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Investors need to re-evaluate their growth expectations, says Henderson’s Stevenson

27 July 2017

Janus Henderson’s director of pan-European equities outlines why investors should not get bogged down in defining what is a growth stock and what is a value stock.

By Jonathan Jones,

Reporter, FE Trustnet

Investors need to ditch their definition of growth and value to instead simply focus on stocks that can make good long-term returns, according to Janus Henderson Investors’ Tim Stevenson.

It is for this reason that the director of pan-European equities is overweight financials, despite his Henderson Euro Trust traditionally exhibiting a growth bias.

Perhaps most importantly, however, the manager said investors need to re-evaluate their growth expectations going forward.

“There has to be this reset of people’s growth expectations,” Stevenson said.

“Ask yourself in 12-18 months’ time are we going to be back to a high growth region and are demographics going to be completely different in Europe – no way.

“We are stuck in a low-growth world because our dumb governments and politicians have basically borrowed so much money over the last few years that they have saddled us with too much debt.

“But this issue is not coming home to roost because central banks have then pumped money into the system. So it is still pretty precarious and we are not going to get back to a rapid growth area.”

Yet investors still expect historical levels of growth, which has led to the ongoing debate of ‘growth versus value’ stocks.

“I think it would be a really useful thing to do [to re-evaluate growth expectations] because it is one of the reasons there is this misleading debate between growth and value. I come across it the whole time,” the manager said.

Over the last five years, value names have performed slightly better than growth names, as the below shows, but Stevenson said these stocks cannot be grouped into buckets.

Performance of indices over 5yrs

 

Source: FE Analytics

“It’s not nearly as nuanced as that at all,” he said.

Indeed, he noted that despite running different mandates, his trust and the funds run by fellow Janus Henderson value manager John Bennett hold many of the same companies.


“John and I discuss it all the time because we actually have a lot of common holdings in our funds but he is seen as a value manager and I am seen as a growth manager,” Stevenson said. 

And this oversimplification of the funds has led some to not invest in the Henderson Euro Trust.

“Someone internally has decided not to buy my fund because he is said it is too growth-orientated but actually it is stuffed with some pretty reasonably priced value names,” Stevenson said.

“It’s true that I have a lot of names like L’Oreal, Essilor and Inditex which people look at and say they are really expensive and they don’t want to hold those shares,” he added.

However, Stevenson noted that he also owns some names that would traditionally be described as value opportunities.

“I think 20 years ago you could find various areas – Asia and parts of Europe – where you could easily predict essentially 15 per cent total return per annum. So you would double your money every five years because there was lots of growth there,” he said.

“Scroll forward 20 years and we are a much more mature economy and I think this is really crucial.

“The demographics and amount of debt in the system means that the amount of GDP growth potential in economies is way less than it used to be.”

Stevenson said that a 10 per cent per annum target is more appropriate than the 15 per cent it has been historically but added that even to achieve this, managers must be flexible.

“You’ve got to be adaptable as to where you can find growth and that is what I think we have had to do and will continue to have to do.”

This flexibility is why the manager is overweight financials (25 per cent), an area seen for the last 10 years as a value sector.

“The question I’ve asked myself is can we get a total return of greater than 10 per cent from an investment in the banks as they begin their economic recovery?” he said.

“I think the answer to is selectively ‘yes’, so that’s why we’ve put financials into the portfolio.”

As such, he is looking for companies that can return 10 per cent per year on a total return basis over at least a three-year period.

However, he is keen to stress this is not guaranteed. “If I could guarantee a company will compound at 10 per cent per annum we would have money pouring in,” he said.


“What I am honestly saying is that I have companies that have the potential to compound at 10 per cent per annum, assuming that markets value everything in the same way in 12 months’ time as they do today – which is a completely and utterly naïve assumption because it won’t.

“Sometimes it’s high, sometimes it’s low. At the moment it’s high and you could easily make the argument that in 12 months’ time the market will value everything 10 per cent cheaper in which case you have flat lined over a year and [hence] why you can’t guarantee it.”

He owns one Italian bank, for example, which is offering a 7 per cent dividend yield, and he remains confident that the improving economy and rising interest rates should lift profitability by the 3 per cent required to give a total return of 10 per cent.

Stevenson noted: “In terms of what a company’s business does, if I know I am going to get a 7 per cent dividend yield then what it has to do is improve its profitability by 3 per cent per annum.

“With a better interest margin that is absolutely possible. As you move to a positive interest curve than enables the banks to make some money.”

Additionally, as the economic recovery continues, some private equity firms may begin to buy up the troubled assets banks are currently saddled with, allowing them to improve the balance sheet.

“So actually you could make the case that so of the banks can recover, which is why we have a position in an Italian, a French and a Dutch bank with a smaller position in a Scandinavian bank.”

While he is underweight banks by 2.7 per cent, he is overweight financials, with more than double the weighting to capital markets banks such as UBS.

Stevenson runs the £241m Henderson Euro Trust, having managed the fund for 25 years.

Over the last 10 of these, the fund has returned 195.48 per cent, 59.01 percentage points ahead of the IT Europe sector average and more than double the FTSE World Europe ex UK index.

Performance of fund vs sector and benchmark over 10yrs

 

Source: FE Analytics

The fund currently has a yield of 1.84 per cent and a clean ongoing charges figure of 0.98 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.