Former manager Brian O’Neill stepped down at the end of January after more than 30 years at the helm.Henderson has appointed Wouter Volckaert (pictured) as his replacement and Tan says that his proposed refocusing of the trust outside the UK and into smaller companies should lead to a substantial re-rating.
“Historically it has outperformed but in the past three to four years it has struggled to outperform,” Tan said.
“Under O’Neill, it had a bias to large cap stocks and towards the UK market, even though it’s a global fund with a global mandate.”
“Historically he has had 25 per cent of the trust in the UK compared with a benchmark weighting of 8 per cent and more than 80 per cent in large caps when the benchmark was 66 per cent, so that has contributed to outperformance over the last three years or so.”
“The new manager is adamant these biases will be eliminated by the time the handover is complete and that is what we think could be needed to turn around performance.”
Data from the AIC shows that the trust is currently trading on an 11.1 per cent discount.
Only a handful of trusts are on wider discounts in the IT Global sector, the average discount of which is 5.7 per cent.
Tan notes that many Henderson-run trusts have been trading at NAV or on small premiums in recent years.
The group has been keen to make its trusts appealing to a retail audience and Tan says it has a formidable marketing team that may support a re-rating.
Data from FE Analytics shows that the trust performed well relative to its peers between 2005 and 2009, but 2012 is the only year in which it has outperformed since.
The fund was bottom quartile for share price returns in both 2011 and 2013 and has made only 8.2 per cent over the past three years while the average Global trust has made 22.4 per cent.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
Tan says the “unloved and neglected” trust could well see a re-rating once the manager has implemented his strategy.
It currently counts global heavyweights such as Novartis, Nestle, HSBC and Pfizer among its top-10 holdings.
Volckaert intends to increase the weighting to small and mid caps and also to use leverage when he believes market conditions warrant it. O’Neill rarely used leverage.
Volckaert says, however, that he does not believe it appropriate to gear up at this particular point in the cycle.
Small and mid caps have a track record of outperforming large caps over the long-run that should stand the portfolio in good stead.
Performance of indices since June 2007
Source: FE Analytics
Volckaert says he expects the transition process to be complete by the time of the next annual general meeting [AGM] in April.
“Both managers have similar approaches to stock selection, ensuring continuity in the quality-focused, bottom-up process that has underpinned HGL’s performance to date,” Tan said.
“However, in our view, changes to portfolio construction may lead to an improvement in longer-term performance, which would help narrow the discount towards par, where many Henderson-managed investment trusts currently trade.”
Volckaert intends to run a portfolio of 50 to 80 stocks, with most concentrated in the top 30 to 40 names.
He expects to see turnover of roughly 30 per cent a year once the portfolio has been refashioned.
The manager has joined Henderson from Morgan Stanley, where he ran portfolios for both retail and institutional clients, but unfortunately his past performance record is undiscloseable.
He ran segregated mandates there and according to Henderson outperformed his benchmark over the course of his employment.
Henderson says he was selected because of the similarity of his investment approach to that of the Henderson global equity team which runs the trust.
The trust currently has a 2.8 per cent yield, the third-highest in the sector, and has a policy of increasing the dividend over time, which will be maintained.
The trust charges a 0.6 per cent management fee on all assets up to £200m and then only 0.35 per cent. Ongoing charges are 0.98 per cent in total.
This is above average for the sector, however, which stands at 0.8 per cent, according to the AIC.
Most analysts agree that there are relatively few obvious areas of value in the current market, with premiums on the investment trust sector near historic highs, but Tan argues this is a special situation that could pay off for investors.
Earlier this week FE Trustnet looked at five star managers whose trusts are trading on double-digit discounts.
