Fund Overview
This Fund seeks to achieve long-term capital appreciation primarily through investment in equity securities of companies domiciled in the US. The Fund is managed by a team of Portfolio Managers who use a bottom-up investment process. The Asset Allocation Strategist, Robert Villiers, oversees the management of the Fund and the allocation of the Fund’s assets among regions and sectors. The three teams of Portfolio Managers focus on investing in companies undergoing positive fundamental or special situation changes. They view these companies as attractive potential investment opportunities as they may offer unique and potentially superior investment opportunities.
* On November 20, 2006, the Board of Trustees of Henderson Global Funds approved a change of name and some of the investment policies for the Henderson U.S. Core Growth Fund. Effective November 30, 2006, the Henderson U.S. Core Growth Fund has changed its name to the Henderson US Focus Fund.
Quarterly Commentary
Global markets have been rocked by the collapse of the US financial sector. It's unsurprising that the collapse of an institution such as Lehman Brothers with a heritage dating back to 1850 - followed by the enforced takeover of Merrill Lynch and the emergency bailout of AIG, draws parallels with the great stock market crash of 1929. After Black Thursday, the Dow Jones took a quarter of a century to recover. Will 2008's meltdown provoke a similarly prolonged depression?
However, while the financial sector is forced to take its medicine, the short-term pain in some instances may prove beneficial in the long-run. We have long held the view that there were too many US banks fighting for market share and that a period of consolidation was necessary. As this enforced merger and acquisition (M&A) continues, and as the Federal Reserve's aggressive interest rate cuts and other liquidity injections take effect, the industry may steadily becomehealthier. Those institutions strong enough to survive the cull may be well-placed in the years to come, however this remains to be seen.
Fund performance
Performance was disappointing over the period, with the Fund underperforming its benchmark, the S&P 500 Index. Negative results were led by Owens Illinois. The company announced very poor numbers, where the weakening European economy has de-railed the pricing improvements that were driving the investment thesis. Apart from that one name, the Fund's Fundamental sub-portfolio has suffered from being too exposed to energy related stocks, and to economies outsidethe US.
Positive performance was led by Bank of America. This is the only traditional bank stock in the portfolio, and we are sticking with it. The acquisitions of Countrywide and Merrill Lynch are not without risk. However, we believe both deals make strategic sense. Bank of America is gaining a valuable private wealth management franchise in Merrill Lynch, and could emerge stronger once the dust settles.
Investment activity
In terms of portfolio positioning, the Fund remains underweight the Financials sector, although we have been steadily - and selectively - reducing the scale of this position since the start of the year. We have continued to avoid those banks with balance sheet risks that are difficult to assess. Therefore our exposure is in companies with strong franchises who we believe could emerge from the credit crisis in a stronger competitive position.
The Fund recently opened a position in Lazard, a firm thatoffers M&A advice and investment management services. We feel this is a strong direct play on the acceleration of strategic M&A.
Outlook
For US investors looking to take some positives out of therecent announcements, it is encouraging that earnings expectations for 2009 are being steadily re-set, presenting the opportunity for upside surprise as the economy slowly begins its recovery. The price of oil and commodities has come down significantly of late, with oil now back to its levels at the start of the year. We believe this may suggest that inflation could be less of a concern going forward and may provide respite for the US consumer. Outside of the Financials sector there remain some well-managed companies with strong balance sheets and valuations that do not appear over-stretched.
The US banking sector and broader economy has started to see an unparalleled policy response, something that has yet tohappen in most other major economies. In our view, the crisis in the financials sector will lead to continued volatility, but it is becoming clearer who the long-term survivors will be. At the stock-picking level we believe there are still opportunities to find attractively valued companies that have been indiscriminately downgraded by the market and that may be at the forefront of a recovery, however we will see how this theory plays out in the coming months.