Henderson High Income held back by gearing – Henderson High Income Trust reported results for the year ended 31 December 2020 yesterday. In a difficult year, the trust generated a return on NAV of -11.4% and a widening discount meant that the return to shareholders was -17.6%. These returns compare to a figure of -6.3% for the trust’s benchmark (80% All-Share Index and 20% ICE BofAML Sterling Non-Gilts). The dividend was increased from 9.8p to 9.9p, this required a modest contribution from the trust’s revenue reserves of 1.32p per share or £1.7m in total. The company still had almost £9m of reserves, well over 8 months’ worth of dividend cover at the end of the year.
Both the equity and bond portfolios performed broadly in line with the respective components of the benchmark, but the gearing and an underweight position in bonds in relation to the benchmark both detracted from relative performance. In the falling equity market, the gearing naturally exacerbated losses, while bonds performed better than anticipated, as a result of central banks’ increased stimulus in response to COVID-19, with the ten year gilt yield falling from 0.8% to 0.2% over the year. The bond portfolio represented 12.5% of the overall portfolio at the close of the year.
Extract from the manager’s report
“The equity portfolio fell 10.1% during the year, performing broadly in line with the FTSE All-Share Index decline of 9.8%. The main detractors to performance were those companies most directly impacted by the pandemic and subsequent government lockdowns. Shares in bus operator National Express, contract caterer Compass Group, events company Informa and hotel operator Whitbread all fell sharply in late February and early March as the restrictions imposed upon populations had a material impact upon each company’s profits and cash flows. Such businesses were forced to cease the majority of their operations, suspend dividend payments, focus on conserving cash and improve their liquidity and balance sheet positions. Each company raised fresh equity during the crisis to shore up their financial strength which we supported, given our belief that the pandemic had not permanently impaired the business models longer-term. Indeed we still maintain holdings in each, despite the prospects of no dividends in 2021, as the roll-out of effective vaccines gives some hope that their businesses will soon start to return to normal, while their repaired balance sheets provide them with the opportunity to take market share once the recovery is sustained.
While the pandemic impacted the majority of companies in the UK market to some degree, it did prove beneficial for a number of the portfolio’s holdings, such as Bunzl and Hilton Food Group. Bunzl sources and distributes non-consumable products, including sanitiser, disposable gloves and masks and other safety equipment, which saw significantly increased demand. Hilton Food Group packages meat-based products for supermarkets globally and benefitted from the shift to food consumption at home. The portfolio’s underweight positions in the oil & gas and banking sectors were also positive for relative performance. Lockdowns significantly impacted the short-term demand for oil-based products while a breakdown in relations between Saudi Arabia and Russia regarding cuts to oil production, caused the oil price to collapse during the crisis, even turning negative at one point. In this environment, both BP and Royal Dutch Shell underperformed and cut their dividends, the latter for the first time since World War II.
Elsewhere it was pleasing to see some of the Company’s overseas holdings performing well. Pharmaceutical company Roche outperformed during the year, as investors sought its defensive earnings, while new additions Deutsche Post and Metso Outotec were also positive for performance. Deutsche Post is a global logistics company which benefitted from increased parcel deliveries given the acceleration towards online shopping caused by the pandemic. Metso Outotec was formed by the merger of Metso and competitor Outotec which has created a global leader in the supply of industrial machinery for the mining sector. Strong profit growth during the year has been supported by robust capital spending by large mining companies and significant merger synergies.
Although the fixed income portfolio marginally underperformed its benchmark, it still produced a positive total return of 7.7% versus the 8.0% rise in the ICE BofAML Sterling Non-Gilts Index. This highlights the benefits of the Company’s unique structure; the ability to own bonds helps dampen the overall volatility of the Company, especially during equity market drawdowns, and diversifies its income stream. The portfolio benefitted from both government bond yields falling, with the UK 10 year gilt yield contracting close to all-time lows of 0.2% as at the end of December, and credit spreads tightening (both positive for bond prices). Both were driven lower by the substantial government support and liquidity provided by central banks, effectively reducing the prospect of material defaults. Holdings in bonds issued by Tesco, Nationwide (preference shares) and Direct Line were the best performers as investors sought their relatively high coupons.”
HHI : Henderson High Income held back by gearing