Henderson International Income struggles in chaotic year – over the year to the end of August 2019, Henderson International Income generated a zero return on NAV and a -1.4% return to shareholders. this compares to an 8.0% return for the MSCI World Index ex UK in sterling, the company’s performance benchmark. As the chairman explains “The positive total returns achieved by the market this year suggest a relatively benign environment. The reality is that the economic and political backdrops have been rather chaotic, resulting in significant falls in markets from September to December, followed by an almost symmetrical rally for the rest of the company’s financial year as most major areas of the world continue to deliver reasonable GDP growth, albeit at a lower level than anticipated. For equity market investors perhaps the most significant events in the year have been the escalation of the ongoing trade disputes between the US and the rest of the world, and the change in policy by many central banks from tightening to easing measures in the face of slowing economic growth.
As a result of the political and economic turmoil, investor confidence has been falling over the year and interest rate expectations have moderately declined. At a sector level the strongest performance came from information technology, utilities, consumer staples and healthcare while more cyclical areas such as materials, financials and energy underperformed the market. The US equity market outperformed the MSCI World Index, while Japan, Europe and the UK lagged.”
The dividend has been increased from 5.3p to 5.7p.
Stock contributions to returns
Top 10 contributors to relative return vs benchmark -------------------------------------------------------- Ranking Company % 1. Nestlé 0.74 2. ENEL 0.59 3. Anta Sports 0.58 4. Coca-Cola 0.46 5. Microsoft 0.42 6. LAM Research 0.39 7. CyrusOne 0.38 8. BE Semiconductor 0.35 9. Novartis 0.34 10. HKT Trust and HKT Ltd 0.32 Top 10 detractors from relative return vs benchmark -------------------------------------------------------- Ranking Company % 1. Vermillion (0.86) 2. Occidental Petroleum (0.68) 3. China Petroleum & Chemical (0.62) 4. Nordea (0.60) 5. Swedbank (0.58) 6. BASF (0.57) 7. Indorama Ventures (0.43) 8. Eurocommercial (0.39) 9. ING (0.35) 10. DuPont de Nemours (0.34)
The table shows relative return versus the benchmark, so registers the impact of both stocks held in the portfolio and those not held but which have been significant drivers of the benchmark.
The manager says “The top ten stocks all returned over 20% over the year. They are all industry leaders in their respective fields and are generally growing and/or exposed to structurally growing areas. ENEL, for example has been transitioning from a largely European regulated utility to a renewable energy company. Both Nestlé and Coca-Cola are starting to see improved revenue growth after refocusing on new product innovation for several years.
The technology sector is well represented in the portfolio by data centre operator CyrusOne, semiconductor equipment manufacturer LAM Research, and software and data management company Microsoft. These companies have continued to grow revenue and have been rewarded by the market for their future potential.
At the other extreme, the biggest detractors to performance have a cyclical bias. Although they are in different sectors chemical company Indorama Ventures, oil companies Occidental Petroleum and Vermilion, and property company Eurocommerical have all taken advantage of low prices to make acquisitions, to which the market has reacted negatively for now. Whilst the capital performance has been disappointing they have maintained their dividends and are very attractively valued so they continue to be held in the portfolio. Nordea, ING and Swedbank are mainly retail banks with conservative balance sheets, but whilst their loan books have shown very little signs of impairment their valuations have proved to be very sensitive to interest rate expectations and have de-rated as economic growth has slowed in Scandinavia.
Whilst it is disappointing that these stocks have underperformed, it is worth noting that several of the largest, best performing holdings in the portfolio for the last few years were purchased when they were largely being ignored by investors. ENEL, Microsoft, and Cisco Systems were all companies whose futures were being questioned when purchased. The team’s investment process is driven by stock selection, based on fundamental qualitative analysis and a strong valuation discipline. Dividends from these companies allow investors to be paid to remain invested until a valuation anomaly corrects. At this time the underperforming holdings have been retained as the valuations are now very attractive with significant dividend yield premiums for each.”
HINT : Henderson International Income struggles in chaotic year