Running a UK equity fund over the past year has been a rollercoaster ride. In 2020, the value stocks that dominate the domestic market were hit harder than other areas, such as the US, where giant tech companies continued to grow at pace. 
Towards the end of the year, that trend reversed, something that continued into 2021 up until recently.
Lowland Investment Company was a beneficiary of that switch. Over the past year, the trust has been the third-best performer in the IT UK Equity Income sector, returning 58.4%, more than double the returns of the FTSE All Share.
Below, James Henderson (pictured), who has managed the £376m trust since 1990, tells Trustnet about his biggest wins and mistakes in recent years, how his trust is built for the future and why he won’t invest in tobacco.
What is your process for picking stocks?
Companies either go forwards or backwards, they rarely stand still. So, over the medium term, we have to believe a business will be a bigger company than it is today.
We are contrarian and value-orientated, but we buy companies that are growing. Yes, valuation matters, but you need to have a growth overlay.
I think some income funds are focusing too much on income and are bleeding their capital. We are focused on growing the capital as well, which will throw off more income over time.
Which is better, growth or value?
It is about having a mix of companies. There is no hard or fast way of knowing if it is value or if it is growth. There will be stocks in both areas that come through and there will be failures in both areas.
The UK economy is very mixed. Some areas are strong and some companies are even trying to keep profit expectations down. We have come out of the lockdown and many consumers have paid down debt, kept their jobs, and pay is going up. They are keen to consume again and that is coming through.
However, there are other areas that have absolutely suffered, where debt levels have gone up and they have been shaken.
It would be wrong to generalise. What we are trying to do is pick the companies that are long-term investments, but that have the wind behind them with the changes in the economy.
Why should investors pick your trust?
Records over time show the approach is a robust one and the risk is moderated by a relatively long list of stocks.
Now is an exciting time to invest in the UK, watching a new generation of companies come through. There is a lot of change happening, but some value managers are a bit blinkered to that change and it is throwing up real opportunities.
One that we bought last year for the first time in my 31 years on the trust was Marks & Spencer. People think it is going nowhere, but the tie-up with Ocado means it has an online presence in food and also the difficult period last year meant tough cost-cutting decisions were taken.
It is reinventing itself. The food operation is growing fast and the clothing part is being looked at. We think it will return to good growth when we are through the pandemic.
There will be plenty of companies that don’t reinvent themselves, however.
Total return of trust vs sector and benchmark over 10yrs
Source: FE Analytics
What has been your best call over the past year?
The best has been the alternative energy companies of late. I invested in Ceres Power, which is a spin-out of IP Group around five years ago when there was a fund raise at 75p. We sold some stock at the back end of last year, because it was becoming too big a part of the portfolio, at £13 per share.
And what has been the worst?
My biggest mistake was slightly more than a year ago. I had too much in contractors such as Carillion which went bust. I also held Interserve. It was, in hindsight, obvious that they were companies that were taking on projects with a very low margin, but this was not reflected in the way that they were pricing them. I kick myself frequently for getting involved.
I had been invested for some time and they paid dividends along the way and the yields were quite high, but the way they were tendering for work was flawed and I should have realised that.
Which stock in the trust are you most excited about?
ITM Power and a holding in AFC Energy – both in the hydrogen area. To produce green hydrogen commercially is the Holy Grail and they have different approaches to it.
ITM tied up with Linde, the great German gas company, at the back end of 2019 and the great part of that is the ability to deliver projects as Linde has the know-how in manufacturing. But one area that is taking up a lot of my time at the moment is whether or not it has the best technology.
AFC is making alkaline electrolysers so there are alternative ways of doing it. It doesn’t have a big partner like ITM but its technology is working and producing good results. As such, I own both.
Are there any sectors you won’t invest in?
We haven’t got anything in tobacco. Not because I am against it, but every time I look at the stocks, the fall in sales is larger than predicted.
Yes, they can shove up the price so the profit number is alright, but the actual volume of cigarettes smoked is in decline and the smoking alternatives are not making up for that fall.
So about 18 months ago we thought “why bother any longer as we are always disappointed”. Yes, they generate a lot of cash and pay good dividends, but companies either go forwards or backwards and if it can’t grow, then it will eventually dwindle away.
What do you do outside of fund management?
I am a real enthusiast for horse racing, particularly jump racing, which is one of my main interests. I often read The Financial Times in the morning and then later in the day will read The Racing Post.