David Smith, Fund Manager for Henderson High Income Trust, reflects on how the Trust has performed over the first half of the year and how the Trust has benefitted from strong market conditions. David also highlights the latest portfolio activity, specifically how the Trust is positioning itself more defensively.
Q: Hello and welcome to the latest video update for the Henderson High Income Trust. I'm joined by fund manager David Smith. David, thank you for joining me.
So we're coming up to the halfway point in 2019 so perhaps it'd be quite nice to reflect briefly on the first six months of the year in terms of performance and markets generally. What's your take been?
A: Well the markets have been strong globally, the equity markets, the U.K. FTSE all share is up 70% to the end of May and I think what's driven that has been a bounce back from the lows we saw in Q4. But also central banks across the globe have actually become a lot more dovish so we're probably expecting rate cuts rather than rate increases where we were thinking this time last year.
The Trust performed well, so the Trust's NAV is up 12% over that time period. Good absolute performance and good to see us outperforming the benchmark and the index as well. I think the key drivers for us within the trust have been our financial exposure. So where we own the likes of Jupiter, Intermediate Capital, Phoenix, the life insurers, these companies really benefited from those strong market conditions. But also some of the results coming out from those companies have been robust over that time period as well.
Q: And in keeping with the portfolio, has there been much activity in the second quarter of the year?
A: We've previously talked about trying to go a little bit more defensively with increasing the bond exposure. I think within the active portfolio we've also focused on trying to go a little bit more defensive and what I mean by that is buy and sell those companies whose profits aren't linked to the global economy. So one of the new additions is Sanofi, the French pharmaceutical company, so yes we're a UK equity trust but we're utilizing our ability to go overseas and we're buying a pharmaceutical company, particularly a French one.
We like the company fundamentally as well, don't get me wrong, they've got a new management team and they're very focused on cost efficiencies and improving those margins, which are a lot lower than where the competition are. But also reinvigorating some of their research and development and really focusing on the drugs they've got some core competencies on.
So actually that should help drive the top line further out. So I think shorter term we've got a good margin story, longer term I think we could potentially have a good growth story coming through. Looking at the valuation it looks pretty attractive versus the sector and the dividend is yielding at about 4.5%, that's quite attractive given we should see dividend growth to top that up as well.
Q: Now David, lastly I wanted to touch on the investment trust structure for which there are some benefits over open ended funds. For example, the ability to withhold revenue for a rainy day. So as a trust focused primarily on delivering a high income stream for shareholders, what's the approach for paying shareholders and contributing to revenue reserves?
A: Yes certainly over the last couple of years I think it's been a prudent balance between the two; focusing both on paying the dividend and trying to grow that dividend but also putting a little bit away into those revenue reserves. The objective of the trust is to provide that high level of dividend. Although not a specific objective, one of the aspirations of the board and me as manager is to try and grow that dividend into the future as long as it's sustainable into the longer term. If you look at the track record over the last six years we've actually grown the dividend around about 2.5% per annum, which is slightly above inflation over that time period.
At the same time, we've also put that money into revenue reserves as well. And actually we've grown revenue reserves up to about 9 months’ worth of dividend cover as of the end of last year. So I think we've done a good job, certainly in the medium term, to be able to balance those two and I think that really does set the company up in good stead if actually the outlook for income becomes much more tougher from here.