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Henderson’s Lofthouse is losing patience with Euro recovery

Henderson’s Lofthouse is losing patience with Euro recovery

Ben Lofthouse (pictured), co-manager of the Henderson Global Equity Income fund, has reduced his weighting to European consumer names struggling with continued weakness in spending growth.

Europe is the £695.7 million global fund’s biggest regional weighting, with 11% in Switzerland, 20% in the UK and 25% in the rest of region.

‘We increased our European exposure gradually last year because of valuations. It looked very cheap versus other areas of the world and it has some world class companies such as Novartis and Roche,’ Lofthouse said.

But the Citywire AA-rated manager is disheartened by the fact that, six years after the economic crisis, Europe is still struggling to display any significant growth. The eurozone registered a paltry 0.2% GDP expansion in the first quarter, down from 0.3% in the last three months of 2013.

Lofthouse questioned member countries’ reliance on the European Central Bank (ECB), which recently announced it was taking deposit rates negative in an attempt to kick start business lending.

‘The rate of growth across Europe is still subdued and disappointing. We had hoped by now we would get some growth from the underlying economies. It’s good the ECB is doing something, but bad that it had to,’ he said.

Consumer-facing names have been hit particularly hard, and Lofthouse’s fund recently sold white goods manufacturer Electrolux. While sales had improved, it was not enough to offset the reduced price competitiveness of a strong euro.

Underweight retailers

Lofthouse is underweight European retailers in general, as consumer spending has failed to materialise, and has also been selling down European financials. This is partly because they have done well recently and also because the outlook for insurers looks more negative as they sell products linked to interest rates.

One area set to benefit for the ECB stimulus is real estate, as investors turn to property to find yield now that rates will stay lower for longer.

On this basis, the fund has added to Reits, including Icade, which invests predominantly in French property.

Although the ECB has paved the way for quantitative easing and a host of other measures to promote growth, underlying countries are not doing enough to secure the recovery, Lofthouse said.

‘We are looking for indications from Europe that they are ready for growth. We have seen the ECB do that, but not governments,’ he added.

Avoiding utilities

Unlike other income funds, Henderson has shied away from utilities, where the fund has only had 3% in the past year, as governments look to win popularity by freezing energy prices.

‘Income funds tend to have more but we do not have a large exposure because there is not a lot of growth there, and as we have seen in Germany, Spain and in the last year in the UK, it has turned out to be quite politically charged,’ he said.

Elsewhere, the manager said what global markets really want to know now is whether the poor GDP data coming out of the US is symptomatic of the terrible weather conditions it experienced earlier in the year, or more fundamental problems.

‘What we are seeing now is how bad that period was,’ he said. ‘The question for markets now is whether we will see a really strong rebound in the second half of the year, and this has muddied the water.’

Although GDP shrank by 2.9% in the first quarter, Lofthouse thinks from a bottom-up perspective, US companies are better positioned for growth than their European counterparts

‘The one [thing] we are really looking out for is what the US does for the rest of the year. There has been some good manufacturing and consumer confidence data. It’s our single biggest country exposure and I think they have more substantial reasons for growth than Europe.’

The fund has been topping up its exposure to internet technology companies in the US in the hope that they will start spending.

‘On a company level we see that the US is recovering. They need to have some more capex, and if that does happen then I think people will be much more comfortable about markets,’ he said.

Lofthouse co-manages the Global Equity Income fund alongside Andrew Jones. In three years to the end of May the fund has returned 39.9% versus 29% for the Citywire global equity sector, while in five years the fund has returned 101.4% versus 83.3% for the sector. 

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