Henderson International Income Trust – Q3 Commentary 2022
Ben Lofthouse, Portfolio Manager of Henderson International Income Trust, delivers an update on the Company, highlighting factors currently impacting global markets, the key drivers of performance, and recent portfolio activity.
2 minute read
Global equity markets, as measured by the MSCI World Index, rose by 2.2% in sterling terms in the third quarter of 2022. The positive sterling return was largely due to weakness in the pound, which fell on concerns over UK growth and domestic fiscal policy. The Company’s performance comparator, the MSCI ACWI High Yield (ex UK) index, returned -0.75%. Major equity indices fell in local currency terms as high inflation increased the chance of further interest rate hikes, but there was a rally in some of the technology and growth stocks on the hopes that the US Federal Reserve (the Fed) might be nearing the end of its interest rate increases. Emerging markets were especially weak due to disappointing growth in China and the extremely strong US dollar.¹
The Company’s net asset value (total return) declined by -2.1% for the period.¹ Share price volatility belies the fact that the operating performance of companies in the portfolio have in many cases exceeded our expectations in what has been another very difficult environment. Dividends have been paid in line or ahead of expectations. Asia underperformed over the period, particularly the Chinese market, due to continued covid lockdowns. Exposure to the insurance sector was reduced after strong relative outperformance, to invest in existing portfolio holdings where we see greater potential for capital growth.
Inflationary pressures, tightening monetary policy and slowing global economic growth, alongside ongoing geopolitical uncertainty, continues to weigh on investor sentiment and we think further market volatility is likely. While the outlook is challenging, with both business and consumer confidence impacted as costs continue to rise, markets have experienced significant falls this year. This has provided an opportunity to invest in well managed, resilient businesses at more attractive valuation levels. We continue to identify companies with robust free cash flow characteristics and strong balance sheets that we believe are well positioned to navigate the challenging global economic environment.
¹Source: Bloomberg as at 30 September 2022
Inflation – The rate at which the prices of goods and services are rising in an economy. The CPI and RPI are two common measures.
Gearing – Gearing is the measure of a company’s 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.
Monetary policy – The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money.
Net Asset Value (NAV) – The total value of a fund’s assets less its liabilities.
Quantitative tightening – Quantitative tightening (QT) refers to monetary policies that contract, or reduce, the Federal Reserve System (Fed) balance sheet. This process is also known as balance sheet normalization. In other words, the Fed (or any central bank)shrinks its monetary reserves by either selling Treasury’s (government bonds) or letting them mature and removing them from its cash balances. This removes liquidity, or money, from financial markets.
Recession – A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region.It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.
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).
Please read the following important information regarding funds related to this article.
- Higher yieldings 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.
- The portfolio allows the manager to use options for revenue enhancement purposes. Options can be volatile and may result in a capital loss.
- Global portfolios may include some exposure to Emerging Markets, which tend to be less stable than more established markets and can be affected by local political and economic conditions, reliability of trading systems, buying and selling practices and financial reporting standards.
- Where the Company invests in assets which are denominated in currencies other than the base currency then currency exchange rate movements may cause the value of investments to fall as well as rise.
- This Company is suitable to be used as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this Company.
- Active management techniques that have worked well in normal market conditions could prove ineffective or detrimental 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 as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incured by the Company can be greater than those of a Company that does not use gearing.
- If the Company seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
- 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.