Matthew Beesley, Head of Global Equities: “Forecasting is a challenging occupation. However, from what we see we think the weather is set fair”.
Multi-Asset
Bill McQuaker, Head of Multi-Asset
At the beginning of 2013 a few brave voices spoke of the possibility of a 'Great Rotation' away from bonds and into equities, but the consensus was that such a move was still some way off. As it turned out, these bold commentators were rewarded for their temerity. The first half of the year was characterised by flows into both bonds and equities, but since the middle of the year flows into bonds have dried up while equity portfolios have mushroomed.
A myriad of factors help to explain why things turned out differently, but the most important influence can be summed up in one word – ‘taper’. Markets were following the script until June, when the Federal Reserve broke the news that it was considering scaling back its programme of quantitative easing (central bank purchasing of assets in the financial markets to support growth and liquidity). That caused a severe setback in bond markets, which has yet to fully reverse. This dented investors' confidence in bonds, and helped fuel appetite for equities.
While, all in all, it has been a good year for owners of capital, it strikes us as curious that sentiment towards asset markets seems to have improved in the second half of the year, despite the fact that most diversified asset portfolios peaked in May. Sharp losses have been reversed, but most investors would have been better off cashing in at the end of May instead of running risk for the balance of the year. The special seductive language of the equity market – all-time highs, instant profits, long-term growth – appears once again to have cast its magic spell. In a world that still faces considerable long-term challenges we would be wise to resist getting too carried away.
Paul O’Connor, Director of Multi-Asset
We expect a modest acceleration in global growth in 2014, with continued marked regional divergences. We are most optimistic on the US economy, where balance sheet adjustment is well advanced (ie, in terms of reducing debt) and where fiscal policy on taxation and expenditure should be significantly less restrictive. The Japanese recovery should continue, albeit restrained by fiscal tightening (eg, through tax increases). The eurozone looks set to expand for the first time in three years, but the recovery will remain fragile and vulnerable to shocks.
2014 looks like another year in which the incremental contribution to global growth will come from developed economies rather than the emerging world. We see a number of vulnerabilities in China and other emerging economies – where growth could potentially surprise to the downside. Globally, the most compelling upside risk to growth would be a resumption of business and consumer sentiment. The US is the country most likely to lead the way on this front.
From an asset allocation perspective, we think that 2014 will be another difficult year for fixed income. The tapering of US quantitative easing will be the first step towards the normalisation of monetary policy that should lead to a slow but downwards re-pricing of government bonds. High yield bonds look like the best place to be in fixed income, but we do not expect much more than mid-single digit returns. Equities remain our favourite asset class, although we expect lower returns than enjoyed in 2013, given that valuations have risen and there remain some significant questions about the scope for earnings growth in the major markets. With sentiment looking increasingly exuberant and some low probability but high impact events that potentially could occur, we expect equities to be much more volatile in the first half of 2014 than in recent months.
Global Equities
Matthew Beesley, Head of Global Equities
There was a British weather forecaster, Michael Fish, who gained notoriety in 1987 on the eve of what was to become one of the largest storms ever to hit the UK, when he opened his bulletin by saying: "Earlier on today, apparently, a woman rang the BBC and said she heard there was a hurricane on the way ... well, if you're watching, don't worry, there isn't..."
It wasn't quite career suicide, but it was certainly a lesson in being emphatic in the face of uncertainty. And there is an overwhelming temptation when making predictions about equity markets to avoid the emphatic. Furthermore, the very nature of looking forward to a new year implicitly suggests that what lies ahead will be different to what we are leaving behind. For equity investors in 2014, this may not be the case: we are currently in the midst of a synchronised global economic expansion, albeit a rather tepid one, and in our opinion all the evidence suggests this is likely to continue. In the eurozone, 2013 became the year when conditions moved decisively from ongoing deterioration to at the very least becoming ‘less worse’, while a recovering housing market has been key to the return of UK consumer confidence. In the US, forced reductions in government expenditure have certainly impacted growth rates, but on balance the US economic recovery is increasingly broad-based.
For equity markets to rise meaningfully, however, we would argue that the expectation of growth in corporate profits needs to become a reality. Profit margins are at all-time highs in the US, but there is room for a meaningful recovery in Europe and Japan. It would be our expectation that after five years of aggressive cost-cutting in Europe – and longer in Japan – that any recovery in corporate revenues leverages into some more impressive growth in net income. This could positively surprise not just investors, but in some cases management teams too, given their much needed aggressive focus on costs during recent tough economic times. However, with valuations having already increased in anticipation of this, any disappointments here mean negative consequences.
Forecasting the weather is a challenging occupation. From what we see, however, largely informed by the hundreds of company management meetings that we conduct globally, we think the weather is set fair. There are those who are warning there is a storm called deflation coming our way. But for now, don't worry, there isn’t...
Global Equity Income
Ben Lofthouse, co-manager of the Henderson Global Equity Income Fund
Global equity returns were strong in 2013 despite subdued GDP growth, government austerity in many major economies, and economic growth in several emerging countries slowing. We are cautiously optimistic that 2014 could provide a similar story. Equity market valuations are higher than a year ago in some markets, particularly Western Economies, but lower in others. Similarly, some sectors have performed very well, and others have lagged. While the opportunities may be different at the start of 2014 than they were a year earlier, stock pickers like us are still finding interesting investment opportunities, and consensus forecasts of 12% earnings per share and 8% dividend growth do not suggest that equity markets are overvalued. While this is our base case it is worth noting that many large economies are recovering from the financial crisis, and any signs that recovery in Europe, Japan and the US is accelerating would, in our opinion, result in significant upside to equity values.
Europe
John Bennett, manager of the Henderson European Focus Fund and the Henderson Gartmore Continental European Fund
We continue to believe that equity markets, on both sides of the Atlantic, have been overbought in the short term and we anticipate a correction in the coming weeks. Nevertheless, we continue to focus our efforts on stock selection rather than the thankless task of market direction guesswork. Indeed, the environment is a fertile one for stock picking. Stocks are once again being priced on their own merits, following the macro-driven “risk on, risk off” jockeying of recent years, where short-term market news or sentiment has driven investors to buy or sell holdings. The ‘risk-off’ sentiment can of course return at any stage, not least since the world’s economic recovery remains a fragile one. Thus, vigilance at the macro level continues to vie with acceptable valuations at the stock-specific level.
Active safety in the car manufacturing industry has joined pharmaceuticals as a key theme in our portfolios. Whereas demand for passenger cars themselves might rise a little, we think some smart component suppliers are really well positioned to see significant growth for their products over the next few years. Right now, we are seeing a shift from passive safety, such as seatbelts and airbags to technology that can stop drivers from having a crash in the first place. The range of development is very broad, and can include things like lane departure warning systems, early braking systems, or even technology that can help you park your car, which many of us already use.
Tim Stevenson, manager of the Henderson Horizon Pan European Equity Fund
Markets are acting in a relatively complex way in Europe at present, being driven in part by demand – people wanting to increase their weighting to Europe – rather than any significant or dramatic improvement in economic data. There is a contradiction here, which seems to be based on potentially exaggerated optimism. While economic news in Europe is marginally better and company news has generally been good, there is a risk people are getting ahead of themselves.
Overall, we anticipate a period of low and volatile economic growth over the next few months. While encouraging economic updates or strong results are possible, markets are also likely to be jittery on the detail of tapering by the US Federal Reserve, any disappointing piece of data or inclement weather conditions that potentially change people’s spending habits.
There has been somewhat of a ‘dash for trash’ in recent months in anticipation of a cyclical recovery that may, or may not, come through. This is a market move in which we have not participated, preferring to maintain our long-term ‘quality growth’ investment style. While this may be considered unfashionable in the current environment, we believe it leaves the fund well-placed for 2014.
Nick Sheridan, manager of the Henderson Horizon Euroland Fund
Euroland has come a long way over the past few years. Countries like Spain and Italy have initiated positive reforms aimed at stabilising their economies and restoring confidence. The current low-inflation environment and muted growth reflects the government spending constraints put in place in recent years. Ultimately, though, we believe that growth is coming through in Euroland, although progress is slow and may be beset by short-term setbacks, either political or economic. We saw this with the negative impact of the US budget deadlock in September/October. Dealing with the high levels of unemployment in the eurozone, particularly in peripheral countries such as Greece, Cyprus and Portugal, is also an issue that Europe’s governing bodies will need to address as a priority.
In terms of the portfolio, our investment process is unchanged and we continue to see a range of good investment opportunities for the fund. The key to our investment process over the past two years has been to identify undervalued companies with established track records that we believe can perform well, regardless of the domestic macroeconomic environment. We strongly believe that an investors’ real return depends on the starting price paid. Buying equities when they are out of favour improves the prospects for better returns in the future and right now, Euroland stocks remain attractively priced relative to the US and UK.
UK commercial property
Ainslie McLennan, co-manager of the Henderson UK Property Unit Trust
During 2013 we have witnessed strong investor flows into the UK commercial property sector, driven by a desire for income-yielding assets. Looking ahead, interest should continue as a result of the sector’s strong fundamentals, namely solid levels of rental income and steady returns, at a time when other asset classes are likely to experience periods of volatility.
An improving economic backdrop should see activity in the development market resume, although this will be dependent on location. The UK occupier market remains extremely mixed with many areas still struggling, which is why a focus on tenant strength, location and sector is extremely important. We believe the market offers the potential for pockets of rental growth in locations and sectors that are exhibiting economic strength. Meanwhile, the market has the capacity and investor appetite to deliver capital growth, particularly as capital values are still some 30% off their historic highs. This growth, however, is likely to be limited and restricted to the South-East and specific niche regional locations. Returns in 2014 are therefore likely to be income-led, highlighting the importance of covenant strength.
The bricks and mortar-based Henderson UK Property Unit Trust remains focused on high-quality properties with a sensible spread of tenants and assets. Key features include its South East bias, where we believe economic growth is set to be strongest, a low exposure to high street retailers, a high occupancy rate and the longevity of the fund’s attractive income stream.
UK Multi Asset
Chris Burvill, lead manager of the Henderson Cautious Managed Fund
The fund’s significant weighting towards equities over the past few years has been based on a simple premise: attractive valuations. We have been positive about the prospects for the asset class, and still subscribe to the view that equities remain undervalued. Markets have come a long way since the start of 2013 though, and we need to keep asking ourselves, ‘what next’? Do we now need economic growth to take over as the driver for further equity performance in 2014? Our answer remains the same: signs of an improving economy might help, but they are not essential.
Overall, while the economic recovery seems to be on track, the short-term direction of the market is less clear. Reflecting this, we have made a tactical call over the past few months to take some risk off the table by securing some profits across the fund’s equity holdings. These profits remain in cash, reflecting a marginally more cautious outlook for the first half of 2014. Nonetheless, the long-term valuation case for UK equities remains strong. The next stage to the market moving higher should come when we start to see better earnings figures filter through to rising dividends.
UK Equities
James Henderson, manager of the Henderson UK Equity Income Fund
The strength of the UK economy continues to surprise many market commentators but not to the extent that people are becoming blasé. Overall, smaller and medium-sized companies, which typically have a higher percentage of domestic earnings, are performing better than large caps. Strong performing companies that have learnt to compete on quality rather than price alone are being re-rated, resulting in the price to earnings dispersion between good and bad widening. These trends look set to continue for some time, which makes it important to run with your winners.
We continue to believe that what matters most over the long term is growing capital within an income discipline. A disciplined cost approach of paying down debt and strengthening balance sheets has led to profit margin expansion. Capital expenditure remains controlled, which is good for investors because the level of growth in the corporate sector is not at a level that would force a significant rise in interest rates. Well-run UK companies are making good returns and have the capacity to grow and add significant value for shareholders. Management remain focused on generating cash, which provides further opportunities in 2014 for dividend growth, special dividends, shareholder buybacks and selective earnings enhancing acquisitions. This, in our view, makes it a good time to be investing in UK companies.
Ben Wallace, co-manager of the Henderson UK Absolute Return Fund
We continue to find good investment opportunities on both the long and short sides of the portfolio in what looks likely to be a sustained period of muted economic growth. Within the portfolio of long positions, we believe that there is considerable value in some businesses that have suffered as a consequence of this prolonged period of low interest rates. A sustained decline in high quality bond yields has hit investment income levels at insurance groups such as Resolution and Phoenix Group. These companies now look attractively priced at current bond yields and should offer considerable upside the Bank of England decides to raise interest rates..
Within the short book we continue to target those companies where we believe management has not properly invested in the business to maintain profits and cash flow over the short term.
Tactically, the fund’s gross exposure has increased over the past few months, reflecting the increase in stock dispersion in 2013. The lower the correlation in share price movements, the greater the opportunity for us to find stocks generating higher or lower returns than the market average. With independent stock characteristics taking centre stage, this provides more opportunities for us to generate profits from long and short stock-picking ideas.
Neil Hermon, manager of the Henderson UK Smaller Companies Fund and the Henderson UK Alpha Fund
2013 has been a very strong year for UK equities; however, we feel that the UK equity market can continue to make progress into 2014. Equity valuations are still not expensive in a historical context and are still attractively valued versus other asset classes. On top of this, the UK economic environment continues to get better, and both business and consumer confidence are improving, which should feed through into increased investment and increased consumer spending. We are optimistic that 2014 should be another good year to hold UK equities.
Retail Fixed Income
John Pattullo, Head of Retail Fixed Income & Jenna Barnard, Deputy Head of Retail Fixed Income
If we wind the clock back to the start of 2013, we stated that our strategy of favouring “double core” bonds – bonds from core companies in core countries – was likely to remain unchanged for the year ahead. A year on and we see no reason to stray from that path. We continue to be mindful of the plethora of small businesses looking for refinancing across Europe as the local banks withdraw financing. We tend to favour larger, less cyclical and geographically diversified businesses to meet our client’s objectives.
2013 turned out largely as we expected; weak global growth, low inflationary pressures, central banks in accommodative mood and occasional political volatility in Europe. Signs of economic recovery in the UK positively surprised and brought forward expectations of higher interest rates; the majority of which are now priced into the bond markets.
As we begin 2014, the higher sovereign yields are encouraging as the market is already expecting interest rate rises. Core government bonds and investment grade corporate bonds may fare better this year — relatively speaking. Their performance is subject to the growing threat of disinflation in continental Europe. Within credit, investment grade industrial bonds offer limited value while we expect considerable volatility via M&A in the telecom sector. Financials, in particular subordinated issues such as contingent convertible bonds (CoCos)*, could prove interesting investments in 2014 and beyond.
In the high yield markets, the default environment continues to remain favourable, with the bulk of funds raised in 2013 used for refinancing debt rather than engaging in aggressive behaviour such as M&A activity or special dividends. We believe the high yield sector will again offer reasonable returns in 2014, given that the search for yield will continue, but as always it is important to own the better quality businesses. However, we are also conscious that credit spreads are tighter as we are a year older in a mature but elongated credit cycle. We intend to use derivatives as an additional and highly liquid investment tool with the aim to exploit shifts in market sentiment or to express views on credit.
In short, opportunities continue to exist, but may be a little harder to find. We feel confident of maintaining the yields on our funds given the very favourable credit environment.
*CoCos convert into equity when a predetermined measure of a bank’s strength is breached. The yield on these bonds is key, as it has to be sufficient to compensate for the danger of being flipped into equity.
Asia
Michael Kerley, manager of the Henderson Asian Dividend Income Unit Trust and the Henderson Horizon Asian Dividend Income Fund
Asia appears attractively valued as we move towards 2014, trading on attractive valuations relative to its own history and relative to developed markets with opportunities for structural growth still abundant. While the US Federal Reserve’s planned reduction of its asset purchase programme may lead to further market volatility in the region, the taper is dependent on improving US economic growth, which in turn will benefit trade with Asia. As observed in the second half of 2013, we expect these episodes of indiscriminate Asian equity market sell-offs to create opportunities for our strategy , which focuses on stocks that we believe are undervalued.
Against this volatile backdrop we expect interest rates to continue to remain low, which will benefit yielding equities. We also expect 2014 to be a strong year for dividend growth as the dash for yield has made traditionally defensive names expensive and dividend growth has become underpriced. In this environment China will continue to be a focus, given the attractive valuations and yield on offer. The recent Chinese Central Committee meeting showcased some ambitious reform measures, which could help turn the recent momentum from positive economic data releases into longer-term sustainable growth trends. In light of this we retain our overweight position in China and continue to focus on dividend growth opportunities benefiting from strong structural growth, healthy balance sheets and strong cash flow generation.
China
Charlie Awdry, manager of the Henderson China Opportunities Fund
After a year in the top job as Communist Party Secretary, President Xi used the November 3rd Plenum to set out an ambitious and positive reform agenda. A commitment to reduce the role of government in business and the economy, together with a formal recognition of the primacy of market forces for determining the price of resources, is a significant step towards economic reform. Major steps are being taken to improve rural land use rights and to improve the ‘hukou’ urban registration system that could boost rural productivity and low end incomes. While the immediate impact on some companies may be to increase costs and pressurise margins, we feel that a more reform-minded policy environment should be welcomed by investors, and any accompanying reduction in risk premiums should boost the price of Chinese assets. Companies that benefit from consumption have performed strongly in 2013. We believe that their outlooks are still strong and so they remain the bedrock of the investment case and the fund. We are optimistic for a prosperous Year of the Horse in 2014.
Fixed income (for SICAV funds)
Credit
Chris Bullock, co-manager of the Henderson Horizon European Corporate Bond Fund, Henderson Horizon Euro High Yield Bond Fund, Henderson Horizon Global High Yield Bond Fund and Henderson Credit Alpha Fund
We will likely look back on 2014 as a déjà vu, characterised by the same contrasting pressures we had in 2013. On one side of the Atlantic we have the Federal Reserve looking to exit quantitative easing in the US without hampering the recovery and on the other side we have a Europe where a uniform policy does not seem to fit all and despite a nascent overall recovery, individual countries are faring very differently. The market no longer views European sovereign risk a central investment theme but another tail risk in portfolio selection and risk management.
With the backdrop of moderate-to-low growth and low inflation, we anticipate a supportive environment for credit markets. Underpinning this constructive view is the low default rate expectation. Default rates will remain low as the capital markets continue to lend to the full spectrum of borrowers, despite the appearance of some more aggressive, but not necessarily late-cycle corporate behaviour. Bank balance sheets continue to repair and strengthen in order to comply with the additional regulatory checks and balances that have been established in recent years.
Credit spreads (excess yield over government bonds) may continue to narrow and credit to perform well overall, but we expect the performance to be concentrated to fewer sectors and offset by the risk of increasing interest rates. We expect high yield to outperform investment grade and subordinated (junior debt that ranks below senior debt in terms of claims on assets) to outperform senior financials on a total return basis. Returns are not expected to move in a straight line, nor be entirely broad-based – timing and stock selection will drive returns, but overall 2014 looks to be a robust year for credit markets.
Economics
Simon Ward, Henderson Chief Economist
A year ago, global real money supply growth was rising and exceeded output expansion. This signalled that economic prospects were improving and there was “excess” liquidity available to boost financial markets. 2013 duly proved a better year for the global economy than 2012 – annual industrial production growth in the G7 and emerging E7 economies rose from 2% in the fourth quarter of 2012 to an estimated 4% a year later. Most risk assets, of course, performed well. Current monetary signals are less favourable. Real money growth is still respectable but has declined from a peak reached in spring 2013. With economies strengthening, it no longer exceeds output expansion. The suggestion is that solid economic momentum will carry over into early 2014 but will fade as the year progresses, while markets no longer enjoy a liquidity tailwind. Central banks are unlikely to deliver additional stimulus against a backdrop of improving labour markets and stable or firmer inflation – monetary trends do not support “deflation” fears. Investors, in summary, should prepare for a more difficult year.
Past performance is not a guide to future performance. 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.
Important Information
Henderson Gartmore Fund
The Henderson Gartmore Fund (the “Fund”) is a Luxembourg SICAV incorporated on 26 September 2000, managed by Henderson Management S.A. This document is intended solely for the use of professionals and is not for general public distribution. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Gartmore Investment Limited in its capacity as Distributor or Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.
A copy of the Fund’s prospectus, key investor information document, articles of incorporation, annual and semi-annual reports can be obtained free of cost from the Fund’s registered office in Luxembourg: 4a rue Henri Schnadt, L-2530 Luxembourg, in Germany: Henderson Global Investors, Bockenheimer Landstraße 24, 60323 Frankfurt, in Austria: Bank Austria Creditanstalt AG, Am Hof 2, 1010 Wien, in Spain: offices of the Spanish distributors, a list of which may be obtained at www.cnmv.es (Henderson Gartmore Fund is registered with the CNMV under number 259); in Belgium: Belgian Financial Service Provider ACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; in Singapore: Singapore Representative Henderson Global Investors (Singapore) Limited, 6 Battery Road, #12-01 Singapore 049909; and in Switzerland from the Swiss representative: BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, CH-8002 Zurich who are also the Swiss Paying Agent.
Henderson Horizon Fund
The Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Fund Management (Luxembourg) S.A. This document is intended solely for the use of professionals and is not for general public distribution. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.
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