The Opportunities in Volatility - Henderson International Income Trust

20/06/2018

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​Volatility has crept back into global markets after a good run in the past few years, but its good news for active income investors (i.e. a team of fund managers that aims to beat an index rather than a fund that tracks an index).

Uncertainty in markets is an advantage for active stock-pickers and we are seeing plenty of opportunity to add high dividend-paying stocks at good valuations to the Henderson International Income Trust.
 
Technology stocks have gradually become important names in the Trust’s portfolio, which is not something you would have heard from an income-driven fund manager just a few years ago and is a clear reflection of the changing times.
 
Janus Henderson’s latest Global Dividends Index revealed tech stocks have grown their dividends far more than any other sector since 2010, while bottom of the class is utilities, which is also the smallest sector weighting in the portfolio (<5%). Dividend growth momentum has been evident in the tech sector for some time and we have been monitoring the technology companies globally for opportunities to buy at attractive valuations.
 
There are several technology stocks in the Trust’s top ten holdings, including Taiwan Semiconductor Manufacturing (2.7%), Cisco Systems (1.9%) and Microsoft (3.7%), which is also the Trust’s largest holding overall.
 
Active advantages
 
An advantage of volatility in markets for active managers is the ability to capitalise on nascent trends – and the reversal of trends. For example, oil companies and banks are showing signs of a return to their high-dividend paying days pre-financial crisis. This comes after a substantial period of financial turbulence for both sectors.
 
The financial sector was targeted by regulators around the world in the wake of the crisis. In the main, banks, insurers and lenders were instructed to improve their balance sheets with stronger reserves and rainy day money. That did lead to a dip in the sector’s dividends for some time. Since then, lots of financial companies have been increasing capital positions and economic growth has helped them improve their financial health, so we are seeing better than expected growth from the banking sector across the board.
 
Banks make up roughly 15% of the Henderson International Income Trust (HINT) portfolio and our exposure is globally diversified, including but not limited to Japanese group Mitsubishi UFJ Financial, China Construction Bank, Natixis and Nordea, while Dutch banking conglomerate ING Groep is the largest bank holding in the portfolio at 2%.
 
The oil sector’s dividend-paying ability suffered after a pretty hefty shock between 2014 and 2015 when the price of crude oil dropped more than 50%. Following that shock, many companies were failing to cover their dividends even when oil was $100 per barrel a day.
 
Now they are very focused on generating cash and for the first time in years they are covering their dividends with cash. We have been increasing exposure to them gradually over the past 18 months with the additions to the portfolio US companies Occidental Petroleum and Chevron.
 
Prioritising prudency
 
The purpose of HINT is to provide global diversification and that means maintaining a diversified portfolio both geographically and on a sector basis. The US is our biggest country weighting (36%), with China (9.3%), France (8.7%), Germany (8.3%) and Switzerland (8.1%) completing the top five country exposures.
 
As well as maintaining sufficient diversification, it is also important to consider value. Valuations are important to total return, income is one part of it, and the value at the point of investment also has a significant impact on your longer term capital returns.
 
The Trust is currently not using the gearing facility (the ability to borrow money). We have the ability to add up to 25% and we have been up to 16% before. We tend to be counter cyclical to the market with the gearing, so by that I mean investing in companies whose attractions are underappreciated and using the gearing when people are worried about markets. At the moment people are worried about lots of things but the actual level of the market has appreciated a lot over the last couple of years, so we’ve allowed the gearing to run down.
 
Looking ahead, the global dividends prognosis is good. Dividends tend to lag earnings, which are strong, and the tax changes in the US are generating much higher earnings with some of that expected to come back in dividends. Commodity prices are higher, which in part will generate much more sustainable dividends and on top of that interest rates are still low, so I think we could see good dividend growth over the next 12 months.

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. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. 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.

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Important information

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

Henderson International Income Trust plc

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.

Past performance is not a guide to future performance. 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.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), 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 Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Specific risks

  • Active management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • This trust 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 trust.
  • The trust could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the trust.
  • The return on your investment is directly related to the prevailing market price of the trust’s shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the trust. As a result losses (or gains) may be higher or lower than those of the trust’s assets.
  • 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.
  • 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.
  • Where the trust 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.
  • The trust may use gearing as part of its investment strategy. If the trust utilises its ability to gear, the profits and losses incured by the trust can be greater than those of a trust that does not use gearing.
  • If the trust seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • 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.
  • All or part of the trust'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.
  • The portfolio allows the manager to use options for revenue enhancement purposes. Options can be volatile and may result in a capital loss.

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