It has been more than two months since the UK’s vote to leave the EU shook financial markets. In the immediate aftermath of the vote, domestically-focused small and medium-sized companies struggled due to their perceived exposure to the uncertain economic and political environment. Meanwhile, the share prices of the UK's largest firms, which derive a greater proportion of their earnings overseas, fell to a lesser extent.
The Henderson UK Alpha Fund’s bias to medium-sized companies proved a strain on its performance in the days following the referendum. Concerns over the impact of the UK exiting the EU on consumers also led to share price falls in companies more reliant on consumer discretionary spending for their success. The fund’s exposure to these areas, as well as the financials sector, dragged on returns.
Many of the poorer-performing areas of the market have since recovered much of their losses. That said, the severity of the fund’s underperformance towards the end of June means it has lagged the broader UK stock market over the course of the year so far. Please remember this is over a short time frame and is not a guide to how the fund will perform in future.
Neil Hermon and James Ross, the fund’s managers, took advantage of the market volatility by adding to favoured investments at cheaper prices. This included house builder Bellway, infrastructure company Balfour Beatty and roadside assistance group, the AA. Two new investments in Lloyds and Ryanair were also initiated. The managers view Lloyds shares as undervalued in comparison with their longer-term growth prospects. In their view, the bank is supported by increased levels of capital, which could provide some resilience against future economic shocks, and maintains its capability to pay dividends.
The share price of Ryanair has suffered in the short term, partially impacted by negative sentiment towards the short-haul airline industry amid a number of profit warnings and falling demand. The managers believe Ryanair will eventually emerge as the industry winner, helped by lower costs and progressive growth plans.
Our view on this fund
Neil Hermon and James Ross assumed responsibility for the Henderson UK Alpha Fund in February 2013. They have since focused the fund towards high-quality companies, favouring those with good quality management, strong balance sheets, and healthy cash flows. The fund has exposure to higher risk smaller companies and they have also increased exposure to medium-sized companies where they see some of the greatest growth opportunities. While this has proven a hindrance in the short term, we feel this positioning could add value over the longer term.
Under their management, the fund has delivered strong returns and grown 47.5% compared with 26.3% for the FTSE All Share Index, although this should not be seen as a guide to future performance. Our analysis suggests good stock selection has played a key role in the fund’s performance.
|Annual percentage growth|
| Sept 11 -
| Sept 12 -
| Sept 13 -
| Sept 14 -
| Sept 15 -
|Henderson UK Alpha||-2.7%||17.5%||12.5%||7.5%||11.4%|
Past performance is not a guide to future returns.
Source: *Lipper IM to 01/09/2016
The fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors. Neil Hermon has over 25 years of fund management experience, although most of this is in managing smaller companies rather than larger businesses. James Ross has a limited track record in managing UK shares. We will continue to monitor the fund and inform investors if our views change.