Europe’s ‘cancelled stocks’ baffle A-rated John Bennett

There is much to feel nervous about as we start 2022: higher inflation, the prospect of interest rate rises and supply chain bottlenecks are just a few looming issues. For Henderson European Focus (HEFT) investment trust manager John Bennett, there is something even more pressing. ‘My biggest worry is our utterly hapless and hopeless politicians and what they are doing right now,’ he told Citywire.

‘Russia and China are absolutely laughing all the way to the bank at the nervous breakdown that is going on in the Western world.’ Citywire A-rated Bennett, who also manages the open-ended Janus Henderson European Focus and European Selected Opportunities funds, believes there has been a ‘failure of leadership’ in Europe and the West in general, and this has only been confirmed during the pandemic. ‘What you have, unfortunately, is a generation of seriously weak leaders.

That is being played out in this pandemic, where they are all like dominoes, following each other into panic,’ he said. ‘That, plus the whole greenwashing agenda, COP26, etc. If you look at what China and Russia are doing, they are laughing at us.

In the West, we are cancelling whole industries and companies, like cement and oil. We are going to need them for the transition, so what are we doing?’ The fund manager is particularly concerned about Scotland’s first minister Nicola Sturgeon’s plans to ‘cancel Scottish oil’, as he puts it.

In contrast, he says China is firing up its coal plants. ‘Sturgeon is doing it because it looks good for the Green Party she is in coalition with. They will import the coal or oil, with higher carbon emissions, from China and elsewhere, because it looks good in this grandstanding project.’

Value in a vacuum

The big dilemma Bennett (pictured) currently faces is that some of the best value in the market lies in these ‘cancelled stocks’, such as cement, oil and gas companies. However, the environmental, social and governance (ESG) scorecard ‘exclusionist’ approach that is adopted by some asset managers precludes them from buying into these sectors, making it hard to see what could drive share prices higher. ‘It could be value in a vacuum, as fund managers are not allowed to buy them,’ said Bennett. 

Janus Henderson does not have a prescriptive approach to ESG investing, meaning he and Tom O’Hara – co-manager on the GBP348m (EUR416m) HEFT, the GBP2.2bn (EUR2.63bn) European Selected Opportunities fund, and other European portfolios – are happy to hold unloved stocks they believe can become part of the solution. Cement company Holcim, which was the trust’s largest position at 5.2% at the end of November, is a good example. Bennett said it is leading the way on the decarbonisation of cement and is prototyping 3D-printed layered concrete, which is fully recyclable.

However, even though the stockpicker recognises the company’s growth potential and describes its management team as ‘outstandingly talented’, his patience is starting to wear thin. Unfortunately, I don’t run just my money, I run other people’s money and you can only be as patient as your clients. ‘I have owned Holcim for four years and the stock is back to my book cost.

The market is cancelling it. I am reducing the position because it is a dead weight on my alpha.’ Bennett describes public markets as ‘broken’ because they are failing to provide funding for many companies that are working towards decarbonisation and energy transition.

Backing Daimler

Elsewhere in the trust’s 45-stock portfolio, Bennett has added to Daimler.

He was drawn to its attractive valuation and the management team’s decision to spin out Daimler Truck, which he also owns. In his opinion, the Mercedez-Benz parent is a good example of an undervalued company where there was a catalyst for change. ‘One of the intrinsic merits with Daimler is the split of the Daimler Truck business, where they have crystallised what we perceived as hidden value within the group.

‘It was not just a case of buying any old car, bank or oil stock just because they are “value”. We don’t think that tends to work unless you have a rip-roaring value market that lifts all boats. You have got to insulate yourself and give yourself a downside margin of safety when you are investing in any stock: value or growth.’

As it is a high conviction portfolio and Bennett was keen to hold the newly listed Daimler Truck too, he has taken profits on Stellantis, which owns the Vauxhall and Peugeot brands.

Pitch perfect

Bennett works hard not to get emotionally attached to his investments, but this wasn’t necessarily the case when he joined the Blue Knights consortium in 2012 to save his beloved Rangers FC. The Glasgow-born manager, who has been on the football club’s board since 2015 and is currently vice-chairman, is proud of the club’s turnaround and the progress made so far, including a Scottish Premiership win last season. ‘I am so chuffed that on the pitch we have done that, but also off the pitch we are heading for profitability.

The club was left in a real mess in 2012 and we stepped in and rescued it, but it has been a hard gig.’ He said the club must not rest on its laurels. ‘In the last six months we have been heading for profitability and I am the guy sending emails saying: “Don’t squander this.”‘

This is an abridged version of an article which originally appeared on Citywire Selector’s sister site Funds Insider.