Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Investment trust offers way to achieve portfolio diversification
Thursday 03 Nov 2016 Author: James Crux

Low interest rates and rising inflation pose a very real threat to UK savers and yield-starved investors.

But the post Brexit vote plunge in the pound should continue to provide a boost to the performance of funds that invest overseas, since the earnings and dividends they generate in international markets become more valuable when translated back into sterling.

Given an uncertain UK outlook following the surprise vote for Brexit and the threat of dividend cuts looming large for UK-focused trusts, the growing and sustainable yield offered by the Henderson International Income Trust (HINT), which has just raised its quarterly dividend to 1.2p, up 4.3% quarter-on-quarter, looks increasingly compelling.

Inv Trust table 1

Diversified vehicle

‘We are the only global investment trust that invests exclusively outside the UK,’ explains Ben Lofthouse, manager of the £223 million net assets trust, which trades at a 3.38% discount to estimated NAV and offers a 3.21% yield at the time of writing. This looks attractive when you consider the diversification benefits and the trust’s strong track record of growth in net assets and rising dividend distributions.

‘HINT is a diversified vehicle for UK investors designed to reduce stock and sector specific risk,’ explains Lofthouse, who adds that ‘economic and political risk in the UK has become much higher following the EU vote’ and flags ‘a big kicker to the NAV performance’ due to the weakness in sterling seen since the referendum.

Significantly, HINT combined assets with Henderson Global Trust earlier this year, doubling the size of the trust. This increase in scale enabled HINT to reduce its ongoing charge and pare the management fee from 0.75% to 0.65% of net assets from 26 April.

‘HINT’s’ objective is to provide a high and rising level of dividends as well as capital appreciation over the long-term from a focused and internationally diversified portfolio of around 60 shares. Top ten positions include the likes of cash-generative software giant Microsoft (MSFT:NDQ), defensive drugs giants Novartis (NOVN:SWX) and Roche (RO:SWX), not to mention strong performer Taiwan Semiconductor (2330:TW), ‘a world leading producer of semiconductor chips which increased the dividend by 33% this year and by 50% last year’.

‘One of the things that HINT does for people is diversify,’ says Lofthouse, whose fund has roughly 40% exposure to the eurozone, just under 40% in North America, an attractive source of quarterly dividends for the trust to harvest, and the balance in Asia Pacific. ‘You’ll have to wait a bit longer for the dividend cover on the trust to benefit,’ says Lofthouse, ‘but the longer the pound stays down here, the more we are going to earn.’

Inv Trust table 2

Portfolio activity

‘Over the past year, the biggest change is that we’ve reduced the US exposure,’ says Lofthouse, who has taken profits on strong performers and recycled proceeds into some European names. ‘We sold out of Reynolds American (RAI:NYSE),’ says Lofthouse of the second largest player in the US cigarette market, which subsequently received a $47 billion offer from British American Tobacco (BATS) for the shares BAT does not already own, ‘because it had done very well.’

‘We also reduced positions in security and aerospace giant Lockheed Martin (LMT:NYSE), theme parks operator Six Flags (SIX:NYSE) and information protecion-to-storage services group Iron Mountain (IRM:NYSE),’ explains the canny manager.

Inv Trust chart

New additions

‘But we’ve added a variety of companies,’ continues Lofthouse, ever-alert to attractively valued dividend growth stocks from around the globe. ‘We haven’t held European banks for years, but in the last sell-off, we bought ING Groep (INGA:EURONEXT) and Natixis (KN:EURONEXT). These are both trading well below their book value and are both well capitalised banks with strong balance sheets that are enabling them to pay large dividends,’ comments Lofthouse.

‘ING and Natixis don’t need to use their balance sheets too much to grow and they’ve got a strategy of improving returns by focusing on niches. In the Netherlands and Belgium, ING is a household name in terms of being a retail bank,’ says Lofthouse. ‘The Netherlands is quite a consolidated market, which means the entry barriers are higher and pricing for ING is better,’ says Lofthouse, who also highlights Natixis attractive yield – 7.62% according to Morningstar – and scope for special dividends too.

Another interesting recent purchase is Panasonic (6752:TSE), the Japanese electronics goliath which is growing its dividend quickly and has a net cash balance sheet which should limit any potential downside.

A long-standing battery partner of Elon Musk’s Tesla Motors (TSLA:NDQ), Panasonic is already working with the US electric cars maker to supply batteries for the Model 3, Tesla’s first mass-market car, though the ‘buy’ case is based on the company selling batteries to multiple global automotive makers.

Panasonic has also now agreed to manufacture solar cells and panels for Tesla, contingent on shareholder approval of the Musk-led auto-innovator’s acquisition of SolarCity (SCTY:NDQ).

Picture - Ben Lofthouse

Ben Lofthouse

Henderson Global Investors

‹ Previous2016-11-03Next ›