For individual investors in the UK

Finding income amid falling rates – Henderson High Income Investment Trust

As the rate of inflation continues to fall, the Bank of England will come under pressure to cut interest rates. Henderson High Income Investment Trust has identified several areas that should deliver high income levels for investors but also the prospects of capital growth in a falling rate environment.

David Smith, CFA

David Smith, CFA

Portfolio Manager – Henderson High Income | Deputy Portfolio Manager - The City of London Investment Trust


15 Nov 2023
6 minute read

Key takeaways:

  • The Bank of England’s Monetary Policy Committee appears to be at the end of its interest rate hiking cycle with the next move likely to be down over the next 12 months.
  • Despite an uncertain economic outlook for the UK, we believe valuations already price in those uncertainties.
  • We have identified several sectors, and companies within them, that have attractive dividends and could outperform in a falling interest rate environment.

Surging inflation in recent years prompted central banks, including the Bank of England, to raise interest rates. However, as price increases continue to moderate, pressure will slowly build for rates to come down to prevent the economy from slipping into recession.

Indeed, at its latest meeting the Bank of England held rates at 5.25% for the second month running. We believe this is a sign that the interest rate hiking cycle is probably over and rates are likely to be cut over the next 12 months or so. Investors should therefore start to consider companies that offer the potential for outperformance in a falling interest rate environment despite an uncertain economic outlook, given we believe valuations already price in those uncertainties.

There are some exciting high-dividend opportunities in the UK market that could benefit if interest rates are cut, that we hold within Henderson High Income Investment Trust:

Housebuilders

Falling interest rates should be a strong driver for the housebuilding sector. More affordable mortgage rates, coupled with falling inflation driving real wage growth and relieving cost pressures, would typically fuel demand for housing. The housebuilding sector is also well-capitalised and is very unlikely to experience the kind of fire-sale observed during the Global Financial Crisis of 2008, which had a detrimental impact on house prices.

In this sector, we own Taylor Wimpey as we believe much of the economic bad news is already reflected in its share price. It has recently been trading at a 20% discount to its net asset value (NAV) – the value of the land and property held on its balance sheet – which we think represents good value. The company also has £860m of cash on the balance sheet as of year-end 2022, which means its 8.7% dividend yield should be sustainable even in more difficult times. In fact, the dividend has been stress tested by the company who believe it can still be funded up to a 20% fall in house prices and a 30% decline in sales volumes.

Building materials

In the building materials sector, a fall in interest rates should help stimulate construction for both residential and commercial properties. Genuit is one of the leading providers of plastic piping systems for the residential, commercial and infrastructure sectors.

The company benefits from several structural tailwinds enforced by government regulation, while new management is restructuring the business to drive cost efficiencies and higher margins over the longer term. Further, Genuit has a an attractive balance sheet and a decent dividend yield of 4.3% with the potential to grow.

Self-storage

The commercial real estate sector also benefits from any cuts to interest rates, as it should lower the cost of capital and make development projects more value-accretive, i.e. generate greater profits. In this sector, we like self-storage, a structurally growing market in the UK with penetration rates significantly lower than in more mature markets such as the US and Australia. Businesses have recognised its value as a storage solution for logistics, adding to more traditional demand from home movers.

Big Yellow is a self-storage company with a powerful brand and high-quality estate focused on London and the South East. It recently raised money that will help fund the development of its existing pipeline of new facilities, which should generate good returns and underpin future earnings and dividend growth. However, its share price valuation currently sits at a 10-year low with a dividend yield close to 5%.

Retailers

Finally, a drop in interest rates aligned with a corresponding fall in inflation should ease the pressure on consumer spending and benefit retailers. In this sector, fashion retailer Next is a high-quality company with a strong digital platform driving most of its profits.

Next’s platform draws on all its assets – stores, warehouses, delivery networks, systems, marketing and credit facilities – to create a powerful aggregation business. It sells hundreds of third-party clothing and homeware brands alongside its own merchandise in the UK and, increasingly, Europe. Its expert management team, attractive balance sheet and attractive valuation make it worthy of consideration, with the company repeatedly revising its earnings expectations upwards.

Balance sheet – A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Capital – When referring to a portfolio, the capital reflects the net asset value of a fund. More broadly, it can be used to refer to the financial value of an amount invested in a company or an investment portfolio.

Discount – Refers to a situation when a security is trading for lower than its fundamental or intrinsic value. The opposite of trading at a premium.

Dividend – A variable discretionary payment made by a company to its shareholders.

Inflation – The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.

Yield – The level of income on a security over a set period, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price. For investment trusts: Calculated by dividing the current financial year’s dividends per share (this will include prospective dividends) by the current price per share, then multiplying by 100 to arrive at a percentage figure.

Disclaimers

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.

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), (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).
Janus Henderson and Knowledge Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc

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.
  • Some of the investments in this portfolio are in smaller company shares. They may be more difficult to buy and sell, and their share prices may fluctuate more than those of larger companies.
  • 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.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • 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.