The global equity income sector only used to have a couple of members but in recent years it has been expanding as new funds have been launched and others have broadened their remits.
Just over three years ago Henderson launched a fund for this market, Henderson International Income (HINT). This week, I thought I’d have a closer look at it.
At launch, HINT raised just £41.5 million; not as much as Henderson was aiming for, which was up to £150 million.
It has grown since then but even today it is not a particularly large fund. It has a market cap of £78 million and gross assets of about £90 million. The expansion was achieved in part through performance and in part through tap issues of stock and a C share issue that raised £21 million gross for the fund in November 2013.
HINT currently trades on a small discount – just shy of 3% – but for most of its life it traded at a premium, barring a brief period around the end of 2011. The discount only really appeared at the end of 2013, unfortunately just after the C share issue.
HINT aims to provide a high and rising level of dividends, as well as capital appreciation over the long term, from a focused and diversified portfolio of overseas (ex UK) stocks.
In the first 16.5 months of HINT’s life it paid dividends totalling 5.4p – which annualises at about 3.9p. In the year to end of August 2013, dividends totalled 4p and in this accounting year the dividend has risen again. The quarterly run rate (all the funds in the peer group pay quarterly dividends) today is 1.05p – 5% higher than a year ago.
Best in NAV terms
The yield HINT generates is a bit below average for its peer group – British Assets churns out a yield of 4.7%; Midas Income & Growth, Murray International and Scottish American all sit on yields of around 4%; HINT’s yield is 3.6%. What it lacks in yield though, it more than makes up for in total return.
Over three years, HINT is the best performing fund in its peer group in net asset value (NAV) terms – up 32.5% versus an average of just 20.6%. The peer group numbers are dragged down by Scottish American, Murray International and British Assets.
HINT’s returns do lag its benchmark (the MSCI World ex UK) by a little though as it rose by 34.2% over the same period. HINT’s underperformance relative to the benchmark can easily be explained by the absence of emerging market exposure in the index. The MSCI All Countries World Index (which does include emerging markets) has returned 27.9% over the past three years.
HINT is differentiated from its peer group by having no exposure to the UK. I think it is odd it is the only fund adopting this strategy. As an overseas income fund, it complements the UK equity income exposure common to most investors’ investment company portfolios.
The portfolio, which has been managed by Ben Lofthouse since launch, is fairly focused and diversified. There were 60 holdings in the portfolio at the end of May 2014.
The largest holding is tobacco company Reynolds American at 3.1%, and the maximum permitted weighting in one stock is 5% at the time of investment.
The largest geographic exposure is to the US (just over a third of the portfolio) and, sector-wise, the biggest weighting is to financials and industrials.
Like its peers, HINT operates with a modest amount of gearing, using an overdraft facility provided by HSBC. Gearing is limited to a maximum 20%, which is relatively conservative.
The company’s small size does have an effect on its ongoing charges ratio, which was 1.4% in the year to 31 August 2013. This should fall a bit this year as it cut the annual management charge from 0.8% to 0.75% in November 2013 – but I think this is one reason why the fund needs to continue to grow.
Opportunity to expand
HINT has a chance to expand shortly as the conversion date for its 8.3 million subscription shares looms.
These have the chance to convert into ordinary shares at a price of 100p and they are well in-the-money now, with the share price at 114p so it looks likely the gross assets will soon edge closer to the £100 million mark. The dilution effect of this is included within the NAV return.
I thought the premise behind HINT was a good one when it launched and I am slightly surprised nobody has launched another fund that competes with it directly.
If HINT can get to £100 million, it should attract a wider audience and a bigger C share could be on the cards (provided, of course, that the discount does not widen from here).
James Carthew is a director at Marten & Co