Why dinosaurs trump unicorns

European equities can seem like relics compared to fledgling tech companies trading at lofty valuations, but Janus Henderson’s John Bennett prefers dinosaurs to unicorns.
“I’m not a deep value manager, but I have always believed that valuation and cashflow matter, which makes me very poor at loss-making businesses, some of which have gigantic valuations,” he told the audience at Sub35’s inaugural event held at the Bond in Motion exhibition in Covent Garden, London.
Whether bitcoin or unicorns, Bennett believes “misallocations of capital are underway”.
He highlighted figures that show huge sums of money flowing into technology company convertible bonds (bonds that can covert to stock). The same thing happened in 2000, before the dotcom bubble burst, and in 2007, before the financial crisis. He also pointed to evidence of insider selling of Nasdaq stocks.
“Things go in cycles,” he said. “We might be about to mean revert. If I’m right – mean reversion is not dead and history tends to rhyme – we might be approaching a moment where the tech and growth stock mantra is going to be challenged.
“I tend to believe you get recessions; you get booms. Profit margins wax and wane. Valuations matter and they wax and wane.”

Best vehicle

Bennett said it was the collective responsibility of the young wealth managers present to ensure that the investment trust structure, “at risk of being pilloried as a dinosaur vehicle”, does not become extinct.
“The closed-end fund is simply the best vehicle for a fund manager to manage his or her clients’ assets bar none,” he said.
He recently “loaded up” personal holdings in Henderson European Focus Trust, a trust he has run since 2010, on the back of discount widening.
“Watch not what a fund manager says; watch what he does,” he said. “If you get a fund manager who’s running open-ended money alongside closed-ended – me, for example – where is his or her money going? Which fund did I buy substantially two or three weeks ago because it went to a 9% discount? Closed end. That’s where my money’s going.”
For Bennett, investment trusts prove why fund managers should never be in the business of gathering assets, rather managing them.
“The single best performing vehicle I’ve got is Henderson European Focus Trust. That’s for a reason; it’s fixed capital. It lets me do things my open-ended funds cannot do. They get too big after three years of good performance and, as has happened over the past 18 months, the people who bought them at the very wrong time in 2015 panic and sell.”
Although investor sentiment can affect the discounts and premiums to net asset value at which investment trust shares can trade, the fixed pool of assets means their managers are not forced to sell shares into a falling market or buy them in a rising one.

Sit tight

It also allows managers to build significant positions and “sit tight” – waiting for them to deliver.
He used his investment in Carlsberg as a case study. While beer overall is not a growth market, he saw an opportunity in the company for a mean reversion. In 2016, Carlsberg’s profit margin was at 13.2% – behind Heineken’s at 17% and ABInBev’s at 29.2% – but the company was loathe to repeat past mistakes of over-promising and under-delivering.
“Carlsberg became an empire builder; I quite like shrinking empires,” said Bennett. “I tend to miss a lot of growth stocks because I’m rubbish at paying the multiples and believing the extrapolation.”
Around 5% of Henderson European Focus Trust is invested in Carlsberg, but the European equities manager is unable to take a similarly sized position in his open-ended fund. The out-of-favour status of the European market makes it inevitable that he will get redemption requests, which will serve to inflate the position.
“[With a closed-ended fund], I can take my time buying the position, check with management quarterly or every six months and hopefully relax. In open-ended, you can’t. You’ll get subscriptions that dilute a position or redemptions that inflate it. It’s very simple, but powerful.
“The one commodity that we are afforded in the closed-end world is the scarcest commodity in our business – patience. This is capital that is patient.”

Watch Bennett’s presentation