Download James Henderson investment opportunities

The discount at which small cap and AIM (Alternative Investment Market) stocks
are trading has deepened, creating compelling investment opportunities,
according to James Henderson, Fund Manager of Henderson Opportunities Trust
plc
We see great value in smaller companies right now as they are priced cheaply and yet their business are
growing fast. Although in the Henderson Opportunities Trust we can invest in companies of any size, right
now we have some 85% in small caps, FTSE 250 and AIM stocks due to their profile of fast growing
earnings and low valuations.
Smaller companies are an appealing area of investment for many reasons. Their small and nimble size
means they can grow quite rapidly and their share prices can also move upwards quite quickly. Some
believe that companies such as these are dependent on growth in the UK economy, the outlook of which
is sluggish at best. However, in reality less than 50% of earnings from UK smaller companies are derived
from the domestic economy and although some 19% appears to stem from Europe that too can be
deceiving. For instance engineering company Senior makes components for Airbus, which means it sells
into France, the end product of which is then sold on to places like the Middle East. The aerospace
industry is so international it is difficult to say where the ultimate sale is occurring. These types of
geographic earnings among smaller companies are broader than many perceive.
Another worry about smaller companies is the state of government spending and the headwind this may
pose for businesses, yet overall less than 14% of smaller company earnings come from public sector
contracts. In addition, although cutbacks in public sector spending may have an impact on some smaller
companies there are ways to reduce this, investing in companies less reliant on government contacts or
concentrating on those areas where service is unlikely to be diminished. This is one of the reasons we
favour two sectors in particular: technology and industrials.
The UK is a global player in both; technology in particular is an area of expertise. Take IP Group as an
example. The group is a portfolio of start-up, unquoted companies that have come out of the chemistry
departments of some of the UK’s leading universities, including Oxford. Companies within IP Group are
making significant break-throughs in their field and have already seen substantial valuation appreciation.
It may be based in the UK but its research can be applied on a global scale.
As for industrials, the UK is a leader in many areas and that feeds into the overall growth in the industrial
sectors worldwide. The global industrial economy is expected to grow at some 3% this year despite the
drag Europe poses. In fact Europe is just 15% of the global industrial economy with the remaining 85%
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elsewhere so the outlook is positive for this market sector to grow. UK companies are well positioned to
service industrials as we possess a number of excellent businesses with technologies that are needed in
growing parts of the world.
The broad investing environment may have been unfavourable towards smaller companies in the latter
half of 2011 but since the beginning of 2012 the tide has turned. The performance of smaller companies,
particularly those in the more volatile AIM market, was impacted as part of wider risk aversion from
investors over fears of the developments in Europe. This led them to favour more defensive and larger
companies during this period of economic uncertainty. In turn this has created great value at the small
end of the market with many companies priced cheaply yet still featuring substantial growth prospects.
There is much to be excited about the value and opportunities to be found in smaller companies but in
general now is a good time to be looking at UK equities, particularly growth stocks. Although the UK’s
GDP has not recovered back to its pre-2008 levels, company profits have and in many cases have even
surpassed those levels. After years of cutting back companies have more cash and less debt than they
have had in years, leading to better margins and the ability to generate top line growth - despite the
headwinds the UK economy poses.
To find the best opportunities in the smaller end of the market requires careful scrutiny and the best
approach is via a fund. AIM can, at times, be a volatile market, which is why a portfolio approach is
needed to unearth the hidden gems that can be found. Via a portfolio we can hold a long tail of such
companies, at small levels, alleviating the impact of one or two going wrong yet each has the potential for
their share price to double or even treble although this cannot be guaranteed.
Gaining smaller company exposure via an investment trust structure offers several advantages to
investors. The structure of an investment trust makes investing easier and at times the fund itself can be
bought at a cheaper price than the assets it holds – similar to buying something on sale. If the companies
the investment trust holds, such as smaller companies, go up in value and their growth accelerates, the
value of the trust tends to also rise. This means that investors not only benefit from their share of the
performance in what the trust holds but they could also benefit from and increase in the investment trust
itself, thereby enhancing returns further. (The value of an investment and the income from it can fall as
well as rise and you may not get back the amount originally invested).
While some investment trusts focus on specific market areas, such as larger or smaller companies,
Henderson Opportunities Trust (HOT) looks across the whole market, buying into areas where we see the
best value and the best opportunities for growth. At the moment we believe that is in the smaller end of
the market, however, our flexible style means we are not wedded simply to smaller companies all the
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time. This flexibility means that as markets and opportunities change, we change with them.
The value of an investment and the income from it can fall as well as rise and you may not get back the
amount originally invested. Nothing in this document is intended to or should be construed as
advice. This document is not a recommendation to sell or purchase any investment. It does not form part
of any contract for the sale or purchase of any investment.
Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which
Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no.
2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management
Limited (reg. no. 1795354), Henderson Alternative Investment Advisor Limited (reg. no. 962757),
Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030)
and Gartmore Fund Managers Limited (reg. no. 1137353) (each incorporated and registered in England
and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated
by the Financial Services Authority to provide investment products and services.
All figures are sourced by Henderson Global Investors unless stated otherwise.
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