Source: Morningstar, Marten & Co. Note 1) see note on page 3. Note 2) The ICE Bank of America Merrill Lynch Sterling Non-Gilts Index

Fund profile

Diversification, high income and the prospect of capital growth.

Henderson High Income Trust (HHI) invests in a prudently diversified selection of both well-known and smaller companies, to provide investors with a high income stream while also maintaining the prospect of capital growth.

In January 2024, HHI merged with its stablemate Henderson Diversified Income, resulting in an additional £72m in assets for HHI, with 42.3m new shares being issued.

The majority of HHI’s assets are invested in the ordinary shares of listed companies, with the balance in listed fixed interest stocks (no unquoted investments). Investee companies should have strong balance sheets that are capable of paying dividends. There is a focus on well-managed companies whose qualities may have been temporarily overlooked by investors and which offer the potential for capital appreciation over the medium term. A maximum of 30% of gross assets may be invested outside of the UK.

A portion of gearing is invested in fixed interest securities

Gearing is used to enhance income returns, and to help achieve capital growth over time. A portion of gearing is usually invested in fixed-interest securities.

Janus Henderson Fund Management Limited is the company’s AIFM and it delegates investment management services to Henderson Global Investors (both are subsidiaries of Janus Henderson Group Plc). The lead fund manager assigned to the trust is David Smith. He was made co-manager of the trust in 2014 and has been sole manager since 2015.

Blended benchmark

HHI benchmarks itself, for performance measurement purposes, against a blend of 80% of the FTSE All-Share Index return and 20% of the ICE Bank of America Merrill Lynch Sterling Non-Gilts Index. For the purpose of this note, we have used the performance of the HSBC FTSE All Share Index Fund as a proxy for the FTSE All-Share Index. The HSBC fund closely tracks the performance of the FTSE All-Share index, although the two can differ over certain time periods.

Market update – turning a new leaf?

July and August have been a landmark period for the UK, marking not only the end of 14 years of Tory leadership, but also the first interest rate cut since COVID-19 (and thus a new chapter in the UK’s fight against inflation). Both of these, in combination with a robust outlook for the UK consumer and economy, may herald a resurgence for the historically undervalued UK equity market.

Going red

A reduction in UK political risk foresaw a rally in UK equities

The Labour Party achieved an impressive victory in the July general election, winning 411 seats and more than doubling its previous number. This landslide victory has led to a significant shift in British politics, bringing an end to several years of Tory party infighting and the revolving door of prime ministers. This increased stability has sharply reduced the political risk associated with the UK, not only due to Labour’s large majority but also because of its apparent commitment to sensible fiscal policy.

Figure 1: Performance of UK versus global equities over 2024

Source: Morningstar

While it is still early days for the current UK government, with their first budget yet to be announced, the market already seems to have viewed the change in leadership as a net positive. UK large caps rallied by 2.4% in July, and the UK small-cap index surged by 7.0%, compared to the stagnant 0.1% of the MSCI ACWI. This momentum has allowed the UK market to close the gap on global equities over 2024, returning 10.7% and 12.2%, respectively. This is a notable achievement, as the UK has not benefitted from the significant momentum behind technology stocks that have driven the rest of the global markets. Remarkably, the MSCI UK Value index, which better reflects HHI’s universe and the domestic UK economy, has performed better, returning 12.4%.

Rate Cuts

August saw the first rate in the UK since COVID-19

Another factor behind the UK market’s performance over 2024 is the 0.25% rate cut implemented by the Bank of England (BoE) on 1 August. Although the decision was passed by a narrow margin (five votes for versus four against), it marks a clear shift towards more accommodative monetary policy.

This should hopefully be the first of many rate cuts, as the most recent inflation figure of 2.2% (a hair’s breadth above the BoE’s 2.0% target) came in lower than the market expected. This figure was driven by lower underlying price pressures, with inflation in both goods and food coming in below 2.0%. UK wage growth has also begun to slow, with the recent figure of 5.4% (annualised) being the lowest in two years, which should help alleviate pressure on the BoE. Although declining wage growth may initially seem negative for the UK consumer, a 5.4% figure still indicates real wage growth. This is arguably more important than simply having a high nominal figure, as it means the average UK consumer’s purchasing power continues to grow.

Manager’s view – a robust UK…

Beyond these two headline-grabbing events, David remains confident in the UK’s outlook, emphasising the additional benefits of a healthy UK consumer and increasing confidence among both businesses and individuals, combined with the attractive valuations currently offered by UK equities.

Data points to increasingly positive UK economic activity

David points to several data points supporting this view. One statistic he is particularly excited about is the improving financial health of the UK consumer, with aggregate UK household borrowings on the verge of reaching net zero – meaning households are becoming net savers rather than borrowers. This not only indicates that UK consumers have greater potential purchasing power, but also reduces the negative impact of higher interest rates on consumer balance sheets (by lowering debt refinancing costs).

This combination of lower political risk, lower rates, and a better-positioned UK consumer has led to a clear improvement in confidence in the UK economy, both for businesses and consumers. Economic activity is particularly important for equity income strategies, as high-dividend-paying stocks typically have greater sensitivity to economic activity due to their more cyclical business models, such as housing related companies, consumer discretionary stocks or financial institutions. In the case of HHI, David has proactively rotated his portfolio towards more cyclically exposed UK income stocks to capitalise on these favourable conditions.

…but even stronger companies

In addition, the UK market not only offers some of the most attractive valuations among developed markets, but also provides investors with the highest total yields (a combination of both dividend income and share buy-backs).

Figure 2: Total shareholder yield from major markets

Source: Janus Henderson

UK assets have seen significant outflows despite robust UK earnings

The UK’s attractive valuations reflect investors withdrawing a record £13.6bn from UK equities over 2023. In fact, May 2024 was the worst month on record for investor withdrawals, with £1.8bn of outflows.

Figure 3: Cumulative total UK asset flows (£bn)

Source: Morningstar, Bloomberg. UK flows represent all UK based investible asset classes

Investment process

David is responsible for stock selection in the equity portfolio, asset allocating between bonds and equities and setting the day-to-day level of gearing. The split between bonds and equities in the portfolio varies, but is typically 20:80. The bond portfolio will usually be funded in whole or in part by gearing, which is limited to a maximum of 40% of gross assets. The margin achieved on the bond portfolio (HHI’s cost of long-term fixed rate borrowing is about 3.7% and the yield on the bond portfolio is about 5.8%) supplements the income account and allows HHI to hold lower-yielding and higher-dividend growth equities, without compromising the trust’s dividend-paying ability.

The margin achieved on the bond portfolio allows HHI to hold lower yielding, and higher dividend growth equities

The bond portfolio is managed by Jenna Barnard, and Nicholas Ware, part of a five-strong strategic fixed-income team headed by Jenna Barnard. They are supported by Janus Henderson’s wider fixed-income team. The team’s approach to managing bond portfolios and its views on the fixed interest market were explored in depth in our notes on Henderson Diversified Income Trust, before that trust was merged into HHI.

Within the global equity income team, which David is a part of, each manager has a good deal of autonomy and is accountable for the performance of their funds. The managers on the team are generalists and get to know investee companies directly rather than relying on analysts’ views. That said, there is considerable collaboration across the team and wider investment floor and significant proprietary research available to David – regular meetings and a centralised system enable the sharing of research across the whole group, including the global analysts based in the US.

Fundamentals, financials, and valuation

For inclusion within HHI’s portfolio, each stock has to pass muster on each of three criteria – fundamentals, financials, and valuation. If a stock fails on one criterion, it will be excluded from the portfolio.

• Fundamentals: the process places strong emphasis on companies that display market leadership, good visibility of earnings, strong franchises, proven management, and robust defensible business models with high barriers to entry that cannot be disintermediated.

• Financials: companies with the fundamental characteristics outlined above should also demonstrate sustainable returns. David is also looking for cash-generative companies with robust balance sheets, which have invested in their businesses, have a sustainable dividend policy – the payment of dividends should not compromise investment in the business – and where management is aligned with shareholders.

• Valuation: companies should be paying dividends and offer the prospect of dividend growth. They should be valued at a discount to David’s estimation of their fair value (offering upside in absolute terms) and attractively valued relative to their peers. The valuation should also be underpinned in some way (for example, by realisable assets) so that the downside is limited. David aims to own companies for the long term. He looks two to three years out when valuing businesses.

Sweet spot between yields of 2% and 6%

David believes that there is a sweet spot for equity income investors of companies offering yields between about 2% and 6%. Within this range, companies tend to offer a good combination of yield and dividend growth. Above this level, it is more common to see dividend cuts/omissions and stocks that fall into value traps. Those very high-yielding companies that HHI does hold have strong cash-generative business models.

Stable growth, high yielders and quality cyclicals

To achieve a balanced portfolio, David focuses on three types of stock: stable growth companies that can provide good dividend growth through a cycle; high yielders that provide a good base level of stable, predictable income; and quality cyclicals that provide strong dividend growth during economic upswings but, given their quality nature, can still pay and perhaps grow their dividend in more challenging times. Utilising gearing and owning bonds to boost income means HHI can own lower-yielding companies that offer more dividend growth; typically-stable growth companies; and quality cyclicals.

Asset Allocation

The most notable shift within HHI’s portfolio since our last publication has been a rotation into companies that David believes are better positioned to capitalise on an increase in UK consumption. This change may not be immediately apparent within the sector allocations shown in Figures 6 and 7, as much of the increased exposure has been achieved through stock-level adjustments rather than major sector rotations. Additionally, a handful of takeovers since our last report have impacted on HHI’s allocations.

Financials and consumer stocks remain the largest allocations within HHI, not only because they represent consumer-sensitive companies but also because they include some of the UK’s best dividend-paying stocks. One aspect not evident in Figures 4 to 6 is HHI’s increased allocation to UK mid-cap companies. This shift results from allocation decisions made by David towards the end of 2023, reflecting his belief in the superior total return potential of smaller capitalisation companies. Since that initial allocation, he has not made any material adjustments to the mid-cap weighting, which currently stands at 22%. HHI’s fixed interest exposure has decreased slightly, a result of the growth in value of non-fixed income assets since our last publication.

At a geographical level, HHI has increased its domestic allocation, reflecting David’s growing confidence in the UK’s outlook. And while HHI is fundamentally a UK equity strategy, the 15% overseas exposure remains sufficient to ensure good portfolio diversification and provides HHI with access to sectors underrepresented in the UK.

Portfolio breakdown

Top 10 holdings

Figure 8: 10 largest holdings as at 31 July 2024

Source: Janus Henderson Investors

There have been two new entries into HHI’s top 10 since our last note – the UK supermarket giant Tesco, and NatWest, the high street bank. They replaced Diageo, the global drinks giant, and 3i group, the private equity firm; both of which still remain in HHI’s portfolio. The inclusion of NatWest and Tesco reflects the relative strength of their share prices over the period, nudging themselves into the ninth and tenth-largest positions, while 3i and Diageo fell out of the top 10, having been the eighth- and ninth-largest in our previous note, respectively. We cover NatWest on page 16, as it has been one of the top contributors to HHI’s recent performance.

Tesco

Figure 9: Tesco

Source: Bloomberg

Tesco (www.tesco.com) is the UK’s leading supermarket giant, with operations in Europe and a banking arm in addition to its retail business. Tesco has been a long-held position within HHI, previously featuring in its top 10. Tesco’s improving share price is a result of both its strong trading update and the general positivity surrounding the UK consumer and economy, given its sensitivity to domestic demand as a major retailer.

Tesco reported strong performance in its recent annual results for the 12 months ending February 2024. Group sales increased by 8.9% year-on-year, spread across all business segments and regions. More impressive was the 12.8% rise in profits, which management attributed to strong retail sales driven by its Clubcard programme and focus on customer value, alongside cost savings through its ‘Save to Invest’ programme. This initiative was a formal effort to simplify and improve business practices, enhancing efficiency and profitability to offset the impact of rising inflation, with measures such as shifting restocking from nights to days.

Tesco has also announced plans to sell its banking arm to Barclays for £600m, while retaining its insurance and money services. Additionally, Tesco continued to return capital to shareholders, purchasing £752m in shares during the year and increasing its full-year dividend by 11%.

Other purchases

Although not apparent in the changes to HHI’s top 10, David has made several purchases over the last 12 months, including Dunelm, Mondi, and Aviva. He also topped up several of his real estate holdings, initiating a position in British Land in late 2023 while also topping up his holdings in Land Securities and Big Yellow; leveraging the supportive market environment we outlined on page 4.

Dunelm Group

Figure 10: Dunelm Group

Source: Bloomberg

Dunelm (www.dunelm.com) is a UK home furnishings retailer, primarily selling own-branded products sourced from external suppliers. David purchased Dunelm to capitalise on the robust UK consumer, noting that its ‘good, better, best’ approach to product offerings allows it to capture a wide range of UK consumers.

Dunelm has remained one of the UK’s higher-quality retailers in recent years, reporting robust sales even during COVID-19, with only a 4% drop in revenues in 2020. It has since experienced a substantial post-COVID-19 surge in revenues, with its most recent results announcement (for the fourth quarter of its 2024 financial year) recording record revenue levels, up 4% year-on-year, despite what its management described as a “challenging consumer environment”. In fact, Dunelm’s management expects its full-year gross profit margin of 51.8% (up 1.7% year-on-year) to slightly exceed market expectations for the 2024 financial year. Management attributes this improving profitability to growth in sales volumes and margins, thanks to a strong summer period and lower freight costs.

Mondi

Figure 11: Mondi

Source: Bloomberg

Mondi (www.mondi.com) is a global packaging and paper company headquartered in Weybridge, with dual listings in both London and Johannesburg. While Mondi has always been on David’s radar, a unique valuation opportunity arose in 2024 that allowed him to purchase it at an aggressive discount. On 8 February 2024, Mondi announced its intention to acquire its competitor, DS Smith. Mondi’s shares fell 4% on the announcement, offering David an attractive buying price. Notably, on 26 February, Mondi paid a special dividend and underwent a small share consolidation, which caused the share price to drop 15% over the following week.

However, on 19 April, Mondi announced that it had withdrawn its offer for DS Smith, believing it was not in shareholders’ best interests, leading to a 10% rally in its share price on the day. Although this announcement generated a positive return for HHI, David commented that he believes both Mondi and DS Smith are fundamentally attractive businesses and is content to hold Mondi, regardless of whether the merger went through.

David believes that the global economic recovery is a structural tailwind for packaging, given its critical role in supply chains, directly profiting from higher trading volumes. This was echoed by Mondi’s management in its recent half-year results for the six months ending 30 June. Its performance was in line with expectations and was “supported by improving market conditions resulting in stronger order books and higher sales volumes,” with rising demand allowing Mondi to implement several price increases across its paper products. Whilst this represents an improvement over the last six months of 2023, it is ultimately a year-on-year decline, as it falls short of the figures posted for the equivalent first half of 2023. For example, its earnings per share fell 30% year-on-year, which can be attributed to lower average selling prices and higher personnel and operating costs compared to H1 2023.

Aviva

Figure 12: Aviva

Source: Bloomberg

Aviva (www.aviva.com) is one of the UK’s major financial institutions, offering insurance, savings, investments, and retirement solutions. While David is generally bullish on financials, he notes that Aviva is particularly attractive in the context of HHI’s income mandate, as the combination of its high dividend yield (currently 7%) and buy-backs effectively means that Aviva has a c.10% annual shareholder pay-out.

Aviva has delivered a strong 12-month performance, up 30% over the last year, with a particularly strong rally at the start of the year. This performance likely stemmed from their robust results for the 2023 financial year, with Aviva reporting growth across all its major services. Key growth statistics include a 13% increase in general insurance premiums, a 19% rise in net pension inflows, a 15% increase in wealth management assets, and a 25% increase in bulk annuity sales. Aviva’s management attributed its growth to both company-specific factors, such as its strong performance in winning new business, ongoing market leadership in the pensions sector, and focus on cost efficiency, as well as key structural drivers supporting its end markets, including strong UK wage growth, ageing populations, and an increasing focus on self-provision for retirement and healthcare. Thanks to these strong results and structural tailwinds, Aviva’s board improved its dividend outlook, expecting mid-single-digit growth, and declared a total dividend of 33.4p for 2023 (an 8% year-on-year increase).

Disposals

David has made two noteworthy disposals since our last update: wealth manager St. James’s Place and Woodside Energy, a petroleum exploration and production company.

David sold out of St. James’s Place after the investment case for the company became impaired, with its share price falling 23% over the last 12 months. The catalyst for this decision was the scrutiny of St. James’s advisory fees, which prompted the wealth manager to offer a one-off refund to clients worth £426m. This, combined with a growing volume of client complaints, led David to believe that the St. James’s brand had been tarnished. He sold his entire holding and replaced it with Aviva.

David also sold his position in Woodside Energy after a change in its capital allocation policy no longer aligned with his income mandate. Woodside’s management decided to utilise its liquid capital for investments rather than returning it to shareholders via dividends. After paying a special dividend, management announced a cut to future dividends, prompting David to exit the position.

Performance

Figure 13: HHI NAV total return relative to benchmark over five years ended 31 August 2024

Source: Morningstar, Marten & Co

As shown in Figure 13, since the start of 2019, HHI has progressively increased its outperformance relative to its benchmark, albeit gradually. This performance can be attributed partly to David’s successful management decisions, as HHI’s equity portfolio has outperformed the FTSE All Share by 3.4% over five years to 31 July 2024. Additionally, the general tailwinds supporting the UK income sector have played a role, with higher interest rates, higher energy and resource prices, and a robust consumer base benefitting the more cyclical companies that typically define the UK equity income sector.

It is also important to remind investors that HHI’s benchmark is an 80%/20% blend of the FTSE All Share Index (proxied by an index fund in the case of Figures 13 and 14) and a global bond index (ICE BAML). This means that HHI’s relative performance is also influenced by David’s allocation decisions between bonds and equities. His historic underweight to bonds has been a net contributor over the last five years, given the negative performance of bonds during this period.

Figure 14:    Cumulative total return performance over periods ending 31 August 2024

Source: Morningstar, Marten & Co, *IA UK Equity Income is the average of the open-ended UK equity income funds

HHI’s NAV returns have not only outperformed its benchmark across all sampled time periods, but have also managed to outperform the wider UK market in almost all periods, falling short only over a three-year sample period. Additionally, HHI has outperformed its equivalent IA sector average, a peer group of the major open-end UK equity income funds, over all time periods. This outperformance is particularly notable in the light of HHI’s structural bond allocation, highlighting both David’s skill as a manager and the advantages that closed-ended funds have over their open-ended peers.

Fixed-income portfolio

The fixed-income portfolio was a positive contributor in 2023, returning 4.6%. However, it underperformed compared to the 8.6% generated by its benchmark. David attributes this underperformance to HHI’s allocation to shorter-duration government bonds, which underperformed UK corporate bonds. Shorter-duration government bonds have less interest-rate sensitivity than longer-duration corporate bonds, and therefore benefitted less from the dampening rate expectations. The overseas nature of HHI’s bond allocation also dragged on performance due to the weakness of the US dollar relative to sterling.

It is worth noting that the more conservative risk profile of HHI’s bond portfolio has been a net benefit over the long term, allowing HHI’s bond allocation to outperform during previous years of negative performance.

David has kept his bond allocation static over 2024, ranging between 13.5% and 15.2%. Although he acknowledges that the current yields and performance of the asset class are attractive, as well as the diversification benefits, his bond allocation ultimately reflects their relative attractiveness versus equities, as well as their relative attractiveness compared to the cost of the debt used to finance his bond investments. With equities currently offering more attractive return potential, particularly with the tailwinds supporting UK income stocks, David continues to favour equities over bonds.

Performance contributors

David has kindly provided us with the major contributors to HHI’s recent 12-month performance, as seen in Figure 15.

Figure 15: Top 5 performance contributors for the 12 months ending June 2024

Source: Henderson. Attribution is calculated relative to HHI’s choice of equity benchmark

Britvic

Figure 16: Britvic

Source: Bloomberg

The largest contributor to HHI’s returns was Britvic, the soft drinks company founded in the 1930s. Britvic owns brands such as Robinsons, Ballygowan, J2O, and London Essence, and is the main bottler for Pepsi in the UK. David believes that under the leadership of Simon Litherland, the previously underinvested and low-growth business has been transformed over the past decade. Britvic’s manufacturing facilities have been upgraded to drive operating efficiencies and provide greater product flexibility, the product portfolio has been expanded into newer, faster-growing categories, and significant investment has been made in marketing its brands.

Although the pandemic, subsequent supply chain disruptions, and a spike in inflation have masked the progress the company has made, David believes that its recent half-year results (for the six months ending 31 March) finally show evidence of a successful transformation, with an acceleration in volume growth. This gives David confidence that the business can sustainably deliver higher organic growth going forward. Britvic’s advantageous positioning has led it to be bid for by the Danish brewing giant Carlsberg, with Britvic’s board accepting an offer of £13.25p per share, valuing the company at £3.3bn. Britvic’s are up 52% over the year as a result.

Intermediate Capital Group

Figure 17: Intermediate Capital Group

Source: Bloomberg

Intermediate Capital Group (ICG) is a London-based private equity firm invested across a range of security types, including both private debt and equity. This is the second consecutive note in which ICG has been a top contributor.

ICG’s shares reached an all-time high in 2024 after reporting a 132% increase in total pre-tax profits for the financial year ending 31 March 2024. ICG’s profitability reflected its growth in assets under management, with fee-paying assets up 11% to $70bn and management fees up 5% year-on-year, surpassing £500m for the first time. The sharp rise in profitability was driven not only by asset growth but also by the strong performance of ICG’s strategies (in which ICG co-invests alongside its clients), with performance fees increasing 276% year-on-year. ICG maintained its progressive dividend policy, increasing its dividend for the 14th consecutive year to 79p per share.

NatWest

Figure 18: NatWest

Source: Bloomberg

NatWest is one of the UK’s major high-street banks, with substantial retail and corporate banking operations. The British government still owns 20% of the company, a result of its bailout during the global financial crisis. NatWest’s recent half-year results exceeded analyst projections, reporting a pre-tax profit of £3bn. A key driver of this was its improving net interest margin, a crucial component of banking profitability. NatWest’s management commented that increasing customer activity and high-quality assets helped position the bank for a strong H1. Additionally, NatWest announced it would purchase the residential mortgage assets of Metro Bank for £2.5bn, adding 10,000 customers.

NatWest’s strong first half follows an even stronger 2023 financial year, where the bank fully benefitted from higher interest rates, reporting even higher profits of £3.6bn for the first half of 2023.

Peer group

Up-to-date information on HHI is available here

HHI sits within the AIC’s UK equity & bond income sector. However, given its investment objective and the nature of its holdings, we believe it is fair to compare HHI to the UK equity income sector, which has similar equity exposures and yield profiles.

Over one, three and five years, HHI is in the top half of the table in NAV total return terms, with its strongest outperformance over the last year. HHI also has one of the highest yields of the peer group, though its NAV return far exceeded the two trusts that yield more than HHI.

HHI combines one of the highest yields in the peer group with above-average long-term NAV returns

HHI’s relative discount has widened since our last note, and it now sits middle of the pack. HHI was one of the few trusts to report a negative 12-month z score, which explains the change in its relative discount.

Whilst its 0.86% OCF may be competitive by other sectors’ standards, it ranks in the bottom half of its peers, a reflection of how competitive the UK equity income sector is. The OCF should be on track to fall after the deal with HDIV. Its market cap also sits dead centre of the peer group and is not small enough to warrant any concerns about the trust.

Figure 19: UK equity income subsector comparison table, as at 13 September 2024

Source: Morningstar, Marten & Co

Dividend

HHI has successfully stabilised its dividend post-COVID, with its last two full-year dividends fully covered by revenues. 2023 marked the 11th consecutive year of dividend increases, with HHI’s dividend growing at an annual rate of 2%. HHI paid a total dividend of 10.35p per share, representing a 2% increase from the previous year. As of 16 September 2024, HHI has a dividend yield of 6.3% based on its share price. While it is noteworthy that HHI’s dividend was covered, its revenue per share increased by only 0.02%.

David runs frequent stress tests of HHI’s revenue account under different scenarios, looking several years ahead. Despite the recovery in HHI’s revenues, David models cautiousness when stress-testing the revenue account, bearing in mind the more uncertain economic backdrop. Thankfully, however, he remains confident that the underlying revenues of HHI under the different scenarios, coupled with the robust level of revenue reserves, can continue to support dividend growth into the future.

Figure 20: HHI dividend history, accounting years ended 31 December

Source: Janus Henderson Investors, Marten & Co

At the start of 2024, HHI held £8.9m of revenue reserves (equal to coverage of 0.5 times its 2023 dividend) and added an extra £128,000 of surplus income to reserves through the year.

Income diversity

Figure 21: Contribution to income from top 20 income paying companies in the FTSE 100

Source: Janus Henderson

A key advantage of HHI’s income profile is its diverse sources of underlying revenues, particularly within the context of the UK equity income sector. As shown in Figure 21, HHI does not rely solely on the dominant UK dividend payers to achieve its above-market yield. This not only reduces the likelihood of any revenue shortfall, but also allows HHI to differentiate itself from more conventional UK income strategies. This is an important consideration for income-focused investors, especially given that the superior yields currently offered by the UK may make it a natural overweight in income portfolios.

Premium/discount

Over the past 12 months, HHI has traded between a discount of 11.1% and 0.9%. The median discount for the period is 8.3%, while the average discount is 7.9%. As of 16 September 2024, HHI was trading at a 8.7% discount.

Figure 22: HHI discount over five years ending 31 August 2024

Source: Morningstar, Marten & Co

HHI’s historically wide discount may offer an opportune time to buy, given the recent events that have supported UK equities

HHI’s current discount has only been a feature of the past 12 months. Prior to August 2023, it traded at a premium after quickly recovering from the COVID-19 sell-off. HHI’s discount widened significantly in September 2023, following the release of its half-year report. It is important to note that there was no negative news or heightened trading volumes at that time, indicating that the discount reflected the behaviour of individual investors rather than broader market sentiment. The sell-off was exacerbated by the announcement of the merger between HHI and Henderson Diversified Income on 10 October, leading to a widening discount of 10.4% before it quickly rebounded. Since then, HHI’s discount has largely been range-bound between approximately 8% and 10%, with investors seemingly topping up their holdings when HHI reaches a double-digit discount. It is worth noting that HHI’s board has not made any share repurchases, so its discount movements are solely driven by market demand.

Few UK equity income trusts have experienced a widening discount over the past 12 months. Given that, HHI’s discount seems particularly anomalous. We believe that it presents a particularly advantageous opportunity for several reasons. First, the merger of HHI and HDIV has made HHI a more attractive trust due to its greater liquidity. Second, the prospect of lower interest rates not only makes equities more attractive but also enhances the appeal of dividend yields relative to lower-risk fixed income assets. Finally, the election of a Labour government has removed a significant amount of political risk from the UK. We believe these are three significant tailwinds supporting HHI, none of which are yet reflected in its current discount.

The board considers the issuance and buy-back of the company’s shares where prudent, subject always to the overall impact on the portfolio, the pricing of other comparable investment companies and overall market conditions. The board believes that flexibility is important in this regard and that it is not in shareholders’ interests to set specific levels of premium and discount for its issuance and buy-back policies. At the time of writing, no additional shares had been issued or repurchased in the past 12 months. The last time HHI issued shares was on 21 June 2022.

Fees and costs

HHI scrapped its performance fee in January 2022

From 1 January 2022, HHI removed its performance fee, which the board says brings the company in line with other UK income-focused trusts. It also amended the level at which the management fee falls from 0.5% to 0.45% from £250m to £325m of average of two-year adjusted gross assets. The board believes that the fee, which is payable quarterly in arrears, remains competitive.

Janus Henderson and its subsidiaries provide accounting, company secretarial and general administrative services to HHI, and delegate some functions to BNP Paribas Securities Services.

The company’s ongoing charges ratio for the year ended 31 December 2023 was 0.86%, marginally higher than the 0.84% of the previous year.

Structure

HHI’s next AGM will be held in London in May 2025.

At 31 August 2024, HHI had 172,141,700 ordinary shares in issue and no other classes of share capital.

The company’s accounting year end is 31 December and AGMs are usually held in May, in London. HHI’s last AGM was held on 14 May 2024, with the next one scheduled for 2025.

HHI does not have a fixed life, but shareholders are asked on a five-yearly basis whether they want to approve the continuation of the trust. The last continuation vote was held at the AGM in June 2020. Shareholders voted overwhelmingly (99.8% of those voting) to support continuation. The next such vote is scheduled for 2025.

Gearing

HHI is permitted to borrow up to 40% of gross assets, but in practice, gearing will usually be lower than this, and the majority of it tends to be used to finance fixed-interest investments rather than just gearing the equity portfolio. The trust should exhibit lower volatility of returns than a pure equity trust with similar levels of gearing.

Gearing is broken down into structural – which is allocated to HHI’s bond portfolio – and tactical, which is allocated to equities. Structural gearing is utilised to enhance the trust’s yield, by taking out long-term debt that is invested into higher-yielding fixed income assets, with the bond yield (at time of investment) being in excess of the cost of debt.

HHI has a £60m floating rate loan facility with BNP Paribas, combined with the long-term fixed rate senior unsecured note of £20m, which pays a sterling coupon of 3.67% per annum (split into two equal payments in January and July). The note will expire on 8 July 2034.

£15m of additional gearing was utilised in January 2024 as part of the combination with HDIV.

As of 30 June 2024, HHI’s gearing was 23%, down 1% from our last note, likely due to the impact of a rising NAV against partially fixed debt.

Board

HHI’s board consists of five directors, all of whom are independent of the manager, non-executive and do not sit together on other boards. HHI implemented a board succession plan over a five-year time frame (between 2016 and 2021) and six new directors were recruited.

No director is expected to serve for more than nine years unless particular circumstances warrant it; for example, to facilitate effective succession planning, maintain continuity in post (particularly in regard to the chair) or promote diversity.

Figure 23: Board member – length of service and shareholdings

Source: Janus Henderson Investors

Jeremy Rigg

Jeremy has been chair of HHI’s board since taking over from Margaret Littlejohns in May 2021 following her retirement. He is currently an independent investment consultant. Jeremy has over 20 years’ experience within the investment management industry, having held roles at Schroder Investment Management (UK) Limited and as a senior investment manager at Investec Asset Management Limited. In 2004, he was a founding partner of Origin Asset Management, a boutique equity investment manager, which grew successfully and was acquired by Principal Global Investors in 2011. Jeremy graduated from St Andrews University in 1989.

Jonathan Silver

Jonathan is the chair of the audit and risk committee at HHI. He has held various senior financial positions, including 21 years as chief financial officer on the main board of Laird Plc from 1994 to 2015. He is a non-executive director and chairman of the audit committee of Spirent Communications Plc, a position he has held since 2015. Since 2017, he has been a non-executive director of East and North Hertfordshire NHS Trust. Jonathan is a member of the Institute of Chartered Accountants of Scotland.

Zoe King

Zoe is a senior independent director at HHI. She is also a director of Evelyn Partners Investment Management Limited, specialising in the management of private client portfolios, and acts as an independent director to the Dunhill Medical Trust investment committee as well as being a member of the Trinity College Oxford investment committee, the Carvetian Capital Fund investment committee and the Stramongate S.A. shareholder advisory committee. Zoe was formerly a vice president at Merrill Lynch Mercury Asset Management and a fund manager at Foreign & Colonial Investment Management. She graduated from Oxford University in 1994.

Richard Cranfield

Richard is a director on the board of HHI. He was a partner at Allen & Overy LLP, having joined them from university in 1978. He has now retired from this role but remains as a senior advisor. Richard is global chairman of the Corporate Practice and co-head of its Financial Institutions Group. He was appointed global head of Corporate in 2000, and in 2010 took a step back from management to focus on client relationships. In June 2019, he was appointed to the board of IntegraFin Holdings Plc, becoming chair in October 2019. IntegraFin Holdings Plc is a FTSE 250 company, the ultimate owner of the investment platform provider Transact.

Francesca Ecsery

Francesca has over 30 years’ experience working in both blue-chip companies and start-ups and has special expertise in multiplatform consumer marketing, branding and commercial strategies. She was previously a non-executive director at Marshall Motor Holdings PLC, Share PLC and Good Energy Group PLC and has held various senior positions in consumer-focused industries including the digital, retail and leisure and travel sectors. Francesca’s previous executive roles include at McKinsey, PepsiCo, Thorn EMI, Thomas Cook and STA Travel.

Previous publications

Readers interested in further information about HHI can read our previous annual overviews and update notes by clicking on the links in Figure 24 below. You can also read the notes by visiting our website.

Figure 24: QuotedData’s previously published notes on HHI

Source: Marten & Co

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