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.

 

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