A winning mix of history and results

Henderson’s unique longevity and experienced fund managers all contribute to producing an investment trust range in good shape for the post-RDR era, says director James de Sausmarez

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Henderson holds some of the granddaddies of the investment trust sector – City of London , for example, has been operating for more than 100 years, Bankers Investment Trust for almost 60. It also has a raft of well-respected, long-serving fund managers from James Henderson to John Bennett. But how is coping with the post-RDR era and its impact on the investment trust industry?

James de Sausmarez, director and head of investment trusts at Henderson Global Investors, is clear that the group’s history is a selling point: “This is a high quality business with a degree of longevity to it. City of London was incorporated in 1888 and it has been doing the same thing for 125 years….There is not lots of action happening all the time, it is not a dynamic business in that sense, but it is producing a high quality service delivery to investors and has been doing so for a long time.”

Product development in recent years has focused on building out the group’s income franchise, recognising that this is increasingly important to clients. The two major launches have been Henderson Diversified Income in 2007 and the International Income trust in 2011.

The Diversified Income fund was the group’s first foray into the fixed income world, but a logical step to harness the well-recognised skills of Jenna Bernard and John Pattullo: “We have a very strong presence in fixed and floating rate investments and also a strong secured loan team. The ability to offer an ongoing income stream, while asset allocating between fixed and floating is, we think, very attractive,” says de Sausmarez.

The Henderson International Income trust, managed by Ben Lofthouse, built on the group’s established equity income franchise, with managers including Alex Crooke, Job Curtis and James Henderson. The trust has performed reasonably well since inception, but raised under £50m at launch and remains small compared with its open-ended equivalents from Artemis, M&G and Newton.

This is a perennial gripe, both about Henderson’s investment trust range and investment trusts in general. The smaller size of some funds hinders liquidity. This is fine for private investors, but difficult for advisers who may want to deal in larger sizes. Stephen Peters, senior analyst at Charles Stanley, says that investment trusts have to be able to offer something over and above their open-ended equivalents: “Are they doing anything different or better?” Therefore, generating liquidity is a problem.

De Sausmarez recognises the problem: “The hardest thing in the investment trust sector is growth at the moment. There is a fair amount of support for existing funds, but launching new things is not easy. My priority is much more on growing the funds we have got and making them bigger and more liquid, than it is in launching new trusts.”

This means trying to expand across all distribution channels – consumer, IFA and discretionary. De Sausmarez says: “We are active across all of these areas and are putting added resources in across the board. If we take the professional end, we now have three professional sales people talking to the intermediary market place about investment trusts and that is expanding the amount of interest there is out there.

“We are getting into the regions in a very serious way and getting into some places that people do not go and finding some good intermediaries there. It is proving to be a profitable area, so we are certainly looking to build our authorised intermediary area.”

De Sausmarez says that post RDR investment trusts now have a level playing field and IFAs have to consider them alongside open-ended funds for the clients. However, he says progress is slow: “We are seeing a slow, but steady increase in interest in looking at investment trusts from this part of the market, but we’re hampered by the attitude of the three main fund platforms, who control around 65 per cent of the marketplace for IFAs. They have not put any investment trusts on their platforms and we recognise that IFAs like to invest using their existing platform.

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“Of course the wrap platforms do offer investment trusts and my hope is that many financial advisers start using those platforms rather than the fund supermarkets. The regulator goes to all the trouble of getting the retail distribution review through in order to ensure that IFAs offer a whole of market choice to their clients and then the platforms do not offer a whole-of-market service. It seems back-to-front to me.”

Again, the major investment trust providers are applying pressure. De Sausmarez says that the more they can get IFAs interested in investment trusts and wanting to buy them, the stronger the argument will be for the platforms to capitulate, but he recognises it will continue to be ‘slow burn’.

The direct side, in contrast, is booming. De Sausmarez says that across the various online share dealing services, the number of Henderson investment trust shares held has gone up by about 70 per cent in the last three years. He adds: “The man in the street is coming back to investing in equities having had a period away from it and we are getting our share of that.” The group is doing more work on its online offering right to boost this part of the market.

In terms of popularity, the income trusts remain the strongest sellers for the group and much of the range remains on a premium to net asset value – High Income is at 6.5 per cent and International Income at 5.9 per cent, for example.

De Sausmarez says the group has been continuously issuing shares across the whole range of income trusts: “City of London is top, but we are also issuing shares on Henderson International Income, Diversified Income, Far East Income and on High Income. Certainly, City of London has been by far the most popular of our trusts. It is invested in large cap blue chip equities, with a consistent long-term track record and it has increased its dividend for the last 47 years. For any investor thinking of dipping back into equities that is the sort of record that appeals.” Bankers Trust has not issued any shares yet, but its discount is low at just under 1 per cent.

However, as with the wider sector it is the growth trusts that have been more out of fashion and discounts are wider as a result. The James Henderson-managed Henderson Opportunities Trust has the widest discount at 17 per cent, but the Smaller Companies and Global trusts also trade at double-digit discounts.

De Sausmarez says: “There has been some good returns but the discounts have not narrowed in as much as they have for the income trusts. We do not do a massive amount of share buybacks. It can be counter-productive. The problem with very active share buyback programmes is that it provides a signal to the market that the trust is always going to buy in shares, which means it can get broked against and the brokers start finding sellers for it.

“Most investors say they would like the discount to be narrow, but they also like the company to be nice and liquid. The more shares a trust buys back the less liquid the company becomes. So there is a balance to be struck. We should be flexible and buy in when it is in the best interests of shareholders to do so, when there is an overhang of stock that is dragging the discount down. We do niot believe trusts should try and defend a certain discount level.”

He says the impact of discounts may have been over-played anyway: “Discounts are a fact of life in investment trusts and I think people get overly concerned about them. We were looking at Bankers Trust discount at the end of last year, and looked at it 10 years before, and discovered that the discounts were exactly the same. For any medium to long-term investor, the reality is that the difference between the buy and sell discount is a very tiny proportion of the overall return. The focus should be on putting money with good quality investment managers.”

And here, Henderson can hold its head reasonably high. The performance on much of the trust range is strong with six out of the 15 funds top quartile over three years. The top quartile performers are spread across smaller companies, equity income and European mandates. Equally it has only two fourth quartile funds and one of these – the Henderson Value trust – was a recent mandate win from SVM and therefore its performance record is not down to Henderson managers.

The SVM – renamed Henderson Value – fund is £133m in size. Some 33 houses expressed an interest in taking over the management and the trust is now being managed by Ian Barrass and Paul Craig. Barrass had been managing the run-off of the Henderson Private Equity trust that is now reaching the end of its life.

De Sausmarez says: “He will bring unlisted fund of funds expertise and Paul Craig is our leading listed fund of funds manager. I think the combination of the two of them could be very exciting for investors who want to invest in the alternatives sector.”

He adds that the biggest challenge for the group is the Alternative Investment Fund Managers’ Directive, coming from Europe and currently being implemented into the UK regulatory environment. He says: “That is a challenge, but primarily for us as managers to make sure we manage things appropriately and properly. We are doing lots of work to ensure we meet its requirements and our boards are taking a close interest in it. I like to think of it as ‘job enrichment’.”

The independent views

Stephen Peters

Stephen Peters, senior analyst at Charles Stanley

“At each stage, it is important to ask whether an investment trust manager is doing something fundamentally different to what they are doing in an open-ended vehicle. Lowland is Henderson’s stand-out performer. It is a good trust with a good manager though it has had a tough time more recently. Elsewhere Tim Stevenson and John Bennett on the European trusts are good managers, but neither trust is particularly liquid. Equally there is nothing wrong with the Henderson Global trust, but I think I can find better in the open-ended sector.TR European is an interesting fund to play the pick up in smaller companies across Europe. Henderson Diversified has well-regarded managers, but is not that liquid and I wonder whether there is any real value left in secured loans and high yielding bonds. Ben Lofthouse on the Global Equity Income side has been a good performer, but – again – the fund is quite small and illiquid. City of London is undoubtedly a good trust, with a good manager, but in that space we tend to prefer PIGIT (Perpetual Income and Growth Trust).”

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Gavin Haynes, investment director, Whitechurch Securities

“We rate the Lowland Investment trust . It is a solid equity income offering. James Henderson has run it for a long time and it has an attractive yield. It is one of the few trusts that deducts fees from income, but it still has an attractive yield. The Henderson Opportunities trust is a more aggressive version of the process, focusing on recovery and ‘special situations’ companies. This is also a good choice. Within Europe, we tend to use Richard Pease on the open-ended side, rather than the closed-ended managers, but Bennett has run the European focus fund since 2010 and performance has been pretty strong.

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Simon Moore, senior research analyst, Bestinvest

“We like Bennett on the Henderson European Focus IT, Stevenson on the Henderson EuroTrust, Hermon on Henderson Smaller Companies and James Henderson on Lowland. The merger with the Gartmore managers seems to have brought a bit more dynamism though some individual egos do not seem to favour cooperation. Henderson remain one of the last houses where some managers are so steeped in their investment trusts roots that open-ended funds are anathema. Certainly the sales support staff of the two fund types are kept strictly apart, which does not seem appropriate in a post RDR world. Since many of their managers only run investment trusts then it is quite likely that IFAs and their clients might not have heard of the managers. Some of the trusts’ names are likewise unusual and do not give a clue as to what they invest in ‘Bankers’, ‘Lowland’, ‘City of London’. Recently Henderson have lost some mandates – the Henderson Asian Growth, which moved to Schroders and the Henderson Fledgling Trust, which moved to Miton, but it has won the mandate to run SVM Global.”

Henderson Managed Investment Trusts

Henderson Global Investors manages a range of 13 investment trusts and 2 investment companies, plus the portfolio management of Law Debenture Corporation plc and a UK smaller companies portfolio for Witan Investment Trust. According to HGI this represents approximately £4.7bn (as at 30 April 2013) of investment trust assets under management.