Henderson High Income says its NAV total return for 2023 was +9.8% compared with the benchmark return of +8.1%, an outperformance of +1.7%. Unfortunately, the emergence of a discount meant that the share price total return was +0.9%, with the share price ending the year at a discount to NAV of 7.7% having started 2023 at a small premium of +0.6%.
The dividend increrased from 10.15p to 10.35p and this was covered by earnings of 10.39p.
The chairman says that the outperformance was mainly due to good equity stock selection and a positive contribution from gearing.
Holders of approximately 55% of Henderson Diversified Income’s shares became shareholders in the company in January 2024. This meant that the company was able to issue about £72m worth of new shares which will improve the liquidity and marketability in the company’s shares and also help to spread the company’s fixed costs across a larger shareholder base which is in the interests of all shareholders.
Extracts from the manager’s report
The equity portfolio gained 10.4% on a total return basis during the year, outperforming the FTSE All-Share Index return of 7.9%. The portfolio’s holdings in financials 3i and Intermediate Capital were positive for performance. Private equity group 3i benefitted from its portfolio holding in Action, the European discount retailer, which delivered strong profit growth underpinned by its value proposition and its store roll out strategy. Despite a more difficult macro environment, alternative asset manager Intermediate Capital continued to attract inflows with the company delivering its 4-year fundraising target a year ahead of expectations.
The portfolio’s positions in other consumer stocks that offer value to customers also performed well. B&M European Value Retail saw good growth in volumes benefitting from more cost-conscious consumers given the “cost of living” crisis. Tesco also outperformed with the company’s drive to become the cheapest full line grocer producing market share gains, good profit growth and attractive cash flow. Elsewhere, holdings in Hilton Food Group and RELX also aided performance. Hilton Food Group reported resilient trading in its core meat division, while management action to improve its troubled seafood business showed progress with the business back in profit by the end of the year. RELX announced strong organic growth ahead of its historic average, benefitting from its continued investment in technology tools and analytics.
On the negative side the portfolio’s holdings in British American Tobacco, Anglo American and NatWest detracted from returns. British American Tobacco announced a payout of $635 million to resolve investigations by the US Department of Justice into the company’s historical business activities in North Korea. It also disappointed the market with weaker trading, the suspension of the share buyback and a non-cash impairment charge of £25 billion relating to the Reynolds acquisition in 2017. Anglo American shares were impacted by falling PGM (Platinum Group Metals) prices, while the announced reduction in production guidance towards the end of the year also disappointed investors. Despite higher interest rates, NatWest reported weaker margins given increased competition in savings and mortgage products.
The fixed income portfolio rose 4.6% on a total return basis during the year, but this lagged the 8.6% return from the ICE BofA Sterling Non-Gilts Index. The portfolio’s exposure to short duration government bonds was detrimental to relative performance given the underperformance of gilts relative to UK corporate bonds. The weakness in the US dollar also created a headwind to relative performance for the US bond holdings. Holdings in high yield bonds, such as Direct Line, Bupa, CenterParcs and Virgin Media, were positive for performance given the more resilient UK economy saw credit spreads tighten during the year.
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