Henderson Far East Income (HFEL) has released its annual results for the year ended 31 August 2022. Its new chairman, Ronald Gauld, opens his statement by saying that, despite the rather dire backdrop of the last financial year, HFEL rose to the challenge in many ways, producing a positive NAV total return of 1.9% and year-end dividend yield of 8.5%. He says that these results compare favourably with the FTSE All-World Asia Pacific ex Japan Index total return of negative 3.4%, but less well against the MSCI AC Asia Pacific ex Japan High Dividend Yield Index which returned 7.4%. Capital performance struggled once again this year with yield, as an investment style, remaining out of favour.
HFEL’s underlying investment bias is toward value rather than growth. This has weighed on its capital returns, over the last few years, as investors have favoured growth over value. More recently, investor sentiment toward value has improved, benefitting HFEL’s portfolio and resulting in a pickup in relative capital returns. Its manager expects this to continue, at least in relative terms, as economic growth slows in the months ahead. During this period of rising of living costs, investors’ need for dividend income is higher than ever. Reflecting this, HFEL’s shares frequently sell at a premium to its NAV.
Dividends – 15 years of consecutive dividend increases
HFEL paid a total dividend of 23.80p per share in the year ended 31 August 2022 representing a 1.7% increase over the prior year and the trust’s 15th consecutive year of increasing dividends. Gauld says that, while the last financial year has been a challenging one, HFEL’s portfolio companies achieved a good rebound in dividend payments and its forecast for dividends in the current year is cautiously positive. After paying the dividend, HFEL will once again be adding a moderate amount to its revenue reserve, which the board uses to smooth the dividend when market conditions are severe. The 4th interim dividend for the year ended 31 August 2022 was declared on 19 October 2022 at a rate of 6.00p per share.
Manager’s comments on performance
“The Company’s NAV total return was 1.9% in sterling terms over the period with a share price total return of 1% reflecting a small contraction of the premium that the share price trades compared to NAV. This compares with a 3.4% decline in the FTSE All World Asia Pacific ex Japan Index and a 7.4% increase in the MSCI AC Asia Pacific ex Japan High Dividend Yield Index.
“The portfolio benefitted from the increase in the allocation to the energy, materials, telecommunications and financial sectors over the period while the exposure to China and in particular consumer related stocks was detrimental. Of the top ten largest contributors to performance, six were in the telecommunications sector, two in energy and two in financials.
“Notable contributors were Australian gas producers Woodside Energy and Santos, which rose 95% and 44% respectively, telecommunications companies PT Telkom and Singapore Telecom, which rose 53% and 29% respectively and Australian investment bank Macquarie which rose 18%. The portfolio further benefitted in August from the BHP takeover offer for copper miner OZ Minerals at a 30% premium to the prevailing price. The biggest detractors were Chinese software company Chinasoft and auto dealer China Yongda Automobiles which both fell more than 40%.”
Manager’s comments on revenue income
“Dividend income from the region was strong over the period, boosted by the weakness of sterling. Revenue from dividends received was up 9.2% compared to a year earlier while option premium declined 5.8%. Total income was up 8.0% and revenue per share rose 5.1% reflecting the increased number of shares in issue.
“We have been encouraged by the willingness of companies in Asia to hold and increase dividends in 2022 especially in this uncertain period. The energy and materials companies have, understandably, seen the biggest uplift but across different countries and sectors, pay-out ratios have risen reflecting strong balance sheets and increased cash flow. Some of these high-dividend pay-outs may not be sustainable going forward but we are broadly confident that dividends in the region will remain robust, especially if China is successful in reviving its flagging economy.”
Manager’s comments on strategy
“Despite strong performance over the past year, we retain a significant exposure to energy and materials companies. Our focus is on fuels and materials that are integral to the energy transition and are seeing existing and new areas of demand which are constrained by supply. In recent months the price of oil and industrial metals has fallen as the market focused on demand weakness, but the lack of investment in these areas over the last ten years suggests that prices will be underpinned beyond a normal economic cycle by demand for lithium, copper, nickel and similar materials as electric vehicles, alternative power sources and energy security dominate future plans.
We retain our exposure to financials although are increasingly moving towards diversified financials rather than banks. Securities companies in China will take market share in high margin wealth management away from the policy banks, while regional insurance remains a long-term structural growth story. We own CITIC Securities and AIA Group to capture these themes. We are also focusing our bank exposure on South Asia which is seeing system wide recovery and a return to positive credit growth. United Overseas Bank in Singapore and Bank Mandiri in Indonesia capture these trends.
“At the country level, Australia is now the highest weighting with three quarters of the holdings reflecting our positive view on energy and materials. Our view on the domestic economy in Australia is less positive as the government and central bank struggle to set appropriate policies to manage rising inflation, a slowing economy and an elevated property market. We have reduced our exposure to Taiwan and remain nervous about the outlook for the technology hardware sector in the face of a global slowdown. At this point we prefer Korea which has valuation support and is further ahead in the interest rate adjustment phase than its North Asian neighbour.
“Over the period the weighting to China has fluctuated. We increased from low levels early in 2022 on the expectation that the economy would open-up and then reduced in the second quarter following a period of outperformance that coincided with a realisation that Covid-19 suppression, rather than economic growth, would be the main policy goal. We maintain the view that China will eventually succeed in reviving growth, but only after it has embarked on a mass vaccination of the population, especially the elderly. With locally developed mRNA vaccines still in the test phase this will only happen in late 2022 at the earliest, but more likely in the first quarter of 2023. In the meantime, we expect economic policy to be marginally supportive but not sufficient to move the needle. However, with conditions deteriorating in other regions this may be enough for Chinese equities to perform well on a relative basis. We retain a 17% weighting in the portfolio with a focus on diversified financials, materials and consumer discretionary but will most likely look to add as events unfold.”