Investors are facing their most challenging markets for years.
While inflation is falling in most developed economies, it is doing so at a much slower rate than many had expected and is still stubbornly above long-run averages. As such, it has become increasingly likely that most central banks will elect to leave interest rates higher for longer. This will undoubtably have an impact on economic growth over the short-to-medium term, with advanced economies forecast to endure a 1.5% drop in growth from 2022 to 2024. For reference, emerging market economies are also expected to slow down, albeit at a more modest rate.
This high inflation, low growth milieu presents a conundrum for investors – do higher interest rates, accessed through fixed income assets and cash, adequately compensate for the impact of inflation on returns or will other assets offer better returns in the medium-to-long term? While some of the top performing sectors of the past decade have derated in the face of higher rates, such as property and infrastructure assets, others like technology remain on relatively high valuations. Whilst there may be long term value in equity markets timing an entry can seem hard.
In this economic environment, a combined focus on income and growth comes into its own, as dividends will ‘pay investors to wait’ for short-term concerns to abate and for businesses to re-rate. This is the approach taken by Henderson International Income Trust plc (HINT), with the investment trust structure allowing us to take a longer-term view on earnings.
HINT is a global mandate and invests across the United States, Europe and Asia. The portfolio specifically excludes investments within the UK, in order to provide UK investors with a truly diversified portfolio, in turn diversifying the economic influences on an investor’s income.
The trust’s objective is to provide shareholders with a growing total annual dividend, as well as capital appreciation. To do this, we screen the investment universe for companies with disciplined and sustained payout policies, based on attractive balance sheets that reinforce a company’s stock valuation.
Global dividend cover for markets in 2022 was in-line with its long-term average, so although cover is expected to fall, it will do so from a higher base. This, combined with the ability of the trust to use reserves to smooth its dividend, is supportive for the trust’s dividend outlook.
Its combined income and growth focus has allowed HINT to ride out the recent market and macro volatility when it comes to distributions: the trust increased payouts by 3.0% year on year to 31 August 2023 and yielded 4.6% at the end of its financial year (31 August 2023). The trust has grown its dividend every year since inception in 2011.
Getting paid dividends from its investments allows the trust to take a longer-term term view, identifying what we believe are high-quality companies at depressed valuations where he expects to see share price recovery in the next few years.
As an example, one of the trust’s most prominent, and positive, allocations over the past three years has been toward the financials sector. While the low interest rates of the past decade were harmful to earnings, companies within the sector were forced to be more disciplined about how they made money. This approach has since literally paid dividends as we moved into a higher interest rate environment, with balance sheet strength and improved earnings allowing for an increase in payouts, despite wider concerns about the economy, and has resulted in capital appreciation on top of the dividends received.
At this point in the cycle, the team is now happy to crystallise the gains made from this allocation; however, it serves as a useful case study of a sector where yields have held and valuations have gradually improved. Looking forward, we see similar characteristics in other depressed areas of the market such as Asian countries, and from a sector perspective, consumer discretionary, technology and utility providers.
While the low-growth environment presents challenges, HINT’s focus on both income and growth and its prudent use of the investment trust structure may allow investors to continue participating in the equity market, comforted by the trust’s dividend, at a time when many are seeking shelter and taking a stint on the sidelines.
Discrete year performance (%) |
Share price
(total return) |
NAV
(total return) |
30/09/2022 to 30/09/2023 |
5.6 |
8.1 |
30/09/2021 to 30/09/2022 |
1.7 |
2.7 |
30/09/2020 to 30/09/2021 |
19.0 |
21.0 |
30/09/2019 to 30/09/2020 |
-10.4 |
-6.1 |
30/09/2018 to 30/09/2019 |
3.5 |
3.2 |
Past performance does not predict future returns.
Disclaimer
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).