Henderson International Income Trust very marginally underperformed its benchmark over the year to 31 August 2016. The total return on the net asset value was 26.9%. The return on the ordinary share price was 24.0%. These returns compare to a total return of 27.2% in the MSCI World (ex UK) Index (sterling adjusted). They also announced a dividend increase from 4.50p to 4.65p.
The ongoing charge to the company for the year to 31 August 2016, as calculated in accordance with the Association of Investment Companies (the ‘AIC’) methodology is 1.01% (2015: 1.11%). The ongoing charge should fall further when the full year impact of the reduced management fee and larger asset base takes full effect.
Several of the top ten holdings, for example, increased their dividends by double digit percentages including Cisco Systems (24%) and Taiwan Semiconductor Manufacturing (33%). All of the Company’s holdings contribute to income generation and the diversification across sectors and geographies is designed to enhance the portfolio’s dividend stability. The weighted average income yield on the portfolio at year end was over 4.0%.
The manager says the strongest performing portfolios have been the Asia-Pacific and North American portfolios, which returned 40% and 38% respectively. Despite some signs of economic stabilisation and continued central bank stimulus European returns were lower at 17%. Stock selection has been strong and the returns of each portfolio exceeded their respective benchmarks. The portfolio return was in line with the benchmark, but the strong stock selection was offset by the relative weakness of the overweight position in Europe. The geographical and sector allocation of the portfolio is largely driven by stock selection. The stock selection process focuses on identifying undervalued companies that are well invested, market leading and generate enough to profits and cash to finance both dividends and appropriate growth investments. Dividends from these companies allow investors to be paid to remain invested until the valuation anomaly corrects. The European market has many such companies, both domestic and global, and its current unpopularity with investors provides an interesting investment opportunity. For this reason the European exposure within the portfolio has been maintained.
At a sector level falling interest rate expectations have generally driven a re-rating of defensive dividend stocks, and a de-rating of many financial stocks. Within the portfolio, this trend explains in part the strong performance of defensive stocks like tobacco company Reynolds American and Australian REIT Scentre, and the weak performance of insurers AXA and China Life.
In the US portfolio the strongest performers were document storage company Iron Mountain, which is in the process of acquiring a competitor to enhance profitability, Lockheed Martin, which has generated outstanding cash flows whilst growing the business, and theme park operator Six Flags Entertainment where growing revenues underpin an attractive dividend yield. The weakest performers include fund manager Och-Ziff, which has been investigated for its sales practices in some countries. The burden of legal costs have resulted in a dividend cut and the position has been sold. Data storage company Seagate operates in a consolidated market, but despite this price deflation has been higher than expected. Concerns around the dividend mean that this position has also been closed.
The largest positive contributors in the Asia-Pacific portfolio included technology companies Taiwan Semiconductor Manufacturing. It has a clear technological lead in its industry and has been successfully winning orders. Meanwhile the Chinese online gaming company NetEase, launched some very successful new products that will enhance its growth profile.
Within the European portfolio the strongest performers included French house builder Nexity and Deutsche Post. Nexity reported stronger than expected sales growth driven by low interest rates and government initiatives to boost house building. German parcels and logistics company Deutsche Post continued to see parcel delivery growth as a result of online retail trends. The weakest performers included pharmaceutical companies Novartis and Roche. The sector has been impacted by the highly publicised actions of a few, high profile companies. Nevertheless the companies held in the portfolio have good drug pipelines and diversified portfolios which should drive future earnings and dividend growth.
HINT : Henderson International Income charges fallling