Henderson UK fund cuts cash to zero

James Henderson, manager of the £380m Henderson UK Equity Income fund, has reduced the fund’s cash level to zero. He also increased the portfolio’s exposure to banks, housebuilders and small caps.

Henderson also last week gained approval to increase the gearing on his Law Debenture investment trust by 3-4%, reflecting his view that many equities have been oversold.

Borrowing on the £400m trust, which stands at about 8%, will rise over the next two months, says Henderson. The money will be used to boost equity exposure across the market. “The board agreed that we should buy in weakness and there is value in a lot of areas.”

Henderson has also increased the gearing on the £300m Lowland investment trust and borrowing has risen to 18%, from a 5% cash surplus at the end of last summer. Lowland, which largely mirrors the open-ended UK Equity Income fund, is holding about 24% of its assets in small caps. The allocation has grown by about 4% over the past few weeks, as Henderson seeks to take advantage of attractive valuations.

UK Equity Income has a small cap weighting of about 20%, of which 5% is in alternative investment market (Aim) stocks. Henderson says: “We are buying what other people are chucking out. Within Aim, these are the ‘duller’ stocks – the older companies, which are not exponential growers.”

Exposure to Aim is likely to increase further over the next year by 2-3%, he adds.

Henderson says the strategy of buying small caps during market downturns has paid off for Lowland before. He points to strong relative returns after the last bear market. While large caps are likely to lead any recovery, investor aversion to small caps during volatility causes many to be undervalued. Henderson says that stocks such as Morgan Crucible and Low & Bonar have moved sharply upwards in recent weeks because results were in line with expectations.

Banks, which formed about 8-9% of the funds last summer, now have a weighting of about 15%. Henderson has increased his exposure to housebuilders through Bellway, Redrow and Bovis.