Henderson Diversified Income embeds ESG within its investment process – Henderson Diversified Income’s board says that it has decided to make some changes to the trust’s investment objective and policy. It says that this is a continuation of a process which has already seen the trust adopt its new benchmark. The board is keen that the ESG (environmental, social and governance) considerations that the manager applies when selecting investments – which form part of the managers’ focus on investing in debt issued by companies whose revenues and profits are sustainable – are embedded within the formal investment policy.
New objective
The company’s investment objective is to provide shareholders with a high level of income and preservation of capital, through the economic cycle.
The previous wording was “The company’s investment objective is to seek a sustainable level of annual income and capital gains consistent with seeking to reduce the risk of capital losses, by investing in a diversified portfolio of global fixed income and floating rate asset classes.” [The major change is the removal of the objective that the income is sustainable – as yields available change, it can be hard to maintain previous levels of income without taking on unacceptable levels of risk. The reference to having a diversified portfolio shifts to the investment policy – see below.]
New policy
The company invests in a diversified portfolio of global fixed income and floating rate asset classes. The company uses a dynamic approach to portfolio allocation across asset classes and is permitted to invest in a single asset class if required. The company seeks a sensible spread of risk at all times. [A line that said – It can invest in assets of any size, sector, currency or issued from any country – has been dropped for reasons that will become clear below.]
The Company has adopted the following allocation limits for each asset class [this section is unchanged]:
- secured loans 0 to 100% of gross assets
- government bonds 0 to 100% of gross assets
- investment grade bonds 0 to 100% of gross assets
- high yield (sub-investment grade) corporate bonds 0 to 100% of gross assets
- unrated corporate bonds 0 to 10% of gross assets
- asset backed securities 0 to 40% of gross assets
- high yielding equities 0 to 10% of gross assets
- As a matter of policy, the company will not invest more than 10% in aggregate of its net assets in a single corporate issue or issuer.
The company has adopted the following investment restrictions [this bit is new and reflects the commitment to embedding ESG within the process]:
- The company will not make any direct investments in corporate issuers who derive more than 10 per cent. of their revenue from oil and gas generation and production, oil sands extraction, shale energy extraction, thermal coal extraction and power generation, and Arctic oil and gas extraction.
- The company will not make any direct investments in corporate issuers that the board, as advised by the investment manager, deems to have failed to comply with the United Nations Global Compact principles.
- The company will not directly invest in sovereign bond issuers that have been sanctioned by the European Union or United Nations and/or that do not score ‘free’ by the Freedom House Index (or other such similar index as determined by the board as advised by the investment manager) that promotes political rights and civil liberties.
- The company will not make any direct investments in issuers who derive any of their revenue from the production or distribution of fur or from the production or distribution of controversial weapons.
Derivatives
The company may use financial instruments known as derivatives to enhance returns. They may also be used to reduce risk or to manage the company’s assets more efficiently. The use of derivatives may include credit derivatives (including credit default swaps) in addition to interest rate futures, interest rate swaps and forward currency contracts. The credit derivatives, interest rate futures and swaps are used to take a synthetic exposure to, or to hedge, an investment position where the derivative contract is more efficient or cost effective than a position in the underlying physical asset. The company’s exposure to derivatives is capped at a maximum net long or net short position of 40% of net assets.
Gearing
The company may also employ financial gearing for efficient portfolio management purposes and to enhance investment returns, but total gearing (both financial gearing and synthetic gearing combined) may not exceed 40% of net assets. Forward currency contracts are used to hedge other currencies back to sterling.
Any material change to the investment policy of the company will only be made with the approval of shareholders
New co-manager
Nicholas Ware, who we interviewed on the Friday show last week, has been made a co-manager alongside John Pattullo and Jenna Barnard.
Interim results
Over the course of the six months ended 31 October 2021, the trust beat its benchmark, returning 1.9% against 1.3% for the composite benchmark of 60% Global High Yield Credit (ICE BofA Global High Yield Constrained Index), 25% Global Investment Grade Corporate Credit (ICE BofA Global BBB Corporate Bond Index) and 15% European Loans (Credit Suisse Western European Leveraged Loan Index). Unfortunately, the discount widened a little and so the return to shareholders was -2.7%. The dividends continue to run at the rate of 1.1p per quarter.
After a period of very tight credit spreads (the gap between the yield on a bond and the yield on government bonds of equivalent maturity) and very low defaults, the managers note that “The period we are entering is understandably a tougher regime – we have very tight credit spreads, and we are at the beginning of a rising interest rate cycle. Bond returns are often lumpy, and this cycle feels no different.”
Extract from the managers’ report
“New loans we bought in primarily included McAfee Enterprises (a provider of enterprise software security provider), UDG (UK based healthcare consultancy business) and Duravant (provider of automated machinery for food processing and packaging). Valuations on loans were expensive which meant there were no significant other opportunities to add. In high yield bonds significant additions to the portfolio included Medline (US manufacturer and distributor of medical products), Diversey (producer of cleaning and hygiene solutions) and we also invested in ING subordinated financial bond (Benelux bank). We also spent time trimming names where we felt the risk/reward given the inflationary backdrop meant that they would struggle to pass through all the price increases to customers. Given relatively tight valuations these switches were into credits without relinquishing yield or spread.”
HDIV : Henderson Diversified Income embeds ESG within its investment process