Fund Managers’ Favourites: Contrarian Edge

Video Transcript:

Alanna Petroff: Many fund managers make presentations showing off to investors about how they are not invested in UK equities; however, a contrarian strategy would be to actually invest in UK equities.

And one contrarian investor that's joining me now is James Henderson from Henderson Global Investors. He manages roughly £1 billion in assets under the following investment trusts: Law Debenture Corporate Trust; Lowland Trust; and Henderson Opportunities Trust.

So, James, you’re invested in UK equities. You take a little bit of a contrarian strategy. Tell me a little bit about your investment strategy.

James Henderson: We move between large, medium and small companies looking for where the value is. It is, as you say, a contrarian strategy built on – but we believe that all these companies are growing and in the UK there's some real good growth opportunities at the moment at very reasonable valuations.

Petroff: Okay. So, good value, looking for growth with that UK focus. And we have three companies that you've come in to tell me about. We have AJ Mucklow, Senior Engineering and Hiscox.

Now, the first two are industrials. Let's talk a little bit about AJ Mucklow. I don't know too much about that company. So, tell me a bit about that.

Henderson: It's a property company based in the Midlands and it is only industrial properties, predominantly. It’s renting out good quality industrial space. And the exciting thing – one of the exciting things in the UK at the moment, is the pickup of the motor industry. This is thanks to the success of Jaguar Land Rover. But through the Midlands now good quality suppliers to these companies are seeing expansion and AJ Mucklow is one of the few providers of really good quality industrial space. So, for the first time in a very long time they are seeing rents going up. And as rents go up, so will the capital value in time because the rental yield on these properties is high.

Petroff: Now, tell me a little bit about Senior Engineering. That's one of your largest holdings within your portfolios. Why do you like them?

Henderson: Rather like with the story of Mucklow, it is an industrial company which is seeing good growth. It's servicing predominantly the aerospace industry. Aerospace has been on an upswing for a number of years in the UK. Good quality companies have shown good profits growth in recent years, but it's set to continue.

For instance, Senior has a lot of work on the 787, Boeing’s 787, the Dreamliner, about $1 million a set it's got on that. The order book for the 787 stretches out to 2018. So, they've got good work on this plane which gives them a huge visibility of their earnings.

Petroff: Very predictable then going forward.

Henderson: Very predictable on those orders, very predictable. And that's been underestimated a bit by investors. They believe these are cyclical companies. Actually high quality engineers aren't as cyclical as the market think they are.

Petroff: Okay. That sounds good, especially [with revenue] going out to 2018, it makes it a good long-term investment, potentially.

Now, let's talk a little bit about Hiscox. An insurance company on the FTSE 250; very different kind of company compared to the last two. Tell me about Hiscox.

Henderson: It brings diversity to the portfolio because, as you say, these other two are industrials and there is an industrial cycle over time. I believe it's got a long way to go, but there is an industrial cycle.

The nice thing about insurance: it's a totally different cycle. And in parts of that cycle it’s going up strongly at the moment. That part is in the property/casualty book. Property/casualty rates are going up after all the disasters last year and the good quality insurers that settled their claims on time last year are in a position now to push rates up and they are, and Hiscox is one of the beneficiaries. It's growing that book. At the same time, it's got a very high quality private insurance business, i.e. retail business, which is doing high net worth people in the UK. They are growing that book well and it's a long-term very profitable area for them.

Petroff: Okay. Now, let's talk about some of the key risks for each of these companies and industries. So, let's start with AJ Mucklow and, potentially, a similar risk for AJ Mucklow and Senior Engineering.

Henderson: My nightmare is that oil prices run up to $150 a barrel, let's say, or further, because these industrials are big energy users. So, at the moment costs in the UK are very well under control, wages aren't going up, but the top lines are, sale are. So, you're seeing this margin expansion.

If oil prices ran up a long way, you'd see the cost line go up. At the same time, that top line will start to fall because oil at that level would be like a huge tax on us all and that would mean we would spend less, at the same time as their costs went up. So, this very good and strong growth in industrials that we're seeing and the revival of UK manufacturing would be hit hard by a very high oil price. My belief is we won’t see $150+ oil, but that's the real risk.

Petroff: That would be the main risk for both Senior and AJ Mucklow?

Henderson: Yes.

Petroff: And Hiscox, what would be the biggest risk there?

Henderson: Well, there can always be another year of dreadful disasters like last year. But it's such a strong company, I think it can put up with quite high levels of disasters and still be there to pay the claims and grow its business the following year, because a lot of weak players would go away and they would have larger market share as rates went up the following year. But in the short term, obviously, if we saw earthquakes and huge disasters around the globe, it would hit the company.

Petroff: Okay. Thank you very much for coming on today.

That was James Henderson from Henderson Global Investors. He runs three investment trusts there. I'm Alanna Petroff. Thank you for watching Morningstar.