Investment Trust Insider: say HHI to some defensive high income

As we know, 2012 has been a great year for many above average-yielding companies and the funds that invest in them.

The net asset value (NAV) of the average investment company in the UK growth and income sector is up by 15% so far this year – well above the return for the UK market, up by 10.4% – and has also outperformed the average UK growth fund, which was up by 12.5% in 2012.

The real star performers are the UK high income small-cap funds, such as Acorn and Aberforth Geared Income , both up by about 40% this year. The UK high income investment companies have also fared well, with the average fund returning 14.8% over the period. One of these that deserves a mention is Henderson High Income.

The £130 million fund has been managed by Alex Crooke at Henderson since 1997. Crooke is maybe better known for managing the Bankers Investment Trust, which he took on in 2003, meaning the Henderson High Income role predates Bankers.

His long-term track record is pretty good. Over 10 years he has beaten the UK market by more than 40% and, since December 1997, Henderson High Income’s NAV is up by 187% on a total return basis versus 103% for the UK market.

Following fashion

Henderson High Income started life as a conventional fund. In 2000, following the fashion, it became a split capital investment trust geared with zeros. In 2005, when splits were deeply out of favour and the zeros were maturing, the board opted to replace the zero gearing with bank debt.

You will know from reading these articles that I am not a huge fan of funds that are highly leveraged with bank debt – it makes them more vulnerable in market downturns than funds geared with zeros.

However, Henderson High Income’s net gearing at the end of September was 20%, which, while at the upper end of what I would normally be comfortable with, is not excessive. Moreover, it is offset by a portfolio of bonds of roughly equal size.

The maximum permitted gross level of gearing is 40% but it is unlikely it would reach that level. To reflect the structure, the benchmark is 80% FTSE All Share and 20% Merrill Lynch Sterling Non Gilts index.