After “24 months of rubbish stockpicking” – his own words – 2018 will be a make or break year for John Bennett, the manager of the Morningstar Bronze Rated Henderson European Focus Trust (HEFT).
I bought pharma beautifully in 2011; sold it really badly, sold 18 months too late.
Bennett runs £9 billion of assets, mainly focused on large-cap European equities with a value tilt. As a result, he’s had a tough couple of years. HEFT is the only vehicle where he can gain meaningful exposure to the mid and small-cap space, which he says has “saved it from the really embarrassing performance that is in my open-ended stuff, where we’ve really toiled”.
Still, out of the eight offerings in the Association of Investment Companies (AIC) Europe sector, Henderson European Focus is dead last in the performance table over one year; and second last over two and three years.
Bennett notes his style of investing, which he expects to stick with, has been well out of favour in what has gone from a “growth beating value market to an all-out momentum market”. “This has caused us some challenges,” Bennett says.
"Rubbish Stock Picking"
However, he does admit other factors have contributed: “It’s 24 months of rubbish stockpicking. I bought pharma beautifully in 2011; sold it really badly, sold 18 months too late. I wish I hadn’t sold Inditex on 22 times earnings because it went to 30; I am scared of high-multiple stocks.
He continues: “I’m a blend manager but, you might say, stupidly, wrecklessly, I tilted all of my funds towards value minimum 18 months ago – not a good idea in terms of the shape of the market.”
After a Trump bump post the US Presidential election in late 2016 value stocks rallied for four to six weeks, suggesting a recovery in the strategy. “But then normal business was resumed and in 2017, on a headline basis, the MSCI Europe Growth index gave you 390 basis points excess return versus the MSCI Europe Value,” Bennett explains.
In 2017, small-cap growth strategies in Continental Europe returned 22% compared to 8% for large-cap value strategies. “No matter what segment of the market you’re looking at, the growth factor is where you’ve wanted to be for minimum a decade. It could be the case for another decade, in which case I’m toast.”
Over five and 10 years the numbers are better, with the trust sitting third out of eight over both timeframes. But Bennett notes that in the industry is geared towards three-year numbers. But, he claims, “the worst possible time to buy an active fund is when it’s top over three years.”
He adds that winning fund manager of the year, which he did in 2015, is “the worst possible thing that can happen to you” and “the most irate is the latecomer money”. He adds: “Those that bought me in 2015, a large part of that has gone and the others just phone me up to abuse me.”
As a result, he says this is the make or break year. “If I put together a third bad year then does the towel have to go in? It might be time for someone else to pick it up and stuff it full of growth stocks at the top, because I’m not doing it," he admits.
“Frankly I wouldn’t give them the chance to fire me here. I’d go before I get anyone tapping me on the shoulder.”
The Morningstar Analyst View
HEFT’s Morningstar analyst rating, along with others Bennett manages, was downgraded in December from Silver to Bronze due largely to the loss of three team members, two of whom went to Schroders. All three had “meaningful input” on the fund, according to analyst Peter Brunt.
“We acknowledge Bennett’s experience and believe that he is motivated to stead the ship, but team departures are clearly a loss here,” Brunt adds.
For his part, Bennett says he thinks he’s hired “three outstanding stockpickers” to replace those he's lost, though they won’t be on board until June and July. He adds: “I don’t think my people selection will be as bad as my stock selection in the last 18 months.”
Brunt notes Bennett has built up a 25-year track record of investing in European equities - and Bennett himself says he’s been through tougher times. “While we find the process incorporates some flexibility, we believe it is both robust and disciplined,” adds Brunt.
He adds the trust has outperformed both benchmark and category average since Bennett became manager.
