Bennett, manager of the Henderson European Focus Trust, claims to take a contrarian approach to investment, which some commentators may find difficult to square with his preference for a popular sector that has been subject to speculation it could be about to enter "bubble" territory. However, Bennett says investors only have to look at the successful restructuring and diversification in pharmaceuticals and the strength of cash flows relative to share prices to see how undervalued it still is.
"Change can be a blessing in disguise, as pharmaceuticals have been forced to adapt," he commented.
"They are redesigning their business models, using their cash-rich balance sheets to diversify into new growth areas, developing drugs with longer-term potential and reining in costs."
"While the sector is primarily known for large pharmaceutical companies, it is diverse, with over 20 separate industries. These range from devices such as dialysis machines to services such as hospitals, through to biotech, including stem-cell technology."
Bennett’s high conviction in the sector is evident from its overweight position in his £1.2bn, five crown-rated Henderson European Selected Opportunities fund. Its top-three holdings are in blue chip pharmaceuticals Novartis, Roche and Sanofi, which together account for 23.8 per cent of assets under management (AUM).
These are also the three top-holdings in his Henderson European Focus Trust, accounting for 21 per cent of AUM.
Since he took over the Henderson European Focus Trust, it has returned 9.98 per cent, slightly below the 10.67 per cent returned by the IT Europe sector. It is currently trading on a discount to NAV of 10.21 per cent.
Performance of trust vs sector since manager took charge
Source: FE Analytics
"We are particularly excited by large pharma. The industry change is underway as they seek to wean themselves off the old ‘find a blockbuster’ model," Bennett continued.
"So often in our industry, earnings momentum becomes overvalued and cash flow becomes undervalued. We see no greater example of undervalued cash-flow than large cap pharma."
In total, healthcare accounts for 29.18 per cent of the Henderson European Selected Opportunities fund and 28.5 per cent of his European Focus Trust.
Aside from pharmaceuticals, Bennett is positive about the prospects for European equities in general.
His investment strategy is based around a belief in mean reversion and he believes that the indiscriminate battering that valuations across the continent have taken since the sovereign debt crisis began means the only way is up for the region.
"We have long attested that the environment in which to find good bargains is that provided by bad 'macro'," Bennett continued.
"That is precisely the proposition that out-of-favour Europe represents. European equities have declined to multi-year lows in valuation terms, both against their own history and versus the current equity safe haven of choice, US equities."
While Bennett believes it could be some years before this strategy pays off and that things could get much worse before they get better – hence his underweight position in southern periphery countries – he believes the long-term prospects look bright for quality European equities.
"We continue to adopt a disciplined, focused approach to our selections, more convinced than ever that a contrarian approach to European equities is now likely to pay rich rewards to the patient investor."
"The key word is patient: the short-term will continue to be volatile but the long-term outlook for European equities is outstanding."
Since Bennett took over management of the Henderson European Selected Opportunities fund in February 2010, it has returned 12.68 per cent compared with 7.36 per cent from its IMA Europe ex UK sector.
Performance of fund vs sector since manager took charge
Source: FE Analytics
The fund requires a minimum initial investment of £1,000 and has a TER of 1.67 per cent.