Henderson International Income has announced results for the year ended 31 August 2015. Over that period the fund underperformed the MSCI World ex UK Index on an NAV basis – returning 2.1% against 5.0% for the benchmark but the fund moved from a discount to a premium and so the return to shareholders was 12.2%. The dividend rose from 4.25p to 4.5p.
Ben Lofthouse’s manager’s statement looks at the drivers of both income growth and performance.
He says that across the portfolio dividend growth has been strong which has allowed the Company to grow its dividend again this year. The strongest dividend growth has come from some of the portfolio’s technology companies, driven by strong balance sheets and excellent cash generation. After coming through a period of significant investment in new capacity, Taiwan Semiconductor Manufacturing increased its dividend by 50%, computer storage device manufacturer Seagate Technology raised its pay-out by 25%, and following several years of double digit growth Microsoft continued its progressive dividend policy with an 11% dividend increase. The portfolio has a significant weighting to financial services companies where the normalisation of dividend payments across the sector is ongoing. Within the portfolio French insurance giant AXA increased its dividend by 17% year on year, Swiss lender Cembra Money Bank increased its dividend by 9%, US retail bank PNC Financial Services provided an increase of 6%, and life and non-life insurer Scor Se announced an 8% increase. Other notable increases from some of the largest positions in the portfolio included theme park operator Six Flags Entertainment with an increase of 11% in its quarterly dividend, media company Nielsen – 12%, Reynolds American – 7%, Lockheed Martin – 13% and Novartis – 6%. It has not been plain sailing however and integrated oil producer ENI announced that it would be reducing its dividend by almost 30% for 2015 in response to falling oil prices. The exposure to oil and oil services companies has been reduced significantly over the last twelve months from over 10% to less than 5%, and the position in ENI was 1.2% at the year end so it represents a small exposure in the portfolio.
The strongest regional portfolio was North America, returning 8.7% over the period, followed by Europe which returned 5.6%, and then Asia-Pacific which generated a -7.6% return. Gearing enhanced the capital returns by 0.6% over the year. The MSCI World (ex UK) Index (sterling adjusted) returned 5% over the period.
All of the regional portfolios have outperformed their respective benchmarks, but performance relative to the benchmark has been held back by the portfolio’s large weight in Asia-Pacific relative to the index (30% exposure on average over the year). Currency played a significant part in the weak performance of the region in a global context; the Australian, New Zealand, and Korean currencies fell 17%, 18% and 7% respectively against sterling over the year, offsetting some good stock selection at a country level.
In the US portfolio the strongest performers were Reynolds American, which is in the process of further consolidating in the US tobacco industry, theme park operator Six Flags Entertainment which is seeing good attendance growth and price increases at its sites, and defence company Lockheed Martin whose restructuring activities are being well received by the market. The weakest performers include Macau Casinos, which have been hit by Chinese government action to crack down on corruption and the positions in Las Vegas Sands and SJM Holdings were weak as a result. The position in SJM Holdings was sold during the period. Loyalty programme operator Aimia was impacted by worse than expected contract terms with one of its key partners.
The threat of deflation in Europe has spurred the European Central Bank into action and its launch of quantitative easing (‘QE’) has had the result of weakening the currency significantly whilst driving equities higher. The overall effect to the portfolio has been positive and holdings such as securities exchange operator Deutsche Boerse, insurance company Scor Se, and French house builder Nexity have all appreciated significantly even in sterling terms, despite the 8% depreciation of the euro over the year. Only time will tell whether QE will be effective, but, he believes, in the short term the fall in currency, precipitous fall in energy prices, and fall in interest costs across the Eurozone over the last eighteen months are all likely to be positive drivers of economic activity in the coming months, which he hopes will drive many of the Company’s holdings earnings growth higher. Whilst weak energy prices will benefit energy users and importers they are not good for power generating utilities or oil producers and unsurprisingly German utility RWE and oil companies Total, PetroChina and ENI were weak as a result. These positions were initiated on the view that management were more focused on investor returns and cash generation, an investment case that was playing out, but unfortunately the fall in energy prices will undoubtedly make this harder to achieve. The position in RWE was closed in April when it became apparent that the dividend cover was going to be lower than we expected. The energy sector exposure was reduced significantly in the first half of the year through sales of oil services operators Sembcorp Marine and Seadrill, and integrated oil company PetroChina. The average sector position in energy was significantly lower than that of the index and this was one of the most significant positives to relative performance at a sector level.
In the Asia-Pacific region a number of the strongest contributors to performance were Chinese holdings, including online gaming company NetEase, which saw strong earnings growth during the year. During the first half of the year the Chinese stock markets rallied significantly in response to Central Bank action to address falling inflation and slowing growth. The portfolio’s exposure to Chinese equities had been increased in 2014 on valuation grounds. The sharp rally resulted in a realisation of much of the value in some positions and some positions were reduced or closed completely including NetEase, Bank of China, property companies Wharf Holdings and Shimao Property, and conglomerate NWS Holdings. With the benefit of hindsight this was well timed because subsequent actions to dampen the stock market have unfortunately resulted in a sharp market correction.
HINT : Henderson International Income rating improvement drives performance