When seeking capital growth, investors are often pointed towards companies at an earlier stage in their development.
Sometimes that can be businesses only just commercialising their products. At other times, that could be companies transitioning to new models. However, these investments can come with heightened volatility in both their finances and share prices.
Henderson Opportunities Trust seeks to give its investors this sort of exposure, while dampening some of this volatility. To achieve this, we employ a distinctive strategy that combines two core types of shares: tomorrow’s leaders and stabilisers.
In our approach to tomorrow’s leaders, we seek to use the structural features of HOT. Its small size means that we can be flexible. We adjust the areas we focus on according to market conditions and opportunities.
And, as HOT is an investment trust, we can confidently allocate over the longer term. Investment trusts have ‘permanent capital’, which means that share sales by underlying investors do not force sales of investments.
As a result, the companies we invest in within this category vary broadly. They include very early stage companies, such as Creo Medical. Also in this category are alternative energy producers like AFC, whose fuel cells could partially replace fossil fuels.
Companies at this stage are naturally riskier, so we limit our allocation.
However, we also invest in more established businesses that still have notable potential growth. An example is Tracsis, which provides software to the transport industry. This can include rail ticketing and timetabling. The company is profitable but is investing in new technologies that could expand its product offer.
Elsewhere, tomorrow’s leaders include companies that are transforming. A clear example is STV, the Scottish media business. It has put major investment and focus into its production business. While there is the risk of a transformation not being successful, it can also create meaningful growth.
Tomorrow’s leaders represent companies with the potential for significant growth over the long term. On the other hand, the ‘stabilisers’ are stocks that we believe provide diversification for the overall portfolio. Past data suggests they could outperform at different times to the often-smaller companies within ‘tomorrow’s leaders’.
Stabilisers fall within one of two areas. One is large, established businesses that we believe have underappreciated potential to grow. Or they are natural resource companies that could benefit when commodity prices rise.
An example of the larger businesses held in Henderson Opportunities Trust is GlaxoSmithKline, one of the world’s biggest pharmaceutical companies. Under a new management team, it has invested strongly in research & development. This is beginning to bear fruit with, for example, a new RSV vaccine recently brought to market.
One of the trust’s natural resources positions is Serica Energy, a largely gas producer focussed on the North Sea. When commodity prices rise, they can put pressure on earnings elsewhere in the portfolio, notably among the industrial companies held. The natural resource companies, therefore, help to provide a form of ‘natural hedge’ during these periods.
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Glossary
Capital -When referring to a portfolio, the capital reflects the net asset value of a fund. More broadly, it can be used to refer to the financial value of an amount invested in a company or an investment portfolio.
Commodity -A physical good such as oil, gold or wheat.
Hedge -A trading strategy that involves taking an offsetting position to another investment that will lose value as the primary investment gains, and vice versa. These positions are used to reduce or manage various risk factors and limit the probability of overall loss in a portfolio. Various techniques may be used, including derivatives.
Investment trust -An investment trust is a form of investment fund, specifically a publicly traded collective investment scheme that invests its shareholders’ money in the shares of other companies.
Risk/risk taking -The acceptance of greater risk in exchange for potentially higher returns. This can apply to both individual investors and companies. An assessment of investors’ attitude to risk forms a fundamental part of identifying a suitable investment strategy for their objectives.
Volatility -The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
Disclaimer
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Important information
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Henderson Far East Income Limited
Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Henderson Far East Income Limited is a Jersey fund, registered at Liberté, 19-23 La Motte Street, St Helier, Jersey JE2 4SY and is regulated by the Jersey Financial Services Commission] Ref: 34V
Specific risks
The Company has significant exposure to Emerging Markets, which tend to be less stable than more established markets. These markets can be affected by local political and economic conditions as well as variances in the reliability of trading systems, buying and selling practices, and financial reporting standards. If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio that is diversified across more countries. The portfolio allows the manager to use options for efficient portfolio management. Options can be volatile and may result in a capital loss. Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise. This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company. Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times. The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company. Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result. The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets. The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing. All or part of the Company's management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time.
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