For most of the year, markets were remarkably resilient despite the impacts of several major events, from the collapse of three US banks, rising interest rates amid elevated inflation, and conflict in the Middle East.
For Henderson Far East Income Limited (HFEL), while it has been a difficult year from a capital growth perspective, the trust has again been able to increase its dividend, to 24.2p per share for the 2022-23 financial year, up from 23.8p per share in the 2021-22 financial year. This represents a compound annual growth rate of 5.3% since 2006, compared to 4.6% for the FTSE All-World Asia Pacific ex Japan index.
China’s troubles
Asian markets underperformed relative to global benchmarks, largely due to a stronger US dollar and multiple economic issues affecting China.
In general, our Chinese holdings did not perform well this year, against a backdrop of local government indebtedness, youth unemployment and a collapse in property sales volumes and foreign investment. Our exposure to consumer-facing businesses in China suffered as the lifting of pandemic-related restrictions did not translate into greater confidence or higher spending, and trends in this area remain weak.
These headwinds for China also mean we have changed our view on companies that are relatively sensitive to the Chinese economy’s performance, such as manufacturing businesses. Even though these kinds of companies can pay good dividends, we believe it will take some time before the economic issues are resolved. As a result, we have reduced our overall exposure to China in favour of positions in markets with higher economic growth prospects and fewer issues that could affect growth.
Australia is now the biggest geographical exposure in the fund, making up 17.1% of the portfolio at the end of October, with China the second largest at 14.4%. The China weighting marks a reduction of 4.3 percentage points since the end of August.
Recession or no recession?
The strength of the US dollar remains a significant risk factor for Asian economies, as historically this has led investment flows away from Asia and could also be a challenge if it leads them to implement higher domestic interest rates to strengthen their own currencies. Inflation and the possibility of a recession in developed markets are also concerns as they would likely impact Asian companies and consumer confidence. The pace of economic recovery in China will also have an impact on the wider region.
If inflation remains stubbornly high, consumer spending and consumption more broadly could be negatively affected. If this leads to a recession, North Asian markets such as South Korea are most vulnerable given that they have a large number of exporting companies. We have a low weighting to these markets and would expect to retain this in a recessionary environment.
However, if the US avoids a recession and we see evidence that interest rates are past their peak, we believe there could be significant opportunities within Asian markets, particularly those in which inflation is significantly lower and rates are not rising. We will look for companies with valuations that are both attractive relative to global markets and correlated to the potentially improving performance of export partners in developed markets.
Opportunities in South Asia
We are less concerned about our South Asia exposures in either scenario. The economic performance of countries such as Indonesia and India will be shaped largely by domestic consumption trends. This means they could be useful defensive plays against a weak global market backdrop.
We have already increased our exposure to Indian companies in the past 18 months, from less than 2% at the end of August 2022 to 11% as of 31 October 2023.
There are several strong long-term investment themes playing out in South Asia, including India, that we believe present exciting opportunities for investors. These include the continuing development and expansion of infrastructure, efforts to improve financial inclusion in under-banked areas of the region, and emerging domestic consumption champions.
There are also opportunities throughout technology supply chains in Asia, which support global innovation in areas such as artificial intelligence and cloud services.
For these reasons, we remain particularly positive on Indonesian banks, Indian utility companies, Taiwan technology players and emerging Chinese domestic brands – despite our relative underweight position in Chinese companies compared to the benchmark.
| Discrete year performance (%) | Share price (total return) | NAV (total return) |
|---|---|---|
| 30/09/2022 to 30/09/2023 | -8.5 | -4.2 |
| 30/09/2021 to 30/09/2022 | -3.5 | -5.8 |
| 30/09/2020 to 30/09/2021 | 4.4 | 7.6 |
| 30/09/2019 to 30/09/2020 | -11.1 | -11.1 |
| 30/09/2018 to 30/09/2019 | 7.2 | 6.2 |
Glossary
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.
Compound Annual Growth Rate (CAGR) – Measures an investment’s annual growth rate over time, including the effect of compounding (where any income is reinvested to generate additional returns). CAGR is typically used to measure and compare the past performance of investments or to project their expected future returns.
Dividend – A variable discretionary payment made by a company to its shareholders.
Exposure – This refers to the part of a portfolio that is subject to the price movements of a specific security, industry or market, etc. It is typically expressed as a percentage of the total portfolio, eg. the portfolio has 10% exposure to the mining sector.
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.
Risk/risk taking – The acceptance of greater risk in exchange for potentially higher returns. This can apply to both individual investors and companies. An assessment of investors’ attitude to risk forms a fundamental part of identifying a suitable investment strategy for their objectives. For investment trusts: Risk taking is the key measure used to assess risk is volatility of returns, using historic net asset value (NAV) performance of the Company over 1 and 3 years. In this instance volatility measures how much a company’s NAV fluctuates over time in relation to the UK Equity market. The higher a volatility figure, the more the NAV has fluctuated (both up and down) over time. Please note that risk categorisations are indicative and based principally on historic data and should not be solely relied upon when making investment decisions.
Disclaimers:
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).
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Henderson Far East Income Limited is a Jersey fund, registered at IFC-1 The, Esplanade, St Helier JE1 4BP, Jersey, and is regulated by the Jersey Financial Services Commission
Important information
Please read the following important information regarding funds related to this article.
- 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.
- The portfolio allows the manager to use options for efficient portfolio management. 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. These markets can be affected by local political and economic conditions as well as variances in the reliability of trading systems, buying and selling practices and financial reporting standards.
- Where the Company invests in assets that are denominated in currencies other than the base currency, the 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 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.
- If the Company seeks to minimise risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or negative for performance.
- 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.