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Henderson High Income outperforms in first half of 2023

Henderson High Income (HHI)

Henderson High Income (HHI) has published its interim results for the six months ended 30 June 2023 and, against what was a volatile period for financial markets, the trust provided a net asset value total return of 3.0%, outperforming its benchmark, which returned of 1.9%. HHI’s share price total return of 2.0% was marginally ahead of the index, reflecting a small widening of the discount during the period.

HHI began 2023 with an overweight position in equities and an underweight position in fixed interest investments compared with its benchmark (80% equities, 20% bonds). This position has not changed markedly during the first half of 2023 and the company’s gearing is also largely unchanged – 21.3% as at 30 June 2023 versus 21.4% as at 31 December 2022 (a proportion of the company’s borrowings are at fixed rates).

Dividends

HHI pays quarterly dividends and the first interim dividend for the current financial year of 2.575p per share was paid on 28 April 2023, while the second, also 2.575p per share, was paid on 28 July 2023. A third interim dividend of 2.575p per share was announced on 17 July 2023 and will be paid on 27 October 2023 to shareholders registered at the close of business on 15 September 2023 (with the shares being quoted ex-dividend on 14 September 2023). HHI’s chairman, Jeremy Rigg, says that looking across the corporate sector at recent results announcements it is encouraging that dividend payout levels continue to be relatively healthy and, notwithstanding the impact of higher borrowing costs on end demand and corporate profitability, UK corporate balance sheets remain in generally good health.

Based on prospective income levels from HHI’s portfolio of investments and the company’s current dividend reserves, the board continues to have confidence in the company’s ability to deliver a high income return to shareholders.

Outlook

Rigg says that, in the near term, the outlook for markets will be driven by inflation expectations and the impact this will have on monetary policy. There are certainly some signs that inflation is easing a little, particularly in the US and across Europe. However, inflation in the UK is proving more problematic, and although the Bank of England has increased interest rates significantly in the first half of 2023, the expectation in the market is that they may have to rise a little further.

The UK corporate sector is in the midst of the interim results season and whilst there are certainly pockets of weakness, corporate results are for the most part holding up well. In particular, UK banks have announced positive updates showing relatively little sign of corporate and personal sector weakness, and capital levels within the banks are at very positive levels. In addition, the UK housing market, which is very important to the UK economy, is holding up reasonably well at this stage.

UK companies, where the majority of HHI’s portfolio remains invested, still appear to be relatively attractively valued in a global context, in Rigg’s view, while still delivering income levels should help HHI deliver a high income return while also retaining exposure to longer term capital growth.

Fund manager’s comments on markets

“After a strong start to the year for equity markets on fading recessionary fears and good corporate earnings, the UK market pared back some of those gains as a result of higher-than-expected inflation and the subsequent rise in interest rates. The FTSE All-Share Index returned 2.6% on a total return basis, which lagged both US and European equity markets. While inflation continued to fall from its peak in October last year, it remained stubbornly high in the UK, with the Consumer Price Index (CPI) rising 8.7% in May. This prompted the Bank of England to raise interest rates four times in the period, from 3.5% to 5.0% as at the end of June. UK government bond yields also rose during the period due to concerns about inflation and the prospect of interest rates staying higher for longer, with the 10-year gilt yield increasing to 4.4% at the end of June, from 3.7% at the beginning of the period.

“Larger cap companies continued to outperform mid-caps with the FTSE 100 up 3.2% versus the 0.6% decline in the FTSE 250. Sectors such as consumer discretionary, industrials and financials performed best, while consumer staples, basic materials and telecoms lagged.”

Fund manager’s comments on performance

“The Company’s NAV (with debt at fair value) rose by 3.0% during the period, outperforming the Company’s benchmark return of 1.9%. Within the equity portfolio, holdings in 3i, B&M European Retail and Whitbread were positive for performance. Private equity group 3i announced strong trading from its largest holding, European discount retailer Action, which supported a significant uplift to its NAV. B&M is another discount retailer held by the portfolio which also delivered robust results, as pressure on consumer spending led to an increase in customers “trading down” to B&M’s value proposition. Whitbread, the owner of budget hotel chain Premier Inn, reported good trading momentum with the company benefitting from the investment it made during the pandemic to emerge in a strong position versus its competitors. Elsewhere the portfolio’s positions in Anglo American and British American Tobacco (BAT) detracted from returns. Anglo American shares came under pressure from falling commodity prices and fears the Chinese economic recovery was stalling, while BAT’s underperformed after it stopped its share buyback program and announced it was to pay $635 million to the US Department of Justice for a historic breach of sanctions in North Korea.”

Fund manager’s comments on portfolio activity

“During the period the allocation to bonds was increased, taking advantage of the move higher in yields on UK investment grade credit. Bonds were purchased in typically non-cyclical businesses such as Sky (media) and EDF (utilities). The bond portfolio represented 11.5% and 13.9% of portfolio gross and net assets respectively as at the end of June.

“Within the equity portfolio new holdings were established in MoneySuperMarket.com, Conduit Re and DCC. MoneySuperMarket.com is the market leading price comparison website in the UK and should benefit from consumers looking to manage their bills in the current high inflation environment. Conduit Re is a specialist property and casualty reinsurer with a diversified portfolio of reinsurance risks. Capacity has reduced significantly in the reinsurance market after a number of years of large losses, and as a result, the market is entering a period of strong premium rate rises which should underpin high returns over the medium term.  DCC, an international sales, marketing and distribution company operating in the LPG, oil, technology and health care sector, has a resilient business with strong free cash flow, high returns and a robust balance sheet which should support further accretive acquisitions. The Company sold some of its overseas holdings during the period, including McDonalds, Deutsche Post and Nordea after a period of good performance.”

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