For financial professionals in the UK

Steady and predictable income – The Henderson Diversified Income way

Investors have been scrambling to find yield that can cushion their portfolios from high interest rates and elevated inflation. As such, some have been reaching for yield, ignoring the risk this entails. In an era where uncertainty and volatility are the new normal, we believe that sticking to the tried and tested is the best approach to a steady and reliable yield.

Jenna Barnard, CFA

Jenna Barnard, CFA

Co-Head of Global Bonds | Portfolio Manager


John Pattullo

John Pattullo

Co-Head of Global Bonds | Portfolio Manager


Nicholas Ware

Nicholas Ware

Portfolio Manager


1 Jun 2023

A reliable approach to income

Over the past year, bond yields have risen significantly, lifting fixed income return expectations to their most attractive point in well over a decade. Some non-investment grade bonds are yielding north of 8.0% – a rate that seems compelling following years of lacklustre bond returns. As such, some investors have been piling into these higher yielding assets in an attempt to recoup the income lost in leaner years. Given the current market backdrop, we don’t believe this is the right approach.

At Henderson Diversified Income Trust, we focus on delivering a ‘sensible income’ to our investors. We focus on investing in quality, large-cap, less cyclical, and modern facing businesses with a strong reason to exist in the post Covid-era. We look for companies that have high cashflows and sustainable revenues to that we can generate a stable and reliable dividend for our shareholders.

In this inflationary and high interest rate environment, we feel far more comfortable occupying the role of the tortoise than that of the hare, and we believe our investors feel the same way. This harks back to our objective, which is to provide shareholders with a high level of income and preservation of capital, through the economic cycle. The latter part of that statement is particularly pertinent during periods of economic stress and helps guides our investment thesis away from short-termism. That being said, we are nimble enough to take the short-term wins, as long they align with our longer-term objectives.

Quality matters

With the days of ‘cheap money’ well in the rear-view mirror, banks and lending markets have tightened up their lending terms significantly due to rising higher interest rate and recession concerns. Historically, when lending standards have meaningfully tightened, higher-yield default rates have risen, pushing yields higher and lifting spreads to compensate investors for the additional risk. For those looking for a steady and reliable income, this is not a rosy picture. Hence why finding quality companies with solid fundamentals and management teams that can navigate them through challenging times is now more important than ever.

In recent months, we have been increasing our exposure to high-quality investment grade bonds. In addition to a reliable income, these bonds can provide diversification and be a source of resilience during challenging times. While last year was an exception, credit spreads and interest rates typically move in opposite directions, so we believe this inverse relationship can provide a valuable cushion against a difficult market. For example, while credit spreads may be expected to widen during a recession as company fundamentals deteriorate, this could potentially be offset by a fall in government bond yields as markets anticipate a cut in interest rates to boost growth.

To tactically take advantage of the current interest rate environment, we have also been investing in shorter-duration bonds. These bonds have a shorter time to maturity – usually 5 years or less – and tend to be less risky than their longer-duration counterparts. Given the current backdrop, we believe short duration bonds offer the potential to preserve principal, minimize interest rate risk whilst providing an attractive income for those investors seeking to take advantage of today’s elevated bonds yields.

Remember your North star

While there may be higher yields in the market, it’s crucial to understand the risks they come with. So while we might forgo investing in a bond that generates a higher yield, we fully grasp the implications this could have on our longer-term return profile. As former Wall Street Analyst, Raymond DeVoe Jr once said, “More money has been lost reaching for yield than at the point of a gun.” By keeping things simple and sticking to our tried and tested investment process, we continue to provide our shareholders with a diversified income strategy that can deliver a steady and consistent income through various market cycles.

Cash Flow – Cash that a company generates after allowing for day-to-day running expenses and capital expenditure. It can then use the cash to make purchases, pay dividends or reduce debt.

Cyclical – 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.

Diversification – A way of spreading risk by mixing different types of assets/asset classes in a portfolio. It is based on the assumption that the prices of the different assets will behave differently in a given scenario. Assets with low correlation should provide the most diversification.

Volatility – The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. Higher volatility means the higher the risk of the investment.

Important information

Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

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These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

Marketing Communication.

 

Glossary

 

 

 

Important information

Please read the following important information regarding funds related to this article.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions.
    Specific risks
  • If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio that is diversified across more countries.
  • Higher yielding bonds are issued by companies that may have greater difficulty in repaying their financial obligations. High yield bonds are not traded as frequently as government bonds and therefore may be more difficult to trade in distressed markets.
  • This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
  • Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
  • The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
  • The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
  • The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.
  • All or part of the Company's management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time.