Henderson International Income Trust Fund Manager Commentary – Q2 2022

Ben Lofthouse, Portfolio Manager of Henderson International Income Trust, delivers an update on the Trust, highlighting the key drivers of performance and portfolio activity over the quarter. Ben also provides his outlook for dividends in the coming months.

Macrobackdrop

Global equity markets, as measured by the MSCI World Index, fell by 9.0% in sterling terms in the second quarter of 2022, mainly due to ongoing concerns about inflation, interest rate hikes and a rising risk of recession.¹ Market declines this year have driven all markets (except the US) to valuation levels below their averages since the early 90s. The Chinese market performed well towards the end of the quarter as lockdown measures eased while cyclical sectors and technology underperformed the broader market due to concerns about global growth.

Trust performance and activity

The portfolio’s focus on reasonable valuations, attractive dividends, strong cash flows and conservative balance sheets has helped protect capital somewhat over the period. The net asset value (NAV) total return (debt at fair value) was -2.2% and included a dividend payment of 1.8p per share.¹

The strongest performers were the energy sector holdings, driven by high oil and gas prices, and holdings in defensive sectors such as consumer staples, telecommunications and pharmaceuticals. Together, these sectors make up approximately 40% of the portfolio.

Companies perceived as cyclically sensitive were the most significant detractors to performance. The technology and consumer discretionary holdings in the portfolio were weak. In most cases, they continued to report strong results, and the fall is more down to investor sentiment. Dividend trends within the portfolio remained positive; the majority of companies increased their dividends year-on-year, and some have paid special dividends.

New positions initiated during the period included Deutsche Telekom, Mediatek, China National Building Material Co and Capital and Integrated Commercial Trust. Positions closed during the period included Quanta Computer, Panasonic, McDonalds, and ABB.

Outlook/strategy

Sentiment has turned incrementally more negative regarding the outlook for global growth and demand, and equities are being rerated ahead of negative revisions from analysts. We think dividend paying stocks with low valuations relative to the market, strong cash flows and conservative balance sheets should be well placed to weather this environment. Growth in earnings is likely to provide less support to market valuations this year, while a focus on cash generative dividend paying stocks means that investors are being paid to wait during this period of high uncertainty.

¹Source: Bloomberg as at 30 June 2022

Cyclical stocks – 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 stocks – 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.

Inflation – The rate at which the prices of goods and services are rising in an economy. The CPI and RPI are two common measures. The opposite of deflation.Valuation metrics -Metrics used to gauge a company’s performance, financial health, and expectations for future earnings eg, price to earnings (P/E) ratio and return on equity (ROE).