despite the strong gains in Serica’s share price between December and mid-April (it has recently fallen back somewhat), it remains on a very low forward P/E of 2.0x, because the high price of gas in particular means its earnings per share are forecast to be very high, at c 166p on a share price of c 330p. Henderson explains that, counter to the general view that a low P/E = good value, with resources companies, the time to buy is usually when the P/E is high, because the cyclical nature of the business means that earnings are due to recover from a low base.

Exhibit 1: Top 10 holdings (as at 30 April 2022)

Company

Index

Sector

Portfolio weight %

30 April 2022

30 April 2021

Serica Energy

AIM

Oil & gas producers

3.6

2.2

Springfield Properties

AIM

Household goods & home construction

3.5

3.1

Next Fifteen Communications

AIM

Media

3.2

2.7

Tracsis

AIM

Software & computer services

2.9

2.4

Barclays

Large-cap

Banks

2.7

2.9

Anglo American

Large-cap

Mining

2.6

2.0

HSBC

Large-cap

Banks

2.4

1.2

Vertu Motors

AIM

Automotive retail

2.1

2.2

Rio Tinto

Large-cap

Mining

2.1

2.1

Jersey Oil & Gas

AIM

Oil & gas producers

2.1

1.2

Top 10 (% of holdings)

27.3

26.2

Source: Henderson Opportunities Trust, Edison Investment Research

HOT is more than just a natural resources play, of course; indeed, more than 85% of its portfolio is invested elsewhere, with the three largest sector exposures at 30 April 2022 being in industrials, financials and consumer discretionary (Exhibit 2). Many of the financials holdings also come under the ‘stabilisers’ umbrella, including the three high street banks in or near the top 10 (Barclays, HSBC and NatWest). While these were an important contributor to HOT’s strong performance in FY21 (to 31 October), they have done less well recently (HSBC excepted), as soaring inflation and the war in Ukraine have dampened hopes for continued global economic recovery.

The core of the portfolio, however, is in ‘tomorrow’s leaders’, which currently make up around two-thirds of the total, although this could go as high as 85%. Henderson and Foll currently see fewer attractive opportunities in the growth small-cap area (which is at the bottom of its allocation range), given valuations are somewhat stretched, and they have reduced some long-standing positions in companies such as mobile payments specialist Boku and railway software firm Tracsis, although both remain in or close to the top 10 holdings. Of the allocation ranges, Foll comments: ‘The indicative ranges are meant to challenge us to think “is there a good reason we are lower or higher?”. We will of course continue to look for attractive small-cap growth companies, but we are not forced to.’ While growth small-cap valuations are on the high side, the managers comment that small and mid-cap compounders have derated significantly year to date, with translation specialist RWS Holdings down c 44% (hindered by fruitless bid speculation) and corporate advisory group K3 Capital off by c 34%. Early-stage companies have also had a rough ride, including in the fuel cell space, with the share prices of Ceres Power and AFC Energy – two of HOT’s top performers in FY20 – having declined by c 33% and c 45% respectively so far in calendar 2022. ‘We might have trimmed some of these positions, but we ask ourselves are valuations at a point where we would want to add back to them’, says Foll.

Exhibit 2: Portfolio breakdown by sector

Exhibit 3: Portfolio breakdown by index

Source: Henderson Opportunities Trust, Edison Investment Research. Note: Sectors and index data at 30 April 2022.

Exhibit 2: Portfolio breakdown by sector

Exhibit 3: Portfolio breakdown by index

Source: Henderson Opportunities Trust, Edison Investment Research. Note: Sectors and index data at 30 April 2022.

Indeed, the managers have added to the holding in AFC Energy in recent months, along with acetylated wood producer Accsys Technologies (growth small-cap), Scottish housebuilder Springfield Properties (compounders), defence company Babcock (recovery), Direct Line Insurance (growth large-cap) and Shell (natural resources). This serves to illustrate the breadth of the portfolio, with individual opportunities existing in each of the buckets even where some categories may look unattractive at the aggregate level.

‘We are looking for good strong companies on a longer view, and the diversity is important’, says Henderson. ‘The UK market is still relatively cheap and we believe earnings growth will surprise on the upside. We are trying to use the volatility and buy on the “red” days. The market is adjusting to a move up in bond yields and a change in interest rate expectations; we might have expected there to be more weakness, but so far it has mainly been in the areas that have been really strong and are highly valued.’

Longer-term performance remains compelling

Exhibit 4: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

CBOE UK All Cos (%)

Numis Smlr Cos + AIM ex-ICs (%)

CBOE UK 250 (%)

30/04/18

9.4

12.0

8.1

7.9

6.9

30/04/19

(0.4)

0.7

2.5

(5.0)

(3.5)

30/04/20

(24.7)

(23.6)

(17.2)

(16.5)

(19.7)

30/04/21

121.1

80.4

25.3

60.3

64.1

30/04/22

(20.6)

(8.9)

9.1

(9.1)

5.9

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

After a stellar year in the 12 months ended 30 April 2021 (NAV and share price total returns of 80.4% and 121.1% respectively), HOT has had a tougher time in the following period, posting absolute declines in both NAV and share price terms (Exhibit 4). Taking the two years together, the trust’s NAV and share price (total returns of 75.6% and 65.3% respectively) have still outperformed both the broad UK market (+36.7%) and the Numis Smaller Companies + AIM index (+44.1%), while narrowly beating the mid-cap index (+73.8%) in share price total return terms but slightly lagging it on an NAV basis.

30 April is HOT’s half-year end and, in the past six months, the effects of higher inflation and commodity prices, the spectre of recession and the war in Ukraine have all had an effect – for good or ill – on the share prices of UK companies. Bigger companies have performed better than small and mid-caps over this period, with the CBOE UK All Companies Index (c 80% large-cap) gaining 3.7% but the mid-cap CBOE UK 250 and Numis Smaller Companies + AIM indices declining by 10.9% and 11.2% respectively. HOT outperformed both these indices, albeit with negative NAV and share price total returns of -9.8% and -9.5% respectively. Given the magnitude of the share price falls in some of the trust’s major holdings (see previous section), the relatively muted decline illustrates the benefit of HOT’s allocation to ‘stabilisers’ in the form of larger companies and, particularly beneficial in recent times, natural resources stocks.

Exhibit 5: Investment trust performance to 30 April 2022

Price, NAV and index total return performance, one-year rebased

Price, NAV and index total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

As shown in Exhibit 5 (right hand chart), despite the recent reversals, HOT has a solid longer-term record of outperformance versus the broad UK stock market, with annualised share price and NAV total returns of c 8–13% over three, five and 10 years, compared with c 4–7% pa for the CBOE UK All Companies Index over the same periods. The trust also has a good longer-term track record versus its peers in the AIC UK All Companies sector (Exhibit 6), being at, or near the top over three, five and 10 years and still ahead of the average over one year, a period in which eight of the nine funds have seen negative total returns. HOT also has an above-average dividend yield in the sector, yet persistently trades on one of the widest discounts to NAV.

Given there are separate sectors for UK Equity Income and UK Smaller Companies, the UK All Companies sector in reality is home to UK equity funds that do not have a specific income or small-cap mandate. Looking at the constituents in greater detail, JPMorgan Mid Cap and Schroder UK Mid Cap, as their names suggest, are mid-cap specialists, while Mercantile invests in small and mid-caps. Aurora and Baillie Gifford UK Growth both have a mid-cap bias (c 50% or over), while Artemis Alpha and Fidelity Special Values both have significant (c 20%) non-UK holdings. Independent Investment Trust, while broadly spread by size, has c 6% ex-UK and c 17% in cash (all data from AIC/Morningstar). This leaves HOT as the only trust in the sector that is truly UK (over 98%) and truly all-cap (see Exhibit 3, noting the large percentage in AIM stocks, which come in a variety of sizes), perhaps suggesting that it should be a more obvious choice for investors seeking a ‘good mixer’ to sit alongside more pedestrian UK or global holdings.

Exhibit 6: UK All Companies peer group as at 25 May 2022*

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Ongoing
charge

Perf.
fee

Discount
(cum-fair)

Net
gearing

Dividend
yield

Henderson Opportunities Ord

96.2

-9.3

22.1

35.0

217.3

0.9

Yes

-13.6

116

2.3

Artemis Alpha Trust Ord

108.9

-27.5

3.0

1.8

28.8

0.9

No

-8.2

113

1.6

Aurora Ord

165.5

-5.6

20.3

20.4

45.0

0.5

Yes

-6.7

98

0.9

Baillie Gifford UK Growth Trust Ord

246.5

-20.8

-4.2

-0.6

84.9

0.7

No

-15.4

101

1.5

Fidelity Special Values Ord

909.1

3.6

24.5

27.8

221.9

0.8

No

-6.2

106

2.4

Independent Ord

230.5

-17.1

-5.5

4.7

174.9

0.2

No

-16.0

83

1.8

JPMorgan Mid Cap Ord

222.9

-25.3

-1.8

2.0

204.8

0.8

No

-13.1

111

3.0

Mercantile Ord

1,590.8

-21.5

5.9

15.9

176.2

0.5

No

-14.8

109

3.4

Schroder UK Mid Cap Ord

195.7

-12.7

14.5

19.1

184.4

0.9

No

-16.5

110

2.6

Average

418.4

-15.1

8.8

14.0

148.7

0.7

-12.3

105

2.2

HOT rank in sector

9

3

2

1

2

4

5

1

5

Source: Morningstar, Edison Investment Research. Note: *Performance to 25 May 2022 based on cum-fair NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared).


General disclaimer and copyright

This report has been commissioned by Henderson Opportunities Trust and prepared and issued by Edison, in consideration of a fee payable by Henderson Opportunities Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

This report has been commissioned by Henderson Opportunities Trust and prepared and issued by Edison, in consideration of a fee payable by Henderson Opportunities Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

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Research: Healthcare

Context Therapeutics — Q122 progress in line with development strategy

Context Therapeutics’ Q122 results were broadly in line with recent trends as the company progresses on its development strategy. The operating loss stood at $3.4m, up from $0.8m in Q121 but in line with the Q421 figure of $3.1m. While the R&D expenses ($1.4m) were lower than our estimates, we expect these costs to go up in the coming quarters as the clinical pipeline progresses. The cash burn rate was $3.9m and the company ended Q122 with net cash of $45.7m, which we estimate to be sufficient to fund operations into 2024, based on our projected FY22e and FY23e burn rates of $13.7m and $23.7m, respectively. We see the upcoming ASCO presentation on ONA-XR monotherapy data from the ongoing Phase II study in granulosa cell tumor (GCT) of the ovary as a potential catalyst alongside anticipated read-outs from the other three clinical programs in 2022. Our valuation is largely unchanged at $133.5m ($8.36/share).

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