For clients that have elected the “Blend” Australian equity option we are buying both Ansell (ANN) and Henderson Group (HGG)

Ansell is a global leader in health and safety protection solutions, currently operating 52 facilities in 35 countries. The business has four divisions each serving a unique end market. These are i) Industrial with multi-use protection solutions specific for hand, foot, and body protection for a wide-range of industrial applications; ii) Medical offering perioperative safety products to protect patients and healthcare professionals alike; iii) Single Use with single-use hand protection solutions focused on the Life Sciences and Automotive Aftermarket; and iv) Sexual Wellness which manufactures and sells condoms and personal products.

We are positive on the outlook for the company for the following reasons:

• New product development efforts continue to drive not only revenue growth but also margin expansion

• the company is expected to benefit from an increasing focus globally on workplace safety standards and medical hygiene

• It is the largest dedicated player globally in protective gloves & clothing with the company’s cost to manufacture estimated to be in the lowest-cost quartile

• With its products used in a variety of industrial manufacturing processes it is leveraged to an eventual pick-up in manufacturing activity

• The agreement with Grainger, the largest US distributor of industrial protection products, will likely see a meaningful boost to volumes

With many of its products exposed to manufacturing activity, organic sales are susceptible to further deterioration in global economic growth. Also, without an effective market in which to hedge the major input costs, an increase in raw material prices (which can be volatile), will increase input costs which may not be passed onto clients hence pressuring margins. The company is however well placed to deal with these challenges.

Henderson is an independent global asset manager with offices in 19 cities around the world and assets under management of approximately £92.7bn. It is dual-listed on the London Stock Exchange and the Australian Securities Exchange. Henderson’s clients range from global institutions to personal investors in a variety of domestic markets worldwide.

The recent sell-off on Brexit concerns presents an attractive buying opportunity and we are positive on the outlook for the company medium term for the following reasons:

• A broad distribution footprint across key markets underpins organic growth

• A diversified product range provides ability to earn performance fees in various market environments

• The build-out of a scalable global platform is largely complete which provides scope for improving operating margins as funds under management (FUM) grow

• The business is well positioned to fund inorganic growth or additional returns to shareholders

• The large % of variable costs enable partial mitigation of negative margin pressure due to declining revenues

While the result of the recent UK referendum does create uncertainty around potential operational changes required for asset managers distributing products into Europe, the actual impact, if any, is likely to be manageable. As for any asset manager the largest driver of revenue is the level of FUM. Notwithstanding the variable costs, the business has inherent operating leverage so near term the greatest risk to margins and profits is a period of sustained market weakness but this has largely been priced in after the company’s recent share price decline.

To fund the purchases we will be selling Fairfax (FXJ) and reducing Perpetual (PPT), the latter to limit the portfolios exposure to pure play asset managers given possible heightened volatility going forward. Fairfax digital subscriber growth remains disappointing relative to our expectations given the very substantial potential audience and importance of successfully converting users to online services to offset declining print readership.

If you have any queries, please contact your Elston adviser.