Henderson International Income Trust’s Fund Manager Ben Lofthouse gives his thoughts on where income opportunities are emerging amid global stock market volatility
Volatility has crept back into global markets after a good run in the past few years, but its good news for active income investors (i.e. a team of fund managers that aims to beat an index rather than a fund that tracks an index).
Uncertainty in markets is an advantage for active stock-pickers and we are seeing plenty of opportunity to add high dividend-paying stocks at good valuations to the Henderson International Income Trust.
Technology stocks have gradually become important names in the Trust’s portfolio, which is not something you would have heard from an income-driven fund manager just a few years ago and is a clear reflection of the changing times…
Janus Henderson’s latest Global Dividends Index revealed tech stocks have grown their dividends far more than any other sector since 2010, while bottom of the class is utilities, which is also the smallest sector weighting in the portfolio (<5%). Dividend growth momentum has been evident in the tech sector for some time and we have been monitoring the technology companies globally for opportunities to buy at attractive valuations.
There are several technology stocks in the Trust’s top ten holdings, including Taiwan Semiconductor Manufacturing (2.7%), Cisco Systems (1.9%) and Microsoft (3.7%), which is also the Trust’s largest holding overall.
An advantage of volatility in markets for active managers is the ability to capitalise on nascent trends – and the reversal of trends. For example, oil companies and banks are showing signs of a return to their high-dividend paying days pre-financial crisis. This comes after a substantial period of financial turbulence for both sectors.
The financial sector was targeted by regulators around the world in the wake of the crisis. In the main, banks, insurers and lenders were instructed to improve their balance sheets with stronger reserves and rainy day money. That did lead to a dip in the sector’s dividends for some time. Since then, lots of financial companies have been increasing capital positions and economic growth has helped them improve their financial health, so we are seeing better than expected growth from the banking sector across the board.
Banks make up roughly 15% of the Henderson International Income Trust (HINT) portfolio and our exposure is globally diversified, including but not limited to Japanese group Mitsubishi UFJ Financial, China Construction Bank, Natixis and Nordea, while Dutch banking conglomerate ING Groep is the largest bank holding in the portfolio at 2%.
The oil sector’s dividend-paying ability suffered after a pretty hefty shock between 2014 and 2015 when the price of crude oil dropped more than 50%. Following that shock, many companies were failing to cover their dividends even when oil was $100 per barrel a day.
Now they are very focused on generating cash and for the first time in years they are covering their dividends with cash. We have been increasing exposure to them gradually over the past 18 months with the additions to the portfolio US companies Occidental Petroleum and Chevron.
The purpose of HINT is to provide global diversification and that means maintaining a diversified portfolio both geographically and on a sector basis. The US is our biggest country weighting (36%), with China (9.3%), France (8.7%), Germany (8.3%) and Switzerland (8.1%) completing the top five country exposures.
As well as maintaining sufficient diversification, it is also important to consider value. Valuations are important to total return, income is one part of it, and the value at the point of investment also has a significant impact on your longer term capital returns.
The Trust is currently not using the gearing facility (the ability to borrow money). We have the ability to add up to 25% and we have been up to 16% before. We tend to be counter cyclical to the market with the gearing, so by that I mean investing in companies whose attractions are underappreciated and using the gearing when people are worried about markets. At the moment people are worried about lots of things but the actual level of the market has appreciated a lot over the last couple of years, so we’ve allowed the gearing to run down.
Looking ahead, the global dividends prognosis is good. Dividends tend to lag earnings, which are strong, and the tax changes in the US are generating much higher earnings with some of that expected to come back in dividends. Commodity prices are higher, which in part will generate much more sustainable dividends and on top of that interest rates are still low, so I think we could see good dividend growth over the next 12 months.