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Investment trust insider on Henderson Diversified Income

Investment Trust Insider on Perpetual Income and Growth

Investment trust insider on Henderson Diversified Income – James Carthew: the bond fund shunning loans in a slowdown

For some time now, the economic headlines have been getting gloomier. Hopes of an end to trade hostilities buoy markets from time to time, as do hopes of a resolution to Brexit. Nevertheless, a consensus has grown over the prospect of a global recession. What if things aren’t as bad as they seem though?

That is the question that the managers of Henderson Diversified Income (HDIV) have posed. The £177 million trust has had a great year with a 14.8% return on net assets over the past 12 months that puts it top of the AIC Debt – Loans and Bonds sector.

This time last year, when the US central bank was talking about raising interest rates to choke off a booming US economy, HDIV’s managers John Pattullo and Jenna Barnard were convinced the global economy could not escape the low growth, low inflation, low interest rate rut it had been mired in since 2008/9.

They weighted the portfolio towards higher yielding, long-duration or interest rate sensitive bonds and reaped the rewards when the Federal Reserve decided it had made a mistake and began cutting rates again.

In October last year HDIV’s managers’ views were firmly out of favour but today this is not the case. Even as equity markets hit new highs, many commentators say we’re seeing a last hurrah before a global recession. If things turn out better than forecast, a bias to long duration assets may be unhelpful as everyone piles out again.

If the slowdown broadens – at the moment it seems to be concentrated in manufacturing inventory – HDIV’s portfolio should continue to do well. Pattullo and Barnard know they need to be vigilant and respond quickly if necessary. In particular, they are looking at job vacancy and employment data for any sign that problems in manufacturing are spilling over into the services sector.

No to CLO
One significant decision the pair made is to avoid leveraged loans. HDIV’s exposure to this sector is just 5%, having been as high as 80% in 2007/8. I find it unsettling that debt levels have ramped back up again and many companies are as highly geared as they were before the financial crisis. Banks haven’t been fuelling this, neither has the high-yield bond market. Borrowers have turned to the loan market instead.

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