Optimist stocks up for better times

James Henderson, who says “mea culpa” over prematurely increasing the Law Debenture trust’s equity exposure, is investing in companies that he expects to share in the global growth to come.

Despite widespread stockmarket pessimism, James Henderson, the manager of the Law Debenture investment trust, is positioning his fund for better times ahead. Henderson says increasing his equity exposure earlier this year was “premature”, but he remains positive on the outlook for 2009.

“Corporations are not over-extended and there are not the usual levels of indebtedness that lead to bad debts,” he says. “Prices of raw materials, soft commodities and oil are also coming back. Inflation should not be such a concern next year, and that brings interest rate cuts closer.” The Bank of England may reduce rates as soon as November, he adds. As Fund Strategy reported on February 25, Henderson gained approval to increase borrowing on the £400m trust. Gearing has since risen to about 10% and Henderson is looking for companies that can “service the global growth that will come through”. Recent buys include American industrials such as Cummins – a maker of diesel engines.

However, the bulk of the portfolio is invested in domestic stocks. Within his British allocation Henderson has increased his exposure to small caps, aerospace, financials and builders. Financials include banks and non-life insurance firms such as Novae – one of 34 stocks in which the Financial Services Authority has banned short selling. He has also topped up his holdings in Amlin, another insurer, and Aviva, which revamped its asset management business last week. Aviva is set to benefit from growth in the savings industry and a strong presence in Europe, he says.

On aerospace, his view is that concerns have been “overplayed”. He highlights the imminent launch of Boeing’s 787 Dreamliner aeroplane as “a step-change”. “It is 25% more fuel efficient than comparable planes and it will become the new standard. There are buyers in the Middle East and Far East and the order book will be OK.” Law Debenture is not directly invested in Boeing but it holds stakes in the firm’s suppliers.

Income plays an important
role in the fund, and Henderson expects higher dividends from 17 of his top 20 holdings in 2009. Dollar dividends from Royal Dutch Shell, BP and HSBC – his three biggest holdings in August – will be bolstered by the dollar’s renewed strength against sterling.

Income is further boosted, he says, by the structure of the trust’s holding company, which operates several businesses, including trustee services for pension funds.

Peter Hewitt, director of global equities at F&C, says the highly cash-generative businesses allow the trust to provide strong levels of income, about 4.5%, while maintaining exposure to equities.

Despite Henderson’s early call on housebuilders and banks, Hewitt says: “James Henderson is in the premier league of investment trust managers. Unless you are very negative on the markets in 2009, the fund is well placed for any recovery.”