The last 12 months has seen the return of volatility to financial markets thanks to geopolitical crises, including the war in Ukraine, the closure of two US banks, higher inflation, and higher interest rates. The case for diversification has never been stronger.
Henderson International Income Trust is designed to provide that diversification, helping to ensure that income from investments remains stable and growing, whatever the world throws at us.
HINT’s strategy of investing across the world in growing and income-generating companies outside the UK has succeeded in delivering an average dividend growth of 6.1% per year – well in excess of the average inflation rate over the same period of 2.5%. Last year, HINT delivered a yield of 4.2%.
The key to this consistent performance is diversification, across sectors, geographical regions, currencies and, when appropriate, across asset classes.
A global portfolio
The value of geographical diversity can be seen in various events of the last year. Developed markets typically move together, but the invasion of Ukraine saw the US pull away from Europe. Later in 2022, the high-profile collapse of two US banks changed the focus again, raising doubts over the health of the US tech sector and its financial system.
Meanwhile, on the other side of the world, China’s extended Covid lockdown had been seen as a negative for economic growth in Asia-Pacific. The sudden change in policy since the start of the year has changed to outlook for the region considerably.
Currencies and domestic economies can be driven by distinctly local events – as witnessed by the effect of the UK’s mini-budget in 2022 on the pound and interest rates.
Amid this tumult of events, one thing is clear – investing too narrowly in one market can be an uncomfortable ride. HINT’s portfolio stretches across the globe from the US to Europe, Asia-Pacific, and Japan. Developed economies dominate, but there is a healthy dose of emerging market companies as well. This geographical diversity is a valuable defence against the unexpected difficulties that can overly impact one particular market.
A spread of sectors
Diversity across sectors is also essential for income stability and often goes hand-in-hand with geographical diversity. For example, an investment in the FTSE 100 Index is highly dependent on a handful of companies for the bulk of its income. The top 10 stocks in the FTSE 100 typically deliver 54% of the index’s total dividends, meaning that a hit to just one or two sectors or companies can have an outsized effect on the total income.
HINT’s wider diversification across non-UK markets means its top ten holdings account for 34% of its earnings. Those top 10 holdings include US tech giant Microsoft, French health group Sanofi and Swiss food group Nestle. Globally, HINT’s portfolio is spread across a wide range of sectors including financials to utilities, materials, and consumer companies.
At different times, some sectors will enjoy stronger earnings and deliver superior dividends than others – diversification provides exposure across the range of sectors, while rigorous analysis ensures the best performing individual companies are selected for investment.
A flexible strategy
Diversification is further enhanced by flexibility. The investment trust structure is one aspect of this, allowing HINT to both retain a proportion of earnings, or when necessary utilise reserves, to help smooth dividend pay-outs to investors over time. The investment mandate is also flexible with few constraints on where and how to invest. HINT can leverage its investments by borrowing where appropriate and there is the flexibility to invest up to 25% of assets in fixed income bonds, providing another route to diversification and the option to underpin equity dividends with some guaranteed bond coupon payments.
The future path of the global economy remains deeply uncertain. Which countries will fare best? Which sectors will thrive? Which currencies will hold their value? These and countless other questions can never be answered with absolute certainty, which is why global diversification is key for any investor seeking stable income and capital growth, whatever the future holds.
It is also the key strategy of Henderson International Income Trust.
Disclaimer
References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.
Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 78, Avenue de la Liberté, L-1930 Luxembourg, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).
Janus Henderson and Knowledge Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc
Janus Henderson Investors
Diversification – A way of spreading risk by mixing different types of assets/asset classes in a portfolio. It is based on the assumption that the prices of the different assets will behave differently in a given scenario. Assets with low correlation should provide the most diversification.
Volatility – The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. Higher volatility means the higher the risk of the investment.
Important information
Please read the following important information regarding funds related to this article.
- Higher yielding bonds are issued by companies that may have greater difficulty in repaying their financial obligations. High yield bonds are not traded as frequently as government bonds and therefore may be more difficult to trade in distressed markets.
- The portfolio allows the manager to use options for efficient portfolio management. Options can be volatile and may result in a capital loss.
- Global portfolios may include some exposure to Emerging Markets, which tend to be less stable than more established markets. These markets can be affected by local political and economic conditions as well as variances in the reliability of trading systems, buying and selling practices and financial reporting standards.
- Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
- This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
- Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
- The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
- Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
- The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.
- If the Company seeks to minimise risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or negative for performance.
- All or part of the Company's management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time.