Henderson High Income Trust Fund Manager Commentary – August 2022

Macro backdrop

During August, the FTSE All Share Index fell by 1.7% as high inflation stoked fears of an economic recession in the UK.¹ July’s Consumer Price Index (CPI ) rose above 10% for the first time in over 40 years and the Bank of England warned that inflation could hit 13% in October.² In response, the central bank hiked interest rates to 1.75%, the highest level since 2008. Concerns about UK economic growth and political uncertainty over the UK’s next Prime Minister caused the pound to fall over 4.5% versus the US dollar during the month.¹ Sectors such as oil and gas, banks and tobacco outperformed while industrials, consumer discretionary and financial services lagged. The 10-year UK gilt yield rose significantly during the month, finishing August at 2.8% -up from 1.9% at the end of July.¹

Trust performance and activity

The Trust’s net asset value (with debt at fair value) fell 2.8% during August, underperforming the FTSE All share (80%) & ML Sterling NG (20%) benchmark’s return of -2.5%.¹ Disappointing performance within the equity portfolio and the negative impact of gearing were the main detractors from performance.

Within the equity portfolio, holdings in housebuilders, Persimmon and Vistry Group, detracted from returns. Fears over continued interest rate hikes by the Bank of England and their impact on housing affordability weighed on sentiment for the sector. Positions in Hilton Food Group and Cranswick were also detrimental to performance. Concerns over CO2 shortages – a gas used in both companies’ operations – caused by rising energy costs put pressure on the share prices.

Elsewhere, the fund’s positions in British American Tobacco and Imperial Brands aided performance, as investors sought their defensive characteristics and attractive cash flows given the uncertain economic outlook. The position in Woodside Energy also benefited performance, supported by rising gas prices and good results which included a higher than expected dividend increase.

During the month, we continued to lower gearing given the uncertain economic outlook, reducing the equity holdings in more cyclical businesses such as Anglo American and Rio Tinto. We also sold out of the position in Volvo, the European truck manufacturer. Although the company continues to be well managed, potential slowdowns in the trucking and construction markets are not fully discounting in the current valuation in our view.

¹Source: Bloomberg as at 31 August 2022.

Glossary Expand

Cyclical stock – Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies

Defensive stock – A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. There is a constant demand for their products, so defensive stocks tend to be more stable during the various phases of the business cycle.

Gearing – Gearing is the measure of a companies debt level. It is also the relationship between a companies leverage, showing how far its operations are funded by lenders versus shareholders. Within investment trusts it refers to how much money the trust borrows for investment purposes.

Net Asset Value (NAV) -The total value of a fund’s assets less its liabilities.