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What our three new stocks tell us about UK smaller companies: The Henderson Smaller Companies Trust

HHI

Henderson High Income Trust plc

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A straightforward approach to investing for high income

Henderson High Income Trust combines a diversified UK equity selection with a bond portfolio, in a bid to achieve a steady, growing income stream.

As far as investing needs go, income is among the most straightforward. At any stage in life, you may need to generate an extra income stream. Naturally, while meeting this need, you may well also seek to preserve your money as far as possible.

To realise this ambition, you could regularly balance your own portfolio. You could consider a range of asset classes, fund types or investment approaches. Henderson High Income Trust aims to do some of this blending on investors’ behalf – providing a diversified income solution in a single fund.

The trust’s target is to provide a steady, growing income stream alongside a degree of capital growth. The trust uses three tactics to meet this aim:

  1. Investing in a diversified selection of equities.
  2. Employing a bond portfolio that offers a stable income stream.
  3. Using the investment trust structure, for example utilising gearing.

 

1. Investing in a diversified selection of equities

The trust’s equity portfolio is managed by David Smith, Henderson High Income’s lead manager. He seeks companies – mainly listed in the UK – with strong cashflows that can support sustained income payouts.

The companies that form the portfolio include a diversified mix of medium and large sized businesses, across a plethora of sectors. David maintains a keen focus on a company’s underlying health, looking for those with solid business models and robust financial profiles. He also seeks companies whose shares are trading at attractive valuations – compared to what he perceives as their true value.

The portfolio combines companies that are growing their dividends and companies that pay high dividends now. This is intended to offer stable dividend growth to investors into the future.

2. Employing a bond portfolio to provide a stable income stream

The other 20% of Henderson High Income is invested in a dedicated bond portfolio. This is managed by a team of specialist fixed income managers – who run their own funds including, pre-merger with HHI, Henderson Diversified Income Trust.

The bond portfolio is intended to offer a more stable source of income for the portfolio. This should reduce the volatility of the trust’s returns. Equities are historically a higher-risk asset class than bonds. In particular, bond interest has proven to typically be more sustainable than equity dividends in time of economic stress.

3. Using the investment trust structure, including gearing

One of the unique features of investment trusts (among commonly-available funds in the UK) is their ability to use gearing. Gearing means that an investment trust can borrow money to invest further. This has the potential to build returns, although it can also extend losses.

Henderson High Income specifically uses its cheaper long-term gearing to buy higher-yielding bonds to generate extra income for the trust. It also uses gearing tactically to buy more equities, when the manager sees opportunities arising.

Click here to find out more about Henderson High Income Trust

Glossary

Bond

A debt security issued by a company or a government, used as a way of raising money. The investor buying the bond is effectively lending money to the issuer of the bond. Bonds offer a return to investors in the form of fixed periodic payments (a ‘coupon’), and the eventual return at maturity of the original amount invested – the par value. Because of their fixed periodic interest payments, they are also often called fixed income instruments.

Diversification

A way of spreading risk by mixing different types of assets/asset classes in a portfolio, on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification.

Dividend

A variable discretionary payment made by a company to its shareholders.

Free cash flow (FCF)

Cash that a company generates after allowing for day-to-day running expenses and capital expenditure. It can then use the cash to make purchases, pay dividends or reduce debt.

Gearing

Gearing is a measure of a company’s debt relative to its equity, showing how far its operations are funded by lenders versus shareholders. Investment trusts: The effect of borrowing money for investment purposes (financial gearing). The amount a company can “gear” is the amount it can borrow in order to invest.

Portfolio

A grouping of financial assets such as equities, bonds, commodities, properties or cash. Also often called a ‘fund’.

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. The higher the volatility the higher the risk of the investment.

 

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).

Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc

Important information

Please read the following important information regarding funds related to this article.

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.
    Specific risks
  • If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio that is diversified across more countries.
  • Most of the investments in this portfolio are in smaller companies shares. They may be more difficult to buy and sell, and their share prices may fluctuate more than those of larger companies.
  • 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.
  • Using derivatives exposes the Company to risks different from - and potentially greater than - the risks associated with investing directly in securities. It may therefore result in additional loss, which could be significantly greater than the cost of the derivative.

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