Building 15

Inflation-beating dividend growth

Henderson International Income Trust 17 June 2022 Update
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Henderson International Income Trust

Inflation-beating dividend growth

Investment trusts
Global ex-UK equity income

17 June 2022

Price

175.0p

Market cap

£343m

AUM

£371m

NAV*

180.4p

Discount to NAV

3.0%

*Including income. As at 15 June 2022.

Yield

4.1%

Shares in issue

196.0m

Code

HINT

Primary exchange

LSE

AIC sector

Global Equity Income

52-week high/low

181.5p

150.0p

188.4p

169.8p

**Including income.

Gearing

Net gearing (as at 30 April 2022)

6.0%

Fund objective

Henderson International Income Trust (HINT) seeks to provide shareholders with a growing total annual dividend, as well as capital appreciation, by investing in a focused and internationally diversified portfolio of c 70 stocks that are either listed in, or whose principal business is in, countries outside the UK. The portfolio is diversified by factors such as geography, industry and investment size.

Bull points

An attractive 4.1% dividend yield, the second highest in its AIC sector, and a recently enhanced dividend payout policy.

HINT’s diversified portfolio gives investors a wide range of exposures to different industries and regions outside the UK.

An experienced manager with a long track record of delivering dividend growth and capital gains in varied market conditions.

Bear points

The trust’s value and income focus mean it may underperform in a growth driven market.

The trust’s use of gearing makes it vulnerable to unexpected market downturns.

Revenue reserves have a limited capacity to supplement dividend payments. However, the trust also has capital reserves sufficient to cover several years of dividend payments.

Analysts

Joanne Collins

+44 (0)20 3077 5700

Victoria Chernykh

+44 (0)20 3077 5700

Henderson International Income Trust (HINT) has succeeded in achieving its dual objectives of capital gains and a high and growing dividend. It has delivered an average annualised total return of 11.3% on an NAV basis over the 10 years to end May 2022, although its focus on income diversification (see chart below) and value means that performance has lagged the index return of 11.6% over this period. At the same time, dividend payments have increased at an average, inflation-beating rate of 5% per annum since inception. An enhanced dividend policy, announced in October 2021, is expected to see the annual dividend increase by at least 14.3% for the current financial year to end August 2022. This represents a prospective yield of 4.1%.

Dividend concentration reduced by investing outside the UK

Source: HINT, year to end Dec 2020, HINT dividend contribution, year to end Aug 2021.

The analyst’s view

HINT’s focus on generating a high and growing dividend from a globally diversified portfolio, combined with its enhanced dividend pay-out policy, may appeal to investors seeking rising income in the current low interest rate, high inflation environment.

The board’s commitment to use reserves to maintain dividend payments, if necessary, should reassure such investors about the reliability of this income.

HINT’s yield is attractive compared to the returns offered by other asset classes.

Its strong performance in absolute terms and persistent outperformance of UK markets may attract investors seeking capital gains and income diversification beyond the UK, although its focus on diversification and value means returns have lagged the benchmark.

The trust’s discount to NAV, while on a narrowing trend, is still relatively wide compared to historical levels close to par, and to that of its peers, and may therefore offer investors an attractive entry point.

There is scope for the ongoing charge to decline once the new, lower management fee structure takes effect in September 2022.

HINT’s strong positive absolute returns over the long-term attest to the manager’s capacity to weather uncertainty and capitalise on the resultant investment opportunities, regardless of the near-term investment climate.

Henderson International Income Trust is a research client of Edison Investment Research Limited

Fund profile: Unique focus on non-UK equity income

HINT was launched more than 11 years ago, in April 2011. Its objective is to provide a high and rising level of income, as well as capital appreciation over the long term, from a focused and internationally diversified portfolio of non-UK securities. The trust is specifically designed as a complementary fund for UK income-driven investors wishing to diversify their portfolios outside the UK. It is the only trust in the Association of Investment Companies’ (AIC’s) Global Equity Income sector to invest solely in companies listed or operating mainly in countries outside the UK. This approach is intended to give investors confidence that they have true stock-specific diversification, while also taking advantage of the fact that global equity dividends are much less concentrated than dividends for the 100 largest UK companies (see chart on page 1).

Ben Lofthouse of Janus Henderson Investors has managed the trust since inception. He adopts a bottom-up, value-driven, income-seeking approach to build a portfolio of around 50–80 stocks, diversified by geographical region and industry sector. HINT invests in North and South America, Europe, Asia and the Middle East and Africa and its strategy uses Janus Henderson’s broad and deep regional market expertise. The trust is limited to investing a maximum 50% of portfolio value in any one region, to ensure global diversification. The mandate is flexible, but targets companies with good fundamentals and high barriers to entry, that can pay a dividend yield of more than 2% and have growth potential. The trust also has the capacity to invest up to 25% in fixed income assets.

Until April 2022, HINT was benchmarked against the MSCI World ex-UK Index, although its objective of geographical diversity means that its composition usually differs to a significant degree from this index, which is dominated (c 67%) by the United States. Effective from April 2022, HINT adopted the MSCI ACWI (ex UK) High Dividend Yield Index as its new benchmark, to provide a more relevant guide to help investors understand the trust’s income objective and relative performance.

The trust informally targets a yield close to that of the UK stock market, although its current yield of 4.1% is above that of the broad UK stock market index (c 3% at end-April 2022). The trust has scope to use option writing to enhance income, which it does sparingly. Currency exposure may be hedged.

Market outlook

Equity markets performed strongly over most of 2021 as the advanced economies pulled out of their pandemic-induced recessions. However, the final weeks of the year and the early months of 2022 brought mounting evidence of inflation, driven by global supply constraints and higher energy and commodity prices. Associated fears of rising interest rates sparked market volatility. Inflation pressures, and volatility, increased when Russia’s invasion of Ukraine in late February jeopardised the supply of Russian oil and gas and Ukrainian grain and escalated geo-political tensions substantially. Bond yields rose sharply as the US Federal Reserve hiked rates in March and signalled further monetary tightening ahead. The Bank of England followed its December 2021 rate increase with three more in subsequent months.

The economic and market outlook is presently very uncertain and even more difficult to predict than usual, given that much depends on the length of the war in Ukraine, the extent of disruptions to oil, gas and agricultural supplies and the willingness of governments to provide support for households most affected by price increases. The post-pandemic economic recovery will almost certainly be robbed of some momentum, especially in Europe, which will be most affected by energy supply constraints and proximity to the conflict. On the positive side, the sudden focus on energy security is giving fresh impetus to global efforts to transition to renewable energy sources, although in the short term existing carbon-intensive energy sources, such as coal-fuelled power stations, may have to remain in use for longer.

Recent interest rate increases have had a particularly adverse impact on stocks whose valuations are based on their long-term growth prospects, as higher rates reduce the present value of future cash flows. Highly rated high-growth stocks in the technology sector have been worst affected – the Nasdaq has dropped almost 30% from its December 2021 highs. Investors have rotated into defensive areas of the market with less sensitivity to economic conditions. Pharmaceuticals, consumer staples and telecommunications stocks have all done relatively well, while consumer discretionary stocks and industrials have lagged.

Despite widespread uncertainty and market turbulence, corporate dividend payments have improved significantly over the past year. Financial sector regulators have removed almost all the restrictions on dividend distributions, and some companies, notably European financial services companies such as insurers AXA and Sampo, and banks such as Italy’s BFF Group and the Netherlands’ Van Lanschot and ING Groep, have paid catch-up dividends. In addition, the recovery in company earnings has been stronger than initially expected and dividend growth has been encouraging. The tech sector continues to lead the way: Broadcom, Microsoft and Texas Instruments have all increased their dividend payments by over 10%, in line with earnings growth. Dividend growth from telecoms and pharmaceutical companies has also been robust. Tele2, a Swedish telecoms company, paid a special dividend, while US drug company Briggs-Myers Squibb’s dividend increased 9.6% and its competitor Merck’s rose by 6%. The dividend outlook is also positive. Janus Henderson, which monitors global dividend payments, expects dividends to surpass their pre-pandemic high this year and to increase further in 2023. The company also expects dividend cover to reach its highest level in a decade next year.

The manager’s view

The outlook for the global economy and financial markets may be particularly difficult to predict right now, but for HINT’s manager, Ben Lofthouse, successful investment management is not about predicting the future, but rather about taking whatever situation arises, and finding the opportunities it presents to invest in companies with strong earnings and positive earnings growth prospects, at attractive levels. In the more than 10 years since HINT’s inception, Lofthouse has proved himself adept at steering the trust through a series of unforeseen and unforeseeable developments, including Brexit and the COVID-19 pandemic. (Our last note discussed HINT’s long-term performance in some detail.)

While few foresaw Russia’s invasion of Ukraine, positioning decisions Lofthouse made in the second half of last year, before the war, have supported performance as equity markets responded to recent events. Without trying to predict actual inflation outcomes, it was clear to the manager in H221 that prices would begin to rise as the global economy recovered from the pandemic, and that central banks would therefore begin to normalise interest rates. Mindful that equity markets, especially highly rated, higher-growth stocks, are always challenged by the transition to inflation and higher rates, Lofthouse reduced exposure to these kinds of stocks. (Exhibit 1 illustrates the decline in the portfolio’s exposure to technology stocks over the past year.) Sales included semiconductor manufacturers BE Semiconductor and a reduction in the position in Texas Instruments. Lofthouse’s caution about the general outlook for inflation paid off when rates rose more quickly than expected in Q122, resulting in a sharp correction in the most expensive tech and other growth stocks.

The manager’s concerns about pending inflation pressures also led him to seek out companies with pricing power, high profit margins and strong recurring earnings, which would allow them to absorb higher energy, labour and raw material costs. Now that energy and commodity price pressures are being compounded by the war in Ukraine, HINT’s portfolio companies have begun to use their pricing power to protect their margins.

While inflation and higher rates pose risks for some businesses, for financial companies, higher rates are typically good news, as they support earnings and margins. So, in the latter part of 2021, Lofthouse began increasing exposure to this sector (details below).

At the same time, Lofthouse also raised the portfolio’s weighting to the energy sector. This was motivated by his view that some energy companies have made successful efforts to improve their execution and cashflows and lower costs. In his assessment, while this restructuring has significantly improved profitability, it has not yet been fully reflected in share prices. The manager also anticipated some increase in oil prices as global economic activity strengthened, and he saw some especially attractive opportunities in the gas sector, where he expects to see increased demand as consumers transition away from more carbon-intensive forms of energy towards gas-fired electricity generation.

Lofthouse adopts a value focus, and he sees many investment opportunities in solid companies across a variety of sectors that he believes have been dismissed by some investors because they have been slow to adapt to technological changes. However, in the manager’s view, the pandemic has made it clear to such companies that the trends towards digitalisation, on-line shopping and payments and remote working are now embedded in business practices and daily life, and that they need to adapt accordingly to survive. Lofthouse believes that this message is now getting through to many ‘technological laggards’ who are becoming more future oriented and willing to take action to catch-up with the earlier adopters of technological change. This change of attitude makes them attractive investments, as their greater willingness to adapt is not yet reflected in their share prices. He cites portfolio holdings ABB, a Swiss electrical equipment producer, Siemens, a German industrial machinery company, and German car maker Mercedes-Benz as examples of undervalued companies with potential to outperform as they catch-up with more tech-driven competitors.

Lofthouse has proved repeatedly over time that the search for under-priced stocks with good earnings prospects can be rewarding, regardless of prevailing economic conditions and geo-political uncertainties, and it seems that sometimes, events such as rising energy and commodity prices, higher rates and technological change, may just conspire to help value to be realised.

Portfolio positioning

The three most significant portfolio changes during the current financial year (beginning 1 September 2021) have been the increases in exposures to financials, and oil and gas (Exhibit 1), discussed above, and a reduction in exposure to China and Hong Kong, due mainly to the severe economic impact of China’s zero COVID-19 policy (Exhibit 2).

On the financial front, Lofthouse added to positions in European names such as Finnish insurer Sampo and French asset manager Amundi, as well as to Taiwanese bank CTBC Financial and Australia’s Macquarie Bank. He mostly avoided US banks, which he views as expensive, although he did purchase Citigroup.

Within the energy sector, the manager made three acquisitions during H221: Norway’s Lundin Energy, France’s TotalEnergies and Australian producer Woodside Energy. Total and Woodside both have significant natural gas reserves, which appeals to Lofthouse given his expectation that gas will be in greater demand as economies transition away from more carbon-intensive energy sources. Lofthouse also likes the fact that each of HINT’s three new energy sector positions is committed to the decarbonisation of their own operations, via increased use of renewable energy and carbon capture processes. The recent surge in energy prices following the outbreak of war in Ukraine has ensured that HINT’s energy holdings have made a positive contributor to performance over the past six months.

The recent surge in energy prices has also improved the dividend outlook for these three new energy sector acquisitions, while Lofthouse expects Lundin’s dividend prospects to be boosted further by its involvement in several large new developments that are supported by tax incentives from the Norwegian government. Since acquisition, Lundin and Woodside have announced mergers, with Aker BP and BHP’s energy business, respectively, which the manager expects will further enhance earnings.

Exhibit 1: Portfolio sector exposure (unless stated)

Portfolio end-April 2022

Portfolio end-April 2021

Change (pp)

Financials

22.0

19.0

3.0

Healthcare

15.0

14.0

0.9

Technology

14.0

17.0

(3.1)

Telecommunications

10.0

11.0

(1.1)

Industrials

9.0

11.0

(2.1)

Consumer staples

9.0

8.0

0.9

Consumer discretionary

7.5

7.0

0.5

Basic materials

4.5

6.0

(1.6)

Energy

4.0

0.0

4.0

Real Estate

3.3

3.5

(0.2)

Utilities

2.1

3.5

(1.4)

100.0

100.0

Source: Henderson International Income Trust, Edison Investment Research

The portfolio’s exposure to China and Hong Kong has almost halved over the past year, due in part to outright sales in positions in Bank of China, sportswear retailer Anta Sports and conglomerate Swire Pacific. But the manager insists that he is ‘not giving up on China’. The country’s COVID-19 restrictions will ease eventually, and he is looking for opportunities to add on weakness.

Exhibit 2: Portfolio geographic exposure (% unless stated)

Portfolio end-April 2022

Portfolio end-April 2021*

Change (pp)

United States

34.9

30.0

4.9

Switzerland

10.0

12.4

(2.4)

France

8.3

4.2

4.1

Australia

5.0

4.0

1.0

South Korea

4.7

7.1

(2.4)

Sweden

4.6

4.2

0.4

Taiwan

4.3

N/A

N/A

China

4.1

7.7

(3.6)

Hong Kong

3.2

6.0

(2.8)

Finland

3.1

N/A

N/A

Other

17.8

24.4

(6.6)

100.0

100.0

Source: Henderson International Income Trust, Edison Investment Research. Note: *N/A where not in end-April 2021 top 10 country exposures.

Other recent sales included US commodity and interest rate derivatives exchange operator CME Group, which the manager believed to be fully valued after a period of strong performance, as well as BE Semiconductor, mentioned above.

In addition to the financial and energy sector acquisitions already mentioned, recent market volatility has provided opportunities to add new positions in Fidelity National Information, a US-based world leader in payment processing, Sandvik, a Swedish specialist industrial machinery company, and Swiss luxury goods company Richemont, which owns several iconic brands including Cartier. Richemont’s price has lagged the sector in recent years, but the company’s latest results showed a sharp post-pandemic recovery in sales. The manager also added to a position in Air Products and Chemicals, as US producer of industrial gases and chemicals with scope to benefit from increased demand for hydrogen as economies strive to meet their net zero carbon emission targets.

Lofthouse also topped up a position in Sanofi, a French pharmaceuticals supplier, which is currently the portfolio’s second largest position (Exhibit 3). Drug manufacturers have been performing well following the resumption of standard medical procedures and treatments now that the pandemic has abated. The portfolio is overweight this sector, and several pharmaceutical companies feature in the portfolio’s top 10 holdings.

Exhibit 3: Top 10 holdings (at 30 April 2022)

Company

Country

Sector

Portfolio weight %

30 April 2022

30 April 2021*

Microsoft

US

Technology

4.6

3.7

Sanofi

France

Pharmaceuticals

3.3

N/A

Nestlé

Switzerland

Consumer goods

3.0

3.3

Coca-Cola

US

Beverages

2.7

N/A

AXA

France

Financials

2.6

N/A

Roche

Switzerland

Pharmaceuticals

2.5

N/A

Cisco Systems

US

Technology

2.3

2.5

Bristol-Myers Squibb

US

Pharmaceuticals

2.2

2.5

Merck

US

Pharmaceuticals

2.1

N/A

Novartis

Switzerland

Pharmaceuticals

2.0

N/A

Top 10 (% of portfolio)

27.3

27.0

Source: Henderson International Income Trust, Edison Investment Research. Note: *N/A where not in end-April 2021 top 10.

In the manager’s view, the current environment of rising prices and rates is less challenging for the trust than the COVID-19 crisis, when many businesses were suddenly forced to cease or severely curtail their operations and cut dividend payments. In addition, HINT has no direct exposure to Russia or eastern European listed companies and most of its portfolio holdings have low revenue exposure to Ukraine, Russia and sanctioned companies. The exception is the trust’s position in US bank Citigroup, which had significant exposure to Russia at the start of the war. It has since decided to exit its commercial banking and other operations within the country, and it has made substantial writes downs to cover associated losses.

The manager uses gearing countercyclically, on the view that crises usually generate buying opportunities, which justify increased leverage. He therefore increased gearing during the depths of the pandemic to an all-time peak of 14.3% in March 2021. Gearing declined to 0% at end September 2021 but it has since begun to climb, and stood at 6% at end April 2022.

The portfolio does not currently have any option positions in place, compared to November 2021, when it held five option positions that together comprised around 1% of portfolio income. As a reflection of HINT’s value focus, the portfolio’s 12-month forward P/E stood at 12.8x at end March 2022, compared to 17.8x for the MSCI World (ex-UK) Index.

Performance: Strong absolute returns

Exhibit 4: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

MSCI ACWI ex-UK HDY (%)

MSCI World ex-UK (%)

CBOE UK All Companies (%)

MSCI World (%)

31/05/18

5.6

6.2

3.0

9.3

6.6

8.8

31/05/19

0.0

0.2

9.7

5.2

(3.4)

5.9

31/05/20

(1.5)

(3.9)

2.7

9.2

(12.0)

9.5

31/05/21

13.7

24.9

16.2

24.1

23.4

22.9

31/05/22

14.2

10.9

11.7

5.2

8.5

7.8

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

HINT has consistently delivered strong positive absolute returns. The trust has generated an average annualised return of 11.3% on a net asset value (NAV) basis over the 10 years to end May 2022. However, its quest for geographical diversity and its value focus mean that portfolio composition differs somewhat from its new benchmark, the MSCI ACWI ex-UK High Dividend Yield Index, which returned 11.6% over the same period. The trust has also lagged its new benchmark over one, three and five years (Exhibit 5, RHS). This underperformance is due in part to the fact that the trust cannot invest more that 50% of the portfolio in any one region, while the index is dominated by US stocks, (which comprise over 60% of constituent companies). This means that the trust has maintained a longstanding underweight to the United States. In addition, many of the benchmark’s component stocks are tech and other growth stocks that have outpaced value stocks over most of the period since the trust’s inception.

In addition to the trust’s strong absolute returns over the long term, for UK investors it is noteworthy that HINT has outperformed the UK market on an NAV basis over three, five and 10 years. This means that in addition to diversifying their sources of income away from the highly concentrated UK market (see chart on page 1), HINT’s shareholders have enjoyed consistently superior returns by investing abroad (see Exhibit 6).

Near-term performance has also been good in outright terms. In the six months to end May 2022, HINT returned 7.0% on an NAV basis, and its share price performed more strongly, returning 11.3% over the period. This resulted in some narrowing of the share price discount to its NAV (discussed below). This performance compared to a benchmark return of 7.6% over the period.

Exhibit 5: Investment company performance to 30 May 2022

Price, NAV and index total return performance, one-year rebased

Price, NAV and index total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

The recent market rotation into defensive, less economically sensitive sectors such as pharmaceuticals, consumer staples and telecoms has supported performance, as HINT has significant exposure to these industries. The largest contributor to returns over the six months to end April, by a significant margin, was drug company Bristol-Myers Squibb. Other pharmaceutical manufacturers Sanofi and Novartis also made meaningful contributions to returns over the period, as did consumer staple Coca-Cola and TELUS, a Canadian telecom services provider. The manager’s decision to increase exposure to energy stocks also paid off. Woodside Energy was the second largest contributor over the period, thanks to the recent surge in energy prices, although underweights to other energy producers Chevron and Exxon Mobil detracted.

The combination of economic growth and expectations of higher interest rates has been generally supportive for the portfolio’s financial holdings, led by Macquarie Bank and Asian banks CTBC Financial Holding Company and KB Financial. However, European banks sold off at the end of February on geopolitical concerns, even though most have limited exposure to Russia and Ukraine. ING Groep was caught up in this sell-off and detracted from performance, as did HINT’s position in Citigroup, which had more substantial Russian exposure. Citi had an estimated exposure of $10bn at end 2021, which declined to $8bn at end Q122, with potential losses of up to $4bn depending on the outcome of its ongoing efforts to reduce exposure to the Russian market.

The trust’s underweight positions in several of the largest tech companies, namely Amazon, Meta Platforms (formerly Facebook) and Alphabet (parent to Google), also enhanced returns, as these companies were among the worst hit by the recent revaluation of high-value growth stocks (discussed above). The exception was Apple, whose share price held up relatively well up to end April 2022, ensuring the portfolio’s lack of exposure to this stock detracted from recent returns. However, the stock has since declined sharply, due to several factors. China’s persistent lockdowns are exacerbating supply chain concerns, European regulators have challenged Apple in relation to anti-competitive behaviour in the mobile payments market, while tight labour market conditions have forced the company to raise wages to attract and retain staff.

Other negative influences on returns in the six months to end April included the trust’s exposure to Chinasoft, an IT services provider, and China Yongda Automobiles Services, which owns luxury car dealerships. Shares in both these companies declined steadily following last year’s regulatory crackdown and the implementation of harsh zero COVID-19 restrictions. The position in Chinasoft has been closed, but China Yongda remains in the portfolio due to the manager’s confidence in its longer-term prospects once regulatory and lockdown conditions ease. Its share price made a partial recovery in May and early June.

The manager is prepared to be similarly patient with the trust’s positions in European utility companies Enel and Iberdrola, which have been affected by negative sentiment related to government intervention in retail energy prices in Italy and Spain. The manager believes that in the medium term, both companies should benefit from an accelerated push towards electrification and decarbonisation of energy due to their investments in renewables, grid and other infrastructure. He continues to hold both names.

The trust’s net gearing position has been a positive contributor to recent performance, boosted by the currency impact of the trust’s euro-denominated long-term financing, as sterling has strengthened against the euro since late 2021.

Exhibit 6: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to MSCI ACWI ex-UK HDY

0.3

4.6

3.5

2.3

(4.0)

(10.3)

(8.8)

NAV relative to MSCI ACWI ex-UK HDY

(0.1)

1.5

(0.6)

(0.7)

(0.1)

(6.0)

(2.8)

Price relative to MSCI World ex-UK

1.5

9.5

17.5

8.6

(10.3)

(17.5)

(22.1)

NAV relative to MSCI World ex-UK

1.2

6.3

12.8

5.4

(6.6)

(13.6)

(16.9)

Price relative to CBOE UK All Companies

0.5

7.2

4.2

5.3

8.7

11.5

26.1

NAV relative to CBOE UK All Companies

0.1

4.0

0.1

2.2

13.1

16.8

34.4

Price relative to MSCI World

1.5

9.1

16.6

5.9

(11.8)

(19.1)

(25.4)

NAV relative to MSCI World

1.1

5.9

12.0

2.8

(8.2)

(15.3)

(20.5)

Source: Refinitiv, Edison Investment Research. Note: Data to end-May 2022. Geometric calculation.

Discount: Narrowing steadily

HINT’s share price has regularly traded at a premium to its NAV since launch. This may, at least in part, reflect the extent to which investors value income in the low interest rate environment that has prevailed over the last decade. Investors may also like the fact that HINT is unique among its peers, being the only AIC Global Equity Income fund that totally excludes UK investments.

At the onset of the pandemic, like many other trusts, HINT’s share price dropped sharply into discount territory, before rebounding back into premium almost as quickly. Since then, the share price settled into a new discount range around 6.7% until late 2021, when the discount began to narrow steadily (Exhibit 7) in response to the announcement of the trust’s new, more generous dividend policy (see details below).

However, at current levels around 3-4%, HINT’s discount remains wide compared to both historical levels and in relation to its peers, which suggests there is scope for the discount to narrow further as the new dividend policy proves its value in the current low-yield, high-inflation environment. The trust’s good outright returns, combined with the possibility of a forthcoming fee reduction (discussed below) should also support the share price over time and take the discount back towards its long-term average close to par.

Exhibit 7: Share price premium/discount to NAV (including income) over three years (%)

Source: Refinitiv, Edison Investment Research

HINT’s board has a flexible premium/discount management policy that aims to keep the relationship between the share price and NAV in line with its peer group. However, the board acknowledges that there is a limit to its ability to influence the premium or discount to NAV and will only consider share issuance or buybacks where appropriate and subject to market conditions. The board has issued shares, most recently in FY20, but to date it has refrained from any share repurchases.

Peer group comparison

Exhibit 8: AIC Global Equity Income sector at 16 June 2022*

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Ongoing

charge

Perf

fee

Discount

(cum fair)

Net
gearing

Dividend
yield

Henderson International Income

343.0

10.9

33.1

41.6

192.3

0.8

No

(3.0)

106

4.1

Invesco Perp Select Glo Eq Inc

57.8

9.5

39.1

47.9

216.9

0.8

No

(6.6)

107

3.1

JPMorgan Global Growth & Income

697.6

9.3

57.0

72.0

275.8

0.5

No

0.9

100

4.0

Murray International

1,586.7

19.0

35.0

37.7

139.5

0.6

No

(2.8)

111

4.3

Scottish American

813.6

7.1

45.5

71.0

247.3

0.6

No

(3.9)

112

2.7

Securities Trust of Scotland

225.1

12.9

35.9

48.8

177.5

0.9

No

0.7

108

2.6

Average (six funds)

620.6

11.4

40.9

53.2

208.2

0.7

(2.4)

107

3.5

HINT rank in sector

4

3

6

5

4

2

4

5

2

Source: Morningstar, Edison Investment Research. Note: *Performance to 31 May 2022 based on ex-par NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

HINT is one of six members of the AIC’s Global Equity Income sector. It is the only constituent of the sector to totally exclude the UK from its investment universe, on the basis that income derived from the UK market is too concentrated. The trust’s bias towards value and income stocks, in a long period during which growth stocks have mostly driven global indices, means that HINT’s long-term performance has lagged that of its peers. On an NAV total return basis, HINT’s performance ranks fourth over 10 years. The trust’s ongoing charge is slightly above the average, although its ranking should improve from September 2022 when the new flat fee takes effect. Like most of its peers, HINT does not charge a performance fee. The trust’s share price discount to NAV is wider than the sector average. Its gearing is slightly lower than the average and its prospective dividend yield, at 4.1%, is the second highest in the sector.

Dividend policy and record

Since its inception in 2011, HINT has delivered on its objective to achieve high and rising dividends, despite a more than fivefold increase in the number of shares in issue since launch. Its dividend has grown every financial year since inception, at an average rate of 5% per annum, historically well in excess of inflation (Exhibit 9).

During FY21 (ended 31 August 2021), HINT paid a total dividend of 6.30p per share, up 5.0% from the 6.00p per share dividend paid in the previous year. This dividend comprised four interim payments, three of 1.5p per share, paid at the end of February, May and August 2021 and a fourth interim dividend of 1.80p, paid in November 2021. FY21 was the 10th successive year in which dividends increased.

The significant increase in the fourth dividend for FY21 marked a shift in HINT’s dividend policy in favour of paying out more of the trust’s total return in dividends, in line with the preference of most existing and potential shareholders. At the time of the new dividend policy announcement, the chairman indicated that 1.80p would be the ‘base’ for future dividend payments and accordingly, the first and second interim dividends for the current fiscal year ending 31 August 2022 (FY22) have each been 1.80p. The chairman recently reconfirmed that it is the board’s current aim ‘to maintain at least the same level of dividend for the remaining six months of this financial year’, which indicates a full year dividend of at least 7.20p. If this target is realised, this would represent an increase of 14.3% on the FY21 total dividend. The portfolio’s prospective yield, based on the expected FY22 dividend and the current share price, is 4.1%.

In order to fulfil its dividend objective, in the event of any temporary shortfall between portfolio income and distributions, the board has scope to utilise the company’s revenue and capital reserves. Reserves were used for the first time in FY20 to fund approximately 9% (£917,000) of that year’s dividend payments, after portfolio income declined when many companies reduced or cancelled dividends during the depths of the pandemic. Reserves were used again in FY21, to a very modest degree, to partially fund dividend payments. However, it seems unlikely that there will be any need to draw on reserves during the current financial year, as HINT’s revenues have benefited from the improvement in dividend payouts discussed above; in the six months to end February 2022, revenue return per share was 2.26p, an increase of c 35% on 1.68p in FY21.

Exhibit 9: Dividend payment history

Source: Henderson International Income Trust, Edison Investment Research

Investment process: Pursuing income and value

HINT’s manager, Ben Lofthouse, is a member of Janus Henderson’s global equity team and is supported by a large pool of in-house analysts based around the world. Lofthouse feels well served by these research resources, including Janus Henderson’s Denver-based healthcare and life sciences team, which has been especially useful given the pandemic-induced focus on these sectors.

The trust’s recent change in benchmark has not altered its investment strategy or its process. The global equity team screens the c 330 constituents of the MSCI ACWI (ex-UK) High Dividend Yield Index, which includes more than developed stock markets, to identify companies that meet HINT’s investment criteria:

a dividend yield within a c 2–6% range;

an attractive free cash flow yield; and

strong free cash flow growth.

Each potential investment is then subject to fundamental analysis to determine its competitive positioning, its ability to generate sustainable cash flows, profits and dividends and its intrinsic value. To meet HINT’s objective to achieve capital appreciation and pay a growing dividend, Lofthouse seeks to maximise potential returns by investing in companies that are presently out of favour with investors and thus undervalued, but that have scope to rise in value.

The manager sets the geographical allocation across five regions: North America, South America, Europe, Asia, and the Middle East and Africa. As no single region can comprise more than 50% of the portfolio, HINT will always be underweight the United States, as US companies currently comprise c 67% of the benchmark. Once regional allocations have been set, the manager uses Janus Henderson’s regional expertise to choose stocks within each region. Individual country and sector weightings are therefore the result of bottom-up stock selection. Lofthouse combines higher-yielding holdings with others with a lower current yield, but better dividend growth prospects over time.

In all, the portfolio usually comprises around 70 stocks. Holding periods stretch from a few months to several years or more; the average portfolio turnover is currently c 25% pa, having declined from c 40% in the previous two financial years. Each holding is assigned a price target; once this target is reached, the holding will either be sold or assigned a new, higher target price if the manager believes there is scope for further upside. Positions may also be sold swiftly – as some were at the onset of the pandemic – if fundamentals deteriorate. Stocks will not be sold automatically if their yield drops below 2%, either due to capital appreciation or a dividend cut, but such a fall would trigger a review of the holding.

The trust can invest up to 25% in fixed income and the manager took this step for the first time in April 2020 when many companies reduced or suspended dividend payments and credit spreads widened dramatically. These positions comprised 7% of the portfolio and were overseen by Janus Henderson’s credit team until their disposal in November 2020, after rates declined and credit spreads narrowed. The manager also has scope to use option-writing to enhance income, although such positions tend to be opportunistic and small. In practice this usually involves writing put options on existing holdings at levels close to their price target, the point at which the manager would be happy to take some profit.

ESG considerations

Janus Henderson has a long history of responsible investing, and environmental, social and governance (ESG) principles are integral to HINT’s investment process. Janus Henderson was a founding member of the UN’s Principles of Responsible Investing and the UK Stewardship Code (Tier 1). It launched its first specialist sustainable and responsible investment funds 28 years ago. Janus Henderson’s Responsible Investment Committee comprises senior representatives from equities, fixed income and distribution, who oversee the integration of ESG principles across all investment strategies. The practical approach to ESG integration is determined by investment teams, with the support of a specialist in-house unit that assists on voting, company engagement and ESG research.

Lofthouse believes that the integration of ESG considerations within HINT’s investment approach ultimately delivers better risk-adjusted returns for clients. To assist with this process, in addition to drawing on Janus Henderson’s considerable ESG resources, HINT’s investment team also employs the services of a third-party provider, Sustainalytics, which is a leader in the field of ESG research, monitoring and rating. ESG risk scoring is incorporated into the portfolio’s risk analytics and Sustainalytics monitors HINT’s holdings and analyses its overall ESG risk exposure.

Company engagement is key to HINT’s approach, to ensure the manager understands how portfolio companies manage ESG risks, including climate change, and how their business models will evolve to remain sustainable over the long term. Companies with weaker ESG profiles are not automatically excluded from the portfolio, provided they are making progress towards mitigating the ESG risks they face. In some cases, where necessary, the investment team will encourage investee companies to take steps to enhance their corporate behaviour.

When engaging with companies, Lofthouse aims to focus on the broadest, most important ESG issues. For example, during the past six months, the team actively engaged with two of the portfolio’s pharmaceutical holdings, Sanofi and Bristol-Myers Squibb, regarding the ethnic diversity of their drug trials, which is an important factor in ensuring universal access to medicines. Both companies plan to increase disclosure on this issue in future reporting. The team also engaged with Microsoft to discuss its policies on the responsible use of its artificial intelligence and facial recognition products, and to advocate for improved reporting of Microsoft’s gender and ethnicity pay gaps. Employee relations has been the focus of recent engagement with MacDonalds.

Capital structure and fees

HINT is structured as an investment trust with one class of share. It had 196.0m shares in issue as at 30 April 2022. The board has not issued or repurchased any shares since FY20, when it issued 8.4m shares in response to investor demand.

Gearing is permitted up to 25% of net assets. HINT has a £30m overdraft facility with HSBC and in April 2019, it issued €30m of 25-year loan notes with a coupon of 2.43%. In total, HINT thus has access to c £56m of available gearing, which amounts to c 15% of net assets. The trust also has scope to use derivatives as a further means of increasing market exposure. However, the overdraft is largely undrawn and net gearing stood at 6% at end-April 2022.

Janus Henderson Investors is currently paid an annual management fee of 0.65% on net assets up to £250m, falling to 0.60% above this level. There is no performance fee. However, effective from 1 September 2022, Janus Henderson has agreed to a reduction in its management fee to a single rate of 0.575%. The increasing size of the trust, combined with management fee reductions, has seen the trust’s ongoing charge decline from 1.38% (end August 2012) to 0.83% end August 2021. This charge may decline further following the introduction of the lower management fee.

The board

Exhibit 10: HINT’s board of directors

Board member

Date of appointment

Remuneration

from 1 Sept 2021

Shareholdings

at end-FY21

Simon Jeffreys (chairman)*

9 March 2011

£42,700

206,276

Jo Parfrey (audit committee chair)

1 January 2021

£38,800

37,500

Richard Hills

25 April 2016

£28,600

39,604

Aidan Lisser

25 April 2016

£26,500

26,148

Lucy Walker

1 September 2020

£26,500

12,307

Source: Henderson International Income Trust. Note: *Due to retire in December 2022 at the AGM. The process of appointing a successor is underway and an announcement will be made in due course.

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This report has been commissioned by Henderson International Income Trust and prepared and issued by Edison, in consideration of a fee payable by Henderson International Income Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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Frankfurt +49 (0)69 78 8076 960

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London +44 (0)20 3077 5700

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New York +1 646 653 7026

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Henderson International Income Trust and prepared and issued by Edison, in consideration of a fee payable by Henderson International Income Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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