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.

Tomorrow’s leaders

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.

Stabilisers

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

Not for onward distribution. 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. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

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