Jenna Barnard, co-fund manager of Henderson Diversified Income Trust, explains why there has been little change in the Trust’s portfolio and why the team have no intention of altering the portfolio. Jenna also discusses the change in mind set by central banks as being more in line with the way in which the Trust is run.
Q:Hello and welcome to this latest video update for the Henderson diversified income trust. Today I'm joined b co-fund manager Jenna Barnard. Jenna, thank you very much joining me today.
Now first of all what can you share with us about your activity on the HDIV portfolio since the end of the year?
A: Frankly there's not been a huge amount of change in the portfolio. It's expensive to trade corporate bonds and we have a relatively strict style so any bond that makes it into the portfolio should adhere to our style of sensible income. So, no cyclical exposure, no companies with huge operational leverage. We just want dull, boring, reliable businesses albeit with a reasonable amount of debt so we get a decent coupon. We’re not the kind of fund managers who are looking to trade small cyclical changes in the market, trade a rebound in growth for a month or a quarter, it’s just how we think. We think about fixed income thematically. So, what is the climate of fixed income investing in? For us that’s a low inflation, low growth backdrop throughout the developed world.
What's interesting this year is central banks are starting to come round to that view of the world. Having panicked about a potential pickup in inflation last year central banks like the Federal Reserve in the US are now saying there's not enough inflation— we've under shot inflation for 10 years. So in a way the world and the market and central bankers have come round to the way we’ve been thinking for a number of years. And the portfolio is positioned to reflect that.
We're not shy of longer dated quality investment grade bonds, which have a lot of duration or interest rate risk inherent in those bonds. And within the high yield market we’re very focused on the upper end of that market kind of quality BB rated, as I said, sensible companies.
So I think actually for us we haven't done a huge amount in the portfolio that reflects the way that we think and manage the assets and what's really changed is the narrative, the narrative in markets is much more sympathetic to the way that we think, whereas last year was more of a struggle, certainly for the first nine months of the year.
Q:What's the significance of the change in mind-set by central banks as you mentioned? What does it mean for your view of the world?
A: Yeah well I mean the pause from the Fed in terms of interest rate hikes — and I think probably the end of interest rate hikes in the US for this cycle — is very important because they were pretty much the only central bank in the developed world, with the exception of Canada, who had an actual interest rate hiking cycle. We did not have a rising rate environment in most other countries.
You had the occasional flip-flopping from the likes of the Bank of England to cut and then hike, but very modestly, which is really nothing in the grand scheme of things and a number of countries have only cut interest rates since 2015, including the ECB, Japan and Australia. So it’s a very divergent world of interest rate policy, a very unusual interest rate cycle globally and, as I said, with the Fed being the only normal central bank in a sense. The fact that they've had to hold interest rate rises with a two- and-a-half percent interest rate, which is very low in the grand scheme of things, sends a very important message; we are stuck in this low interest rate, low inflation, low growth environment and I know a lot of people are being sceptical and anchor back to the 1990s or the early 2000s.
We’ve never been of that view and the core message is that it’s very hard to get out of a low interest rate environment. It’s very hard for any one domestic central bank to generate inflation. There’s a global theme going on here, which frankly central banks aren’t really in control of individually.
So what does that mean? It means bond yields are lower as you would expect. Bond yields have really collapsed since November/December, even in the US but also in many other markets. And the bond market is starting to get the sense that interest rates may never go back to a normal level or whatever you think that normal level might be. So it's quite profound and it's very important and we now have a sense that the peak in interest rates is behind us.
As a bond investor we’re thinking how low do interest rates go in the next downturn and not only that but once they get to the zero bound or in some cases negative interest rates, what else do they do. Do they do quantitative easing? Do they use fiscal policy? Does monetary and fiscal policy start
working together? There's going to be a whole new regime and I think that's where the mentality of bond investors is increasingly focused.
Q:And lastly what can we reasonably expect to see from the HDIV portfolio over the remainder of the year? What’s the strategy?
A: If we’re right, nothing frankly. As I said, it’s expensive to trade corporate bonds. We don't want to trade corporate bonds. There's a natural need to reinvest when you have maturities or bonds being bought back by issuers and we have to then reinvest the proceeds or an interesting new issuer comes to market that we haven't seen before and like.
But generally if we’re right about the world and we’ve done the right credit selection and adhere to that sensible income style then ideally we don't want to do anything on the portfolio. There may be market opportunities but I think the chances of bond yields, government bond yields, moving materially higher this year is actually quite low, so there is unlikely to be an opportunity for us. In my view, a bigger risk is that bond yields actually collapse even from here.
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