Having bond exposure in a world of uncertainty

04/06/2019

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​For an investor looking for income, the ability to invest in both equities and bonds can be beneficial, particularly in the current investment climate, says David Smith, Fund Manager of Henderson High Income Trust.


When economic growth is looking fragile and uncertainty creeps into equity markets, having the flexibility to diversify your exposure to different asset classes can be beneficial – particularly for income-seeking investors.

At Henderson High Income Trust (HHI), we have the ability to invest in bonds (government and/or corporate debt) in order to diversify the income generated from the underlying holdings and reduce the overall volatility of the Trust.  In recent years, government and investment grade corporate bonds (the higher quality bonds as defined by the rating agencies), have offered little in way of income for investors given the level of interest rates and bond yields. That has been reflected in the Trust’s positioning with around 90% typically invested in equities. However, with yields becoming more attractive recently we decided to move part of the portfolio out of equities and into bonds, specifically US investment grade corporate bonds, including some well-known companies like Amazon and McDonald’s.

End of cycle?

Over the past 12 months there have been signs that the global economy is slowing at the same time as corporate profitability and equity markets are close to peak levels.  Closer to home, the UK is surrounded by Brexit and political uncertainty so we believe it’s prudent to both move defensively and consider other markets for investment opportunities.  Having the ability to own bonds and invest overseas are key benefits of the Trust in this regard.

Why US bonds?

With the US Federal Reserve increasing interest rates, we saw an opportunity late last year to buy investment grade US corporate bonds, yielding on average an attractive 4.5%, which hasn’t been possible for some time. The rationale was two-fold: firstly, it meant we could reduce our exposure away from equity markets by allocating more to bonds without impacting the income of the Trust; and secondly, it presented an opportunity to diversify away from the UK by buying the debt of US companies.  Increasing the bond exposure also helps reduce the overall volatility of the Trust’s net asset value (NAV), given bond prices, especially investment grade credit, generally fall less than equities in more challenging economic environments.  Having increased the Trust’s exposure to US investment grade bonds, the overall bond portfolio is now 19% of net assets.

Borrowing

The bond portfolio has always been a key feature of the Trust; it dampens the overall volatility of the NAV and offers a predictable revenue stream. The other important aspect of the Trust is its ability to use gearing*, especially to fund the bond portfolio given its relative stability, to help enhance the overall income of the Trust.

With the Trust’s borrowing costs currently lower than the yield on the bond portfolio, we have utilized gearing fully to fund the bond portfolio, which boosts the revenue generation and helps support the Trust’s 5.5% dividend yield.  It also means that within the equity portfolio we don’t have to chase the highest yielding areas of the market where dividend cuts and value traps are more prevalent.  With this structure the equity portfolio can continue to own some high quality companies with attractive dividend growth prospects.

Given the increasing probability of an economic slowdown and uncertainties in the UK, we have utilized the Trust’s ability to own bonds and invest overseas to position the Trust more defensively. 

*Gearing is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes and is normally expressed as a percentage of net assets


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 High 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.
  • If a trust's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio diversified across more countries.
  • 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.
  • 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 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.
  • 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.
  • Some of the investments in this portfolio are in smaller companies shares. They may be more difficult to buy and sell and their share price may fluctuate more than that of larger companies.

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