It is no surprise that an international fund based in London would cotton to stocks from Europe. But European stocks held by Henderson International Opportunities had to work especially hard in 2013.
During a year in which Japan stocks were the top performers in the benchmark MSCI All Country World Index ex-U.S., the fund was light on that country as its managers took a wait-and-see approach to the Bank of Japan's aggressive (and, in the end, highly successful) asset-buying program. As a result, the Henderson fund's proportion of Japanese holdings was well below the 16% weighting of the benchmark.
But even underweighted in Japan, the Henderson fund had a 33% return for the 12 months that ended on Nov. 19 - placing it in the top 4% of the foreign large-blend category. That, crows the fund's lead manager, Stephen Peak, shows just how well its European picks did.
At 58% of assets, Europe is by far the fund's largest sector. In summer 2012, the fund doubled down on its investments there, believing that the European debt crisis had offered a good entry point by making stocks cheap across the board.
Sure enough, sentiment began to improve that fall when the president of the European Central Bank, Mario Draghi, declared that the bank would buy up sovereign debt from struggling economies to shore up the euro. "It wasn't that long ago that most investors thought of Europe as an uninvestable market," Peak says. "But what we've been seeing more recently is that there are signs of life." It may be too early to assume there will be a full recovery, but the outlook is decidedly less dour, Peak says.
Clearly, the bleeding has been stemmed, especially in countries like Greece that were hit hardest by the crisis. Growth actually returned to the 17-member euro zone in the second quarter, though France and Italy have slipped back into recession, leading the European Central Bank to cut its benchmark interest rates to 0.25% in early November.
Because Europe makes up a disproportionately large share of the $3.4 billion fund's assets, two portfolio managers pick stocks. Peak is one, and Tim Stevenson the other. While Stevenson gravitates toward growth-oriented issues, Peak prefers special situations and turnaround plays with more of a value bent.
The rest of the portfolio is divided among four other management teams. One covers Japan, another handles the rest of Asia and a third does Latin America. Global technology - at 6.6% of assets - is its own category and spans across geography. That is the only bucket to contain U.S. stocks.
By combining several managers' styles, the portfolio is skewed toward growth at a reasonable price and large-cap names. The approach seems to work. For the three years that ended on Nov. 19, the fund was up an average of 8.2% a year, which put it in the foreign large-blend category's top 19%, according to Morningstar. For the five-year period, Henderson returned an annualized 16.3%, in the category's best 24%.
The 2012 debt crisis gave Peak plenty of opportunities to find out-of-favor stocks. One play is European Aeronautic Defence and Space, the parent company of Airbus, the aircraft manufacturer that is Boeing's main competitor. "We bought the stock over a year ago when Airbus went through an abortive merger with BAE and there was a lot of panic selling," Peak says. "That gave us a good entry point."
The deal for EADS, which is 15% owned by the French government, was called off after German Chancellor Angela Merkel told the French president, FranÃ§ois Hollande, that she believed the merger would be negative for her country.
Even without the merger, EADS (soon to be renamed Airbus) is doing well, competing successfully for order against Boeing. The stock more than doubled in the last 12 months, and Peak believes there is a further upside. "We're betting on global middle-class travel growth," he says. "The longer-term underpinnings of the sector are attractive."
Another pick is Continental of Germany. Formerly a tire maker, it is now an automobile component supplier, manufacturing electronic brakes and vehicle stability control systems. Its revenues are distributed among different business lines. "When you look at profitability, they can be much more profitable than the average car parts company, and that's not reflected in the price," Peak says. This stock also doubled in the 12 months ending Nov. 19.
Henderson has struggled to find a good entry point in Japan, where stocks have surged since the central bank began its aggressive easing policy in late 2012. "We sat on the sidelines because the market was on tear," Peak says. Over 12 months, the Nikkei 225 rose 67.8%, far ahead of other country indexes.
This past spring, Japanese stocks took a breather, and Peak and his managers built up their stake from the low double digits to 15%.
To be sure, the central bank's easing stance gives a boost to exporters because a weaker yen makes Japanese goods more competitive abroad. But Peak believes there is more opportunity domestically.
The team likes Sumitomo Mitsui Financial Group. Share prices have benefited from the stock market rally, which pushed up the value of the lender's sizable equity portfolio; previously, the sluggish stock market had created a drag on company profits. "It's a pretty good proxy for a recovery sector in a recovery market," Peak says. The stock gained 65.1% in the year that ended Nov. 19.
Another holding is Obayashi, a construction firm, which, among other projects, is working on a space elevator the company hopes to complete by 2050; it is supposed to rise to a spaceport a quarter of the distance to the moon. On earth, Obayashi is benefiting from renewed lending and spending on capital projects. "There's been a withdrawal of capacity, but that's changing," Peak says. Obayashi rose 18.9% in the 12-month period.
SOUTH KOREAN GIANTS
Other areas of Asia are less rosy. China's shift away from exports toward meeting domestic demand will probably mean a slower pace of growth than investors are used to. "We think China will work its way through these issues, but the gloss has been taken off Asia," Peak says.
Instead of China, the Henderson managers prefer South Korea. Samsung, with businesses as divergent as construction, department stores and paper, is largely seen as a mobile device maker - and is undervalued for that reason, the managers believe. Its fortunes should not rise and fall with the fickle phone market, but should reflect the company's full portfolio. The stock was up 10.6% over the 12-month period.
Then there is Hyundai, now a global car exporter. Hyundai's price-to-earnings multiple of six makes it cheap, especially for a company with exposure to China's growing middle class.
When it comes to tech, the managers believe the sector needs to be viewed on a worldwide basis. After all, technology competes against other technology, not within its own borders. This category is dominated by U.S. picks, with names like Apple, Amazon and - as of early November - Twitter, after the company's initial public offering.
Ilana Polyak, a Financial Planning contributing writer in Northampton, Mass., has also written for The New York Times, Money and Kiplinger's.
Henderson Intl. Opportunities
Experience: Portfolio manager, Henderson Global Investors (1992-present); director and head of investment department, Touche Remnant (1986-1992); overseas fund manager, Cornhill Insurance Group (1984-1986); global equity fund manager, ADIG Investments (1983-1984); fund manager, Norwich Union Insurance Group (1975-1983)
Inception of fund: August 2001
Style: Foreign large blend
AUM: $3.4 billion
3- and 5-year performance as of Nov. 19: 8.22%, 16.31%
Expense ratio: 1.46%
Front load: 5.75%
Minimum investment: $500
Alpha: 2.16 vs. MSCI ACWI ex-U.S.
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