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Global income: HINT retains fans despite ‘unspectacular’ year

7 November 2019

Analysts rate the attractiveness of Henderson International Income Trust despite it underperforming global equities by almost 10% in its most recent financial year.

Analysts rate the attractiveness of Henderson International Income (HINT) despite the trust underperforming global equities by almost 10% in its most recent financial year.

Shares in the trust, designed for income-seekers who already have their UK equity allocation determined, lost 1.4% in the year to the end of August while the MSCI World (ex-UK) index rose 8%.

However, John Newlands, founder of Newlands Fund Research, believes HINT ‘looks extremely attractive at the moment, especially for relatively risk-averse seekers of dividend income and long-term potential for capital growth’.

‘There is no overlap with trusts investing in UK-domiciled entities and moreover the trust has recently struck a stunningly effective deal in fixing much of its borrowings for 25 years at an annualised coupon of 2.43%,’ he said.

‘The fact that it has not produced sector-topping performance against far from identical peer group funds puts me off not one jot.’

Big headwind

HINT’s relatively pedestrian performance is disappointing but unsurprising. The £312 million trust targets companies with sustainable dividends that are covered by cashflow, which necessitates an underweight to the growth investment style that has been in vogue.

‘Its quality style with a dividend focus means it has lagged during a period when low- and non-dividend-paying growth companies have outperformed,’ said Alex Moore, head of collectives at Rathbones, the trust’s largest shareholder with more than 10% of assets.

The strategy’s structural underweight to US equities, which account for 31% of assets versus 63% of the benchmark, also makes a ‘respectable absolute performance appear quite pedestrian in relative terms’, according to Brewin Dolphin, its third largest shareholder with 5.7% of assets.

Chris Salih, a research analyst at FundCalibre, regards the trust’s performance as ‘solid but unspectacular’ thanks to its underweight to the US owing to the low dividend yields and extra withholding tax that such an investment entails.

‘This has been a big headwind for global income managers as US performance has been so strong relative to the rest of the world,’ he added.

The global equity income trusts that have outperformed HINT in the past five years, Scottish American (SAIN) and JPMorgan Global Growth & Income (JPGI), have a stronger growth bias. JPGI also has a far greater exposure to the US, which accounts for more than half of its assets.

‘If either of those trends reverse, then things could change very quickly [for HINT],’ said Salih.

Income generation

HINT aims to provide shareholders with a growing total annual dividend, as well as capital appreciation, and has achieved its income focus ‘reasonably successfully’ since its inception in 2011, according to Moore.

‘The dividend has increased annually, it pays a quarterly dividend that is covered by the underlying portfolio’s earning stream and there is enough in the trust’s revenue reserves to potentially smooth income distributions should the global equity market reduce its total distribution,’ he said.

The trust is well diversified with more than 70 holdings, making it less vulnerable than more concentrated portfolios to dividend cuts in the event of an economic downturn.

‘The portfolio’s income generation is diversified in that no one company will represent a disproportionately large amount of the dividend income and can be supplemented by an allocation to bonds and/or option writing, something which further differentiates HINT from its peers,’ said Markuz Jaffe, an analyst at Cantor Fitzgerald.

Shares in the trust have also demonstrated capital preservation tendencies in most periods of market drawdown. They have risen by more than 50% since issue and paid dividends throughout, giving a total shareholder return of 10% per year.

Murray International (MYI) is by far the biggest trust in the sector at more than £1.5 billion and boasts the highest yield of 4.3%, but its performance record is worse than HINT’s, in part due to its high exposure to emerging markets.

Scottish American yields the least among peers at 2.8%. JPMorgan Global Growth & Income yields 3.9%, more than HINT’s 3.4%, but pays a portion of its income from capital. ‘Some investors are averse to this idea,’ said James Carthew, research director at investment trust research company QuotedData.

He regards Securities Trust of Scotland (STS), which yields 3.2%, as HINT’s closest comparator, but it is smaller and has higher charges.

‘Which of these you choose will depend on your outlook for global economic growth and a large part of that depends on the outcome of the US/China trade dispute,’ added Carthew. ‘A return to more normal conditions might favour HINT.’

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