Henderson High Income (HHI) has published its interim results for the half-year ended 30 June 2024, during which it provided an NAV total return of 6.5%, outperforming its benchmark, which returned 5.9%, although the share price total return was less at 3.4% reflecting a widening of the discount. The NAV outperformance was achieved during a period that HHI’s chairman, Jeremy Rigg, describes as being generally positive for financial markets, noting that, with softer inflation globally, policy makers are focusing on lowering interest rates and investors have responded accordingly by increasing exposure to financial assets. Rigg goes on to say that the immediate outlook for markets is dominated by speculation over the timing of interest rate cuts with the US Federal Reserve having just instigated its first reduction. The Bank of England has made its first cut from 5.25% to 5% and there have been a number of reductions across Europe. Inflationary pressures are abating and with early signs of weaker labour markets across the globe it is now likely that monetary policy will loosen further over the remainder of 2024.

Gearing and equity-fixed income split

HHI started 2024 with an overweight position in equities and an underweight position in fixed interest investments compared with its benchmark (80% equities, 20% bonds) – a position that has not changed markedly during the first half of 2024, while HHI’s gearing is also largely unchanged (21.5% as at 30 June 2024). HHI’s board says that it has continued to regularly review the level of gearing with the trust’s manager during the current period of higher borrowing costs, notwithstanding the fact that a proportion of the company’s borrowings are at fixed rates.

Successful combination with Henderson Diversified Income

HHI issued £72.1 million of new shares in January 2024 following the successful combination with Henderson Diversified Income Trust plc. This will help to improve the liquidity and marketability of HHI’s shares and it has also helped to spread the company’s fixed costs across a larger shareholder base, which is in the interests of all shareholders.

Dividend

A first interim dividend of 2.625p per share was paid on 26 April 2024 and the second interim dividend for the same amount was paid on 26 July 2024. A third interim dividend of 2.675 pence per share was announced on 4 July 2024 and this dividend will be paid on 25 October 2024 to shareholders registered at the close of business on 13 September 2024 (with the shares being quoted ex-dividend on 12 September 2024).

Rigg comments that the UK equity market is delivering growth in dividend payouts during 2024 as UK corporates remain in relatively robust financial health. He adds that, within the market UK banks in particular have increased payout levels although this has been offset to some degree by lower dividends from the UK mining sector where weaker metals prices globally have impacted profitability.

Investment manager’s comment on performance

“The Company’s NAV (with debt at fair value) rose by 6.5% during the period, outperforming the Company’s benchmark return of 5.9%. Within the equity portfolio, holdings in Britvic, NatWest and Intermediate Capital were positive for performance. Britvic announced strong results during the period before being subject to a bid approach from Carlsberg. NatWest reported good results with net interest margins ahead of expectations and a 15% increase in the dividend. Alternative asset manager Intermediate Capital announced solid trading with better than expected fund raisings which should lead to future profit growth. Elsewhere the portfolio’s positions in Burberry and Mony Group (owner of MoneySuperMarket.com) detracted from returns. Mony Group’s share price was weak as investors feared that an easing in insurance premium price inflation would lead to fewer consumers switching their insurance providers. Burberry reported poor results and cautioned on the outlook given the challenging demand environment for luxury goods. After period end the company announced a further deterioration in trading and a suspension of the dividend, hence the position was sold.”

Investment manager’s comment on portfolio activity

“At the start of the year the Company completed the proposed combination with Henderson Diversified Income Trust plc (HDIV). The £72.1 million of new assets taken on as part of the transaction were invested in line with the existing portfolio at the time. The bond allocation remained relatively stable through the period and ended June at 14.0% of net assets.

“Within the equity portfolio new holdings were established in Dunelm, Mondi and Aviva. Dunelm is the UK’s leading homewares retailer with a strong business model which supports its competitive price position that has driven market share gains. The company also has a robust balance sheet, high free cash flow and an attractive dividend yield. Mondi is an integrated European packaging and paper company where we believe cyclical pressures that had constrained profits in recent years are now easing. Current investment in new capacity should also produce value accretive growth for the company over the medium term. After a period of restructuring, Aviva is now a much simpler business with good market positions in its core operations in the UK and Canada. It is well diversified across both life and general insurance and generates good cash flow. Funding came from the sale of B&M European Value Retail and Woodside Energy. B&M was sold on concerns that the business was being run too aggressively, while fears regarding the oversupplied LNG (Liquefied Natural Gas) market led us to exit the position in Woodside Energy.”