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James Henderson: Where I'm still finding value in UK equities

11 September 2014

Henderson’s James Henderson says that while valuations are high, opportunities abound in two key areas.

By Daniel Lanyon,

Reporter, FE Trustnet

UK manufacturing and university spin-off groups are the few areas of the UK market offering value, according to FE Alpha Manager James Henderson, who says examples can be found up down the market cap spectrum but small caps in particular look undervalued.

ALT_TAG Henderson who manages three investment trusts and one open-ended fund describes himself as a true multi-cap manager as he is happy to hold an AIM stock next to a global mega cap in his top ten.

“I have International Power and HSBC in my portfolios but I also have AIM stocks - that is genuine diversity. Diversity of activity and not concentration in certain industries is the way to preserve capital in my view, over the long term.”

Like fellow FE Alpha Manager Neil Woodford, Henderson is particularly bullish on the prospects for small cap stocks stemming from UK universities.

“It is a new area but there is something happening. Some of them won't work and someone of them will be a bit binary but there are a lot of good things coming out of our universities. But a lot of the spin outs are coming from IP Group,” he said.

“Within IP Group the biggest is Oxford Nanopore which now has a valuation of £1bn and could be a lot more than that.”

Henderson says the best share he has bought this year is the AIM listed 4D Pharma, which is also held by Woodford in his newly launched CF Woodford Equity Income fund.

“It was a spin out from Aberdeen University. Two guys had a project; how to fatten pigs and they found a bacteria that helped with that and realised that it might have implications in humans. In a very short period of time it has risen.”

The stock is up 123.18 per cent since it was issued in February 2014.

By comparison the FTSE All Share and the FTSE AIM indices have been broadly flat over this period.

Performance of stock and indices since Feb 2014


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Source: FE Analytics


He says manufacturing in general, but particularly aerospace stocks, offer good value due to a strong competitive edge.

“Manufacturing is still a very important part of the portfolio and the area where I see the best management teams,” Henderson said.

“If you've lived through and managed a manufacturing business over the past 20 years you're good at, having had a huge headwind in seeing much go overseas.”


“You have also had vicious recessions on top of that and so you have to be very good at what you do. You have to have some real competitive advantage to succeed in the global economy and if you have got those things you have a really good business because the global economy is going to keep growing and you can service it with excellent products.”

In an article earlier this year, Henderson highlighted manufacturing stocks Senior and Elementis as companies that can deliver a fast-growing income.

Henderson’s longest tenure is the Lowland investment trust which he has managed since 1990 which holds a mixture of larger and smaller companies.

For example, currently in its top 10 are Royal Dutch Shell, BP and Rio Tinto alongside International Personal Finance and Senior.

According to FE Analytics, the trust has returned 223.41 per cent over the past 10 years compared to an IT UK Equity Income sector average of 142.85. The FTSE All Share gained 128.01 per cent over the same period.

Performance of fund, sector and index over 10yrs


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Source: FE Analytics


However, 2014 has seen the trust move into negative territory. It is down 6.41 per cent compared to a gain in the FTSE All Share of 3.49 per cent and the sector average’s return of 0.67 per cent.

He says having held an overweight position in small and mid-caps has meant the trust has fallen harder during times of market weakness such as in 2008 when the FTSE AIM and FTSE 250 fell much harder than the FTSE 100.

Performance of indices over 7yrs


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Source: FE Analytics



However, he says that holding a mixture of micro, small, mid and large caps can give you an idea about what is happening in at opposite ends of the market.

“The mixture of investing in both areas and not having a de embarkation between large medium and small allows for opportunities to be seen.”

“For example, when I found out about Betfair, I realised I should never hold Ladbrokes again and when I understood what Tesco meant when they said prices were going ‘down, down, down’ I realised what that meant for milk companies.”

He says small companies will also continue to offer stronger returns because companies’ life cycles are getting shorter.

The Lowland investment trust is currently trading on a discount of 3.7 per cent, has gearing of 13 per cent and ongoing charges of 0.62 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.