Income investors need to make sure they are exposed to the trends reshaping the global economy, according to Janus Henderson fund manager Ben Lofthouse, rather than wait around for a recovery in traditional bastions like oil and gas.
As the coronavirus pandemic has brought the structural issues in such sectors to a head, the manager has been trying to increase exposure in the £285m Henderson International Income (HINT) investment trust and £661m Global Equity Income fund, which he co-manages with Andrew Jones, to areas like renewables and tech.
Instead of going for all-out-growth, however, they have been hunting for the kind of businesses that can generate healthy amounts of cash to sustain dividends while moving with the times.
‘Right now, we’re in a very tragic situation, but we are on quite an exciting journey globally driven by some of the technological advances,’ said Lofthouse.
‘It’s not impossible to gain exposure to that through a wide range of different areas and it doesn’t just have to be buying the most thematic area of the market, which potentially doesn’t have valuation support.’
‘The oil companies have just started trying to figure out how to transition from a fossil fuel-dependent life to something else and actually a number of the European utilities have been figuring that out for the last six or seven years,’ he said.
‘They have shifted quite a lot into being some of the biggest renewables companies in the world.’
In that area, the fund managers have been adding to Italy’s Enel (ENEI.MI) and Spain’s Iberdola (IBE.MC).
Tech companies, whose shares have soared this year, are already a fairly large weighting. Microsoft (MSFT.O) is a top holding at around 5% of the fund and trust, with both holding Taiwan Semiconductor (2330.TW) in their top 10.
However, Europe has also proved a fertile hunting ground for businesses with tech-related exposure which still offer attractive yields and valuations, helped by the prospect of the EU’s green-tilted stimulus package.
‘If you look at the headlines, areas like France and Spain have had massive dividend cuts as countries. But what we’re also finding are companies like Siemens (SIEGn.DE) and ABB (ABBN.S) have good technology, where they’re well positioned to be part of automation,’ said Lofthouse (pictured).
The manager explained how they had been taking a similar approach in property as they tried to transition the portfolio ‘quite aggressively’ over the last few years. While avoiding shopping centres and staying light in offices, he had addded specialist real estate investment companies, such as data centre investor CyrusOne (CONE.O) and telecoms tower owner Crown Castle (CCI.N). Both were in the US and growth markets, he said.
While financial services have been a major area of dividend cuts, Lofthouse retains conviction in the sector’s income credentials, particularly non-life insurers, aided by a ‘hardening’ insurance market feeding into higher premiums.
Insurers make up around a tenth of the fund, while financials are the largest sector in the trust at more than a fifth of holdings.
Lofthouse (pictured below) picked out recent buy Zurich (ZURN.S), which yields nearly 6%, as an example of a company where the managers could be ‘paid to wait’ for a rerating. Exposure was also increased to German insurers like Allianz (ALVG.DE), with northern European regulators generally taking a softer view on dividends than neighbours like France.
Discounts and dividends
Lofthouse’s global equity income fund is down 6.9% this year, in line with the average in its IA (Investment Association) sector.
HINT shareholders have fared worse, despite the investment trust’s underlying net asset value (NAV) holding up better with a 5% decline. The shares have slid nearly 12%, with the discount – or gap between their price and the NAV – recently slipping to a wider-than-average 4%, though this has since narrowed to just over 2%.
Lofthouse (pictured) thought there was an ‘element of value exposure’ to cheaper, high-yielding stocks that had been a factor in weakening sentiment at a point when high-growth tech stocks have been all the rage with investors amid deep coronavirus uncertainty.
‘It will take a bit of time for people to get more confident that the income support is there and that’s going to be our job over the next six-to-twelve months,’ he said.
‘I think it’s much easier for us as an international trust to cover our [dividend] longer term than it will be if you’re purely one region, like UK or Europe,’ he added.
The manager, who estimated about 15% of the stocks in both portfolios had cut payouts this year, said he felt ‘pretty confident’ the dividend would return to being covered by investment income longer term.
To bolster revenue, 4%-yielding HINT has also upped gearing to 9%, using most of the borrowing to invest in corporate bonds. It also has revenues reserves, which investment trusts accumulate out of whatever income they do not pay out to investors each year, to support payouts. These stood at £5m at the end of February, about half the level of its total dividends in its last full financial year, which ended last August.
The Global Equity Income fund, which in contrast to the trust also has about a tenth of its assets in UK companies, yielded 3.3% at the end of June, according to its latest factsheet, down from 3.5% at the start of the year.
The effect of ‘value’ exposure on performance this year is revealed by a comparison with more growth-focused Baillie Gifford global income funds. The Edinburgh manager’s £604m Global Income Growth fund is up 4.8% over 2020, as the £677m Scottish American (SAIN) investment trust’s shares have rallied 3.8%. However, these are lower yielding strategies, yielding 2.5% and 2.8% respectively.
Over five years, the Janus Henderson fund has delivered a 34% total return, as HINT’s shareholders have enjoyed a 47% return. That compares to average gains of 43% and 55% in their respective IA and Association of Investment Companies sectors.
The latest edition of our quarterly investment trust e-zine has a feature highlighting eight overseas income trusts in ‘a lost decade for UK dividends.