Henderson International Income (HINT ) has announced that following a spate of poor performance it intends to follow peers such as JPMorgan Global Growth and Income (JGGI ) and Invesco Global Equity Income Trust (IGET ) down the route of supplementing its dividend with payments out of capital.

At its annual general meeting next month it will ask shareholders for approval to turn its share premium account into a distributable reserve. However, ahead of this, for the financial year that ended on 31 August, it is paying a dividend of 7.71p per share from earnings of 6.72p, taking £1.94m off its brought-forward revenue reserves of £5.33m.

Within the AIC Global Equity Income sector, excluding highly geared minnow British & American (BAF ), Henderson International is the worst-performing of six trusts over five years with a total shareholder return of 26.8%. Over three and ten years it ranks above only Scottish American (SAIN ) and Murray International (MYI ) respectively.

The underperformance to JPMorgan Global and Invesco Global is significant, amounting to about 80 percentage points behind JGGI and 46 percentage points behind IGET over five years.

That is reflected in its rating: Henderson International shares sit on the widest gap to net asset value in the sector, though at 11% the discount is only marginally bigger than Murray International and Scottish American. Yet, despite trading on a double-digit discount for most of the past 18 months, the £325m trust’s board has not bought back any shares.

In his statement, chairman Richard Hills has highlighted HINT’s problem. Low- and zero-dividend-paying stocks have significantly outperformed high-dividend-paying stocks over the past few years, and that is particularly true in the US market, which dominates its MSCI All Country World (ex-UK) High Dividend Yield index benchmark with a 52% weighting.

By supplementing the revenue account with capital reserves, fund managers Ben Lofthouse and Faizan Baig will be able to lower the yield on the portfolio and invest more in low- or zero-yielding shares.

This is the growth versus value debate once again. Henderson International is jumping ship from value to growth, but is the leap mistimed?

Charts comparing the returns of global growth and value indices show a marked outperformance of growth from the financial crisis onwards, outperformance by value in 2022, and then renewed outperformance by growth, erasing value’s gains in 2022.

For most of that period, the dominant factor at work here was interest rates. Slashing rates in the wake of the financial crisis favoured growth. Then fears of rate hikes to combat soaring inflation favoured value. Now with rates coming down again, growth should recover, but it is important to remember that rates are not going down to previous low levels.

The other distorting factor at work here is the Magnificent Seven, which is behind much of the growth recovery in 2023 and 2024. We know that beating the global index without much exposure to those stocks has been very hard. This has been HINT’s problem, but what if that is already changing?

Among the seemingly shrinking pool of value-orientated funds, one that stands out is Temple Bar (TMPL ). Its fund managers say they are often told that value investing does not work anymore. Co-manager Ian Lance recently set out to disprove that theory using data from the end of October 2020, when value stocks started to rally as it became clear that vaccines were going to work against Covid.

Coincidentally, that is when he and Redwheel colleague Nick Purves took on the UK equity income trust after the dismissal of Ninety One.

In the UK, the MSCI UK Value Index has outperformed the MSCI UK Growth Index by 45 percentage points over that period, and Temple Bar beat the value index by an additional 28 percentage points.

Lance cites more data showing that over the four years, the small-, mid-, and large-cap Europe value indices have beaten their growth counterparts by a similar margin. In the trust world, this is demonstrated by the outperformance of Fidelity European (FEV ) versus its peers. The same is true in Japan, where CC Japan Income and Growth’s (CCJI ) high-yielding stocks, and the deep-value small-cap stocks in AVI Japan Opportunity (AJOT ) and Nippon Active Value (NAVF ) have beaten their rivals.

As Lance points out, the big exception to this has been the US, but growth has only beaten value within US large-cap as value is ahead amongst small- and mid-caps. What this reveals is the distorting effect of the Magnificent Seven, which makes growth look better than value in US and global indices over this period.

Lance suggests that the Magnificent Seven phenomenon represents the tail-end of investors’ obsession with growth. He points out that lowly valued stocks have outperformed in every complete decade of the last 100 years, with one exception – the 2010s, the decade of easy money and quantitative easing.

I still think that falling rates ought to be good news for growth stocks in the short term. In addition, I have always believed that good stockpickers can overcome style headwinds and that there is a logic to seeking out underappreciated smaller companies that can grow into the large stocks of tomorrow.

Nevertheless, Lance believes that value investing has returned to form and is the best way of beating indices over the long term. The problem that he and other value investors face is that a generation of fund managers and shareholders have become convinced that the opposite is true. Henderson International is shifting more towards growth. The debate is not settled yet and may never be.

James Carthew is head of research at QuotedData.

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