Ben Lofthouse, Fund Manager for Henderson International Income Trust, delivers an update to investors on how the portfolio has fared amidst recent market volatility. Ben also discusses the latest portfolio activity; particularly the addition of fixed income to the portfolio.

Transcript

Hello, I’m Ben Lofthouse, Fund Manager for the Henderson International Income Trust. We published our half year results last week, so I thought it would be an appropriate time to update investors on generally what we’re doing in the portfolio at the moment and generally how the portfolio is coping with the onset of this pandemic.

Firstly, at Janus Henderson, I’d like to stress, it is very much business as usual; we are obviously working remotely, but the systems are working really well. And what’s quite interesting in terms of interactions with companies is that a lot of interactions with companies are continuing virtually. So, we still have virtual conferences, for example there are financial conferences and industrial conferences happening where you can talk to companies on subjects that are specific to their industry. And we’re also seeing access via trading statements and these types of things; there are road shows that are happening they’re just virtual road shows. So, for a business like ours which has people all over the world meeting a lot of companies normally as a part of the business of managing our investments for you that continues pretty much as normal, just with a lot less travel.

In terms of Henderson International Income Trust, what we’ve been doing this year is making sure that we change the portfolio to reflect changes in the world; particularly from an economic point of view. I think when the virus started to spread, we were quite quick in reducing our exposure to areas that were most directly impacted; which include things like cruise liners, some of the travel orientated areas and that was the right decision which we made early. I think if we could go back, the area we probably would have reduced a bit more would be the financial area. We’ve seen quite a lot of regulatory change happening over this period or certainly regulatory pressure around dividends in financial services. I think the good news for a portfolio like Henderson International Income is it’s a very widely diversified portfolio; we have over 70 holdings spread around 20 countries in the world. And, these dividend trends tend to be quite focused, at the moment, towards Europe and even certain countries in Europe rather than other countries, so we’ve been exposed there but not overly exposed.

One of the things we’ve been doing over the last year is quite significantly reducing our exposure to the energy sector. We’ve done quite a lot of that before March, then in March the OPEC Plus agreements somewhat collapsed and we’ve reduced the [exposure to] energy still, so from an income point of view and from a capital point of view we have very low exposure to that area and we have lower exposure than we’ve had for a long time to the financials area.

I think the three areas that are most impacted by COVID-19 [have been] leisure, financials and energy. On the flip side of that we’ve seen certain parts of the portfolio performing pretty well actually in this environment. We’ve seen for the food companies, eating at home is a trend that is driving and increasing the weekly shop; we are seeing some companies that we own benefit from that. We’re also seeing in the technology space, the fact that many of us are working at home and are very quickly having to adapt to new circumstances and new technologies; and in some cases, using technologies that companies have been trying to get us to use for many years. So, a company like Microsoft is seeing quite a big benefit from people moving towards its Microsoft Teams. We’re seeing a lot of demand for data storage, also things like the Cloud in which Microsoft has a lot of business. We hold a data centre business which actually disclosed for us in REITs; it’s quite an interesting subject as real estate investment trusts have had quite a tough time this year in many cases because you’re seeing, in the shopping area, people are not paying rent. Generally, our REIT investments, we have around 7%, have not seen that because we don’t have any shopping mall exposure. What we do have are telecom towers, data centres and some gaming exposure in the US; all of these companies have been receiving their rents. In areas like that we are seeing benefits and in areas like health care as well, which is the biggest sector that we own. We’re seeing a number of the companies that we own like Roche and Sanofi emerging at the forefront of things like testing and vaccine development. I think there is a tendency to hear a lot of the negative views going around at the moment and worry about a great deal of issues that must be happening to all companies; but across the portfolio it has been quite balanced.

From a dividend point of view, we have seen a few cuts; generally, what we’ve seen more are requests from regulators to delay payments for financial services companies. Where we have seen cuts is in the oil sector space. We’ve also seen increases in companies like Johnson & Johnson, who recently have increased their dividend payments in these last few weeks. And in terms of dividend payments around the world we’ve seen most of the dividends coming in from areas like the U.S. and Asia as expected. And even within Europe areas like Switzerland and Germany, corporates there have tended to pay their dividends. So, although the dividend cuts are quite highly publicised it hasn’t been an enormous detriment to the portfolio.

The one thing that is worth saying that we have done, is take advantage of some of the disruption in the market and for the first time since we launched the Trust we have bought some investment grade corporate bonds. In the sell off during March there was quite a lot of volatility in bond markets as well as equity markets. With this uncertainty around the economic outlook and dividends in some sectors we took the opportunity to perhaps increase the certainty of our income by taking advantage of the fact that these markets were selling off and got our credit team to buy a relatively modest weighting around 8% of the fund into investment grade bonds. That just gives us some guaranteed income for the next 12 months, 18 months, 24 months until the outcome of COVID-19 is clearer. The portfolio has always been designed with the ability to have up to 25% in bonds. As I said it’s a relatively modest allocation but I think it’s worth highlighting to investors at this time because it is the first time that we’ve used that allocation.

In terms of the dividend of the Trust we’ve just confirmed the quarterly dividend will be exactly the same for this quarter as it has been. And the board are willing to use the reserves that we have built up, so over time the Trust has not paid out everything it’s earned in income each year and the board are willing to use those reserves to cover any temporary shortfall between the income that the fund has to pay out and the income that the portfolio is generating. As I said and I stress this, it’s a very varied experience across the portfolio from an income point of view. The majority of the companies that we own are paying their dividends, but I wanted to reassure investors that we do have, as an investment trust, a little bit of flexibility over the next few years to help smooth that dividend.

If those dividends don’t come back, which leads us onto the outlook, in terms of outlook it is very difficult at the moment as, I think, we’re still in the early stages of reacting to COVID-19. What we are seeing in the portfolio is [COVID-19] is hitting differently in different countries and at different times around the world; and those countries are reacting to it in different ways and at different paces around the world. Areas like China and Korea where we own some shares, that were first hit by the virus, many of the factories there are fully open. We haven’t seen a full recovery in areas like transport and some other areas. But we have seen quite a lot of business activity recovering and we’ve seen some of those shares being some of the best performers in the portfolio this year. I think at the other extreme areas like the US, it is much more recent to see the impact there. We expect them to take longer to come out the other side. What we’ve seen that is consistent around the world is an enormous amount of support from central banks and governments to try and cushion the blow of the virus. I think there is an enormous amount being done and we’ll keep watching to see how that’s going and what opportunities that might throw up in the future for the fund to generate additional capital and income returns. But at the moment we’ve tilted [the portfolio] relatively defensively, the biggest sectors that we have exposures to are areas like healthcare, consumer staples and technology areas which in this crisis are certainly seeing more benefit than they are damage. Thank you very much for your time, I will give you further updates as the year progresses.