The fund managers of Henderson Value Trust have been working hard since taking over the former portfolio of SVM Global Fund on 1 April 2013. It started life, in the 90’s, performing well, providing investors a diverse and interesting product: a fund of funds that would seek the best managers of listed and unlisted specialist and alternative assets, such as hedge, private equity, property, natural resources, and the like. Unfortunately, following the global financial crisis, the Trust suffered, with a combination of disappointing performance and valuation and accounting issues resulting in the Board putting its management out to tender in late 2013.
In particular the Board took to Henderson’s valuation and risk management systems, key when managing a specialist and relatively illiquid portfolio, and the Trust was subsequently awarded to Henderson.
Following this, 3 months were spent reviewing the portfolio’s valuations, working closely with the Trust’s auditors Ernst & Young and Henderson’s own Fair Value Pricing (FVP) committee*. With the review completed some key decisions were taken in how to move the Trust forward, as Ian Barrass, Co-Portfolio Manager, explains:
“Firstly we decided to start the process of moving the portfolio away from its riskier ‘deep value’ positions to investing in higher quality funds to stabilise performance. We then updated the Trust’s investment limits to ensure an appropriate degree of portfolio discipline. Finally we adopted a new approach to portfolio construction so that, moving forward, we will seek to hold a core tranche (75% of assets), containing good quality non-mainstream listed and unlisted funds, and a tactical tranche (25%), encompassing broader macro-economic and short-term ideas from the rest of the multi-asset desk.”
All considered they ultimately hope that the changes will reinvigorate the performance of the Trust’s distinctive, rare mandate.
Ian and Paul play certain themes, and intriguing ones. Ian points to two examples in the core portfolio:
• Distressed debt - This is debt from a company experiencing significant problems in their operations, often in, or near, bankruptcy. Banks are often willing to sell it to specialist distressed debt investors, usually at a significant discount to face value. The investors may then accelerate clauses in the debt contracts and take control of the company, hoping to turn it round and profit from the newly created equity. The assets of the company also serve as some loss protection.
Ian explains: “At the higher risk-end of our investments, NB Distressed Debt Investment Fund Ltd is run by managers we’ve known and trusted for some time. And they’re well positioned. In Europe, banks, up until now, having been holding onto distressed debt from the global financial crisis but new regulations and stress testing are forcing them to shrink their balance sheets and offload it. It creates a strong deal-flow pipeline for this type of distressed debt fund and plenty of opportunities.”
• Renewable energy: Specifically, these are investments in wind farms and solar projects aiming to give long-term stable returns, usually linked to inflation. As a result of the Kyoto agreement on climate change, the EU set a target stating that by 2020, 20% of the total energy consumed in a member country should originate from renewable sources. This means big investment and a growing source of reliable cash-flows in a number of European countries. “Within this theme we have bought The Renewables Infrastructure Group on account of strong management and good quality assets in the UK, France and Ireland. The fund is targeting a cash yield of 6% per annum and may also benefit from some modest NAV accretion. In the UK, many of these projects are backed to some degree by the government to give security and comfort to their investors”
As for the tactical plays:
• Recovery in emerging markets and natural resources – these asset classes have been unloved in recent years due to the threat of removal of cheap central bank money and global growth worries. As economies tread a more stable footing, recovery plays are looking attractive.
“We recently bought BlackRock Latin America Fund given that we felt company valuations in Brazil, in particular, were becoming attractive following the recent turbulence in Emerging Markets”.
Ian concludes: “I would be surprised, even concerned, if I were to find a comparative open-ended product that invests in the sort of specialist and alternative, less liquid, positions we hold in the Henderson Value Trust; a closed-end structure is perfectly suited to this type of investing. This, we believe, is what makes us unique.”
*Committee that brings together experts from across areas of the business to sense check fund manager methodologies when valuing securities that are difficult to mark-to-market.
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. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.