Analysis of Henderson European Focus Fund
analysis, mutual fund

Today’s piece in Barron’s profiles the Henderson European Focus Fund (HFEAX; Class A shares). This $3.7 billion European equity fund has a 5.75% maximum sales charge, 1.31% operating expense and 75% turnover. According to the article

Under [the manager’s] guidance, the fund has returned an average of 14% a year, more than twice the MSCI Europe index.

The primary benchmark for the fund is the MSCI Europe Index. The only available ETF tracking this index, the iShares Core MSCI Europe ETF (IEUR), has been in existence since June 2014. Therefore, we will instead use the iShares Europe ETF (IEV) for comparison purposes. Alpholio™’s calculations show that since inception the fund returned more than the ETF in approximately 93% of all rolling 36-month periods, 87% of 24-month periods and 84% of 12-month periods. The median outperformance over a rolling 36-month period was 23.5%.

While comparing returns is useful, it does not account for the fund’s risk. Let’s apply a variant of Alpholio™’s patented methodology which constructs a dynamic reference ETF portfolio for each analyzed fund. The ETF membership in such a portfolio is fixed but the ETF weights can change over time to better track the analyzed fund. Here is a chart of the cumulative RealAlpha™ for the Henderson European Focus:

Cumulative RealAlpha™ for Henderson European Focus Fund (HFEAX)

Over the past 11 years, the fund generated about 4.5% of the regular and 4.1% of lag annualized discounted RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). However, the fund did so mostly since 2009 and with high volatility: its standard deviation was around 22.5% vs. 19.5% for the reference ETF portfolio. The fund’s RealBeta™ of 1.22 also underscores its risk.

The following chart illustrates changes of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for Henderson European Focus Fund (HFEAX)

The fund had top equivalent positions in the iShares MSCI United Kingdom ETF (EWU; average weight of 30.6%), iShares MSCI Germany ETF (EWG; 14.3%), iShares MSCI Canada ETF (EWC; 11.2%), iShares MSCI Eurozone ETF (EZU; 11.1%), iShares MSCI Italy Capped ETF (EWI; 8.5%), and iShares MSCI Sweden ETF (EWD; 7.5%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

It is worth noting that according the fund’s summary prospectus

Under normal circumstances, the Fund invests at least 80% of its net assets in equity securities of European companies.

This supports the finding that at times the fund had a considerable exposure to Canadian stocks (or natural resources), as indicated by its equivalent position in EWC.

Under the same management since inception, the Henderson European Focus Fund added a significant amount of value, although at the expense of elevated volatility. The fund’s steep front load detracts from its appeal. At times, the fund had significant distributions (e.g. over 5.8% of NAV in 2011), which could potentially make it less suitable for taxable accounts going forward.

To learn more about the Henderson European Focus Fund and other mutual funds, please register on our website.


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Analysis of Henderson Global Equity Income Fund
active share, analysis, app, mutual fund

A recent piece in Barron’s covers the Henderson Global Equity Income Fund (HFQAX; Class A shares). This $3.7 billion fund has a front sales charge of up to 5.75% and a relatively low expense ratio of 1.09%. According to the article

International stocks often pay dividends annually rather than quarterly, allowing the fund’s managers to move in and out of stocks based on the timing of their payouts. That’s how the fund manages a robust 6.03% trailing 12-month yield, even though the average yield among the fund’s holdings is around 2.8%. Of course that also leads to a high turnover rate – at 103% it’s nearly twice the category average. This is a fund best-suited to a tax-advantaged account. The globe-hopping dividend fund has a four-star rating from Morningstar and has outpaced 95% of its peers over the past five years, with an average annual return of 8.33%.

The primary benchmark for the Henderson Global Equity Income fund is the MSCI World Index. One of the accessible implementations of this index is the iShares MSCI World ETF (URTH). Alpholio™’s calculations show that since that ETF’s inception in January 2012, the fund returned more than the ETF in about 18% of all rolling 12-month periods and 6% of rolling 24-month periods. However, this ETF has arguably too short a lifespan to serve as an adequate reference for the fund whose inception date was in November 2006.

The fund’s strategy to capture and pay out infrequent dividends can be emulated from a total return perspective. In the simplest application of Alpholio™’s patented methodology, both the membership and weights of ETFs in the reference portfolio for the analyzed fund are fixed over the entire analysis period. Here are the cumulative RealAlpha™ chart and the related statistics for the fund, generated by the Mutual Fund Service of the Alpolio™ App for Android:

Cumulative RealAlpha™ for Henderson Global Equity Income Fund (HFQAX)

Statistics for Henderson Global Equity Income Fund (HFQAX)

The fund added a miniscule amount of value over the static reference portfolio but did so at the expense of slightly higher volatility (standard deviation of returns).

Here is the reference portfolio for the fund over the same analysis period:

Statistics for Henderson Global Equity Income Fund (HFQAX)

The fund had equivalent positions in the iShares Europe ETF (IEV), iShares MSCI United Kingdom ETF (EWU), iShares Global Consumer Staples ETF (KXI), iShares Global Telecom ETF (IXP; weight of 8.6%), iShares U.S. Telecommunications ETF (IYZ; 8.3%), iShares Global Healthcare ETF (IXJ; 6.0%), and five additional ETFs with smaller weights. The equivalent positions in the iShares 1-3 Year Treasury Bond ETF (SHY) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 5.4%) represented the fixed-income holdings of the fund.

According to the current factsheet, to date the Henderson Global Equity Income Fund

…has provided 100% dividend income and has not returned shareholder capital

Therefore, the article’s statement on the fund’s unsuitability for taxable accounts is somewhat misguided, especially given the current tax treatment of dividends received by moderate income investors. Nevertheless, the above analysis has demonstrated that so far the fund could have been effectively substituted, from a total return perspective, by a fixed portfolio of ETFs. It is also worth noting that the high active share of the fund (over 90%, according to the factsheet) is undoubtedly a result of a frequent equity hopping to sustain its high dividend. This is an example of a strategy whose high active share does not necessarily result in a significant risk-adjusted outperformance.

To learn more about the Henderson Global Equity Income and other mutual funds, please register on our website.

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