The ap­peal of look­ing beyond the UK for div­i­dends

We ex­plain how Hen­der­son In­ter­na­tional In­come Trust finds op­por­tu­ni­ties in over­seas mar­kets

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The Bank of Eng­land’s re­cent move to raise UK in­ter­est rates from 0.25% to 0.5% re­flects a de­ter­mi­na­tion to get a grip on in­fla­tion, of­ten dubbed the ‘cru­ellest tax’, since it erodes savers’ pur­chas­ing power.

Those in­vestors con­cerned by in­fla­tion and the im­pact of Brexit on do­mes­tic earn­ings may wish to con­sider some ex­po­sure to ris­ing div­i­dends gen­er­ated away from the UK’s shores. One rel­e­vant prod­uct is in­vest­ment trust Hen­der­son In­ter­na­tional In­come Trust (HINT).

The global equity in­come uni­verse con­tin­ues to be in good health and it is pos­si­ble to find com­pa­nies of­fer­ing real div­i­dend growth. De­spite many over­seas mar­kets scal­ing new heights, equities still look at­trac­tively val­ued rel­a­tive to bonds.

Div­i­dend-in­come di­ver­si­fier Hen­der­son In­ter­na­tional In­come Trust seeks to pro­vide a high and ris­ing level of div­i­dends as well as cap­i­tal ap­pre­ci­a­tion over the medium to long term.

Ben Loft­house has man­aged the trust since launch in 2011. A div­i­dend seek­ing, val­u­a­tion driven in­vestor, Loft­house looks for com­pa­nies that have strong fun­da­men­tals, good bal­ance sheets and at­trac­tive cash flow char­ac­ter­is­tics that can sup­port grow­ing div­i­dends, tend­ing to focus on com­pa­nies that yield above 2%.


Im­por­tantly, Hen­der­son In­ter­na­tional In­come Trust looks to find these com­pa­nies from across the globe but not the UK, of­fer­ing in­vestors the chance to di­ver­sify from any UK in­vest­ments they may have, and in par­tic­u­lar UK-based in­come gen­er­at­ing stocks.

As at 30 Septem­ber 2017, the port­fo­lio’s ex­po­sure to the Amer­i­cas, Europe and Asia Pa­cific stood at 34.4%, 40.2% and 26.5% re­spec­tively.

This is sig­nif­i­cant, as in­vestors who focus solely on UK-listed firms, or the funds that in­vest in them, run the risk of sig­nif­i­cant in­come con­cen­tra­tion.

‘More than 70% of the UK’s in­come as a mar­ket comes from the top 20 stocks,’ says Loft­house. ‘We’ve un­der­taken never to own UK names, so we offer di­ver­si­fi­ca­tion,’ con­tin­ues Loft­house, who re­marks that this alarm­ing con­cen­tra­tion of UK equity in­come hasn’t re­duced in the years since Hen­der­son In­ter­na­tional In­come Trust’s launch. ‘If any­thing, it has gone the other way,’ he ex­plains.


In the fi­nan­cial year to 31 Au­gust 2017, Hen­der­son In­ter­na­tional In­come Trust gen­er­ated a to­tal re­turn of 18.8% in net as­set value (NAV), in­clud­ing div­i­dends of 4.9p per share, up a healthy 5.4% year-on-year. While that is a good per­for­mance, in­vestors should not as­sume fu­ture re­turns will be the same. The value of in­vest­ments can go down as well as up, so you could get back less than you in­vested.

The quar­terly div­i­dend payer’s on­go­ing charges fig­ure (OCF), cur­rently 0.88%, has re­duced from 1.39% in the year of its launch as a re­sult of as­set growth and a re­duc­tion in fees in April last year.

The trust has also grown sig­nif­i­cantly since launch; net as­sets nearly dou­bling in size to around £200m in 2016 af­ter com­bin­ing as­sets with Hen­der­son Global Trust and

through the is­suance of shares to boost liq­uid­ity, broaden wealth man­ager de­mand and lower charges.

‘Div­i­dend growth has been good in the port­fo­lio and widely spread across sec­tors and re­gions,’ says Loft­house, ad­dress­ing last year’s per­for­mance.

The in­vest­ment trust’s val­u­a­tion dis­ci­pline of­ten leads Loft­house to in­vest in out-of­favour sec­tors and re­gions. Europe has been the largest regional ex­po­sure in the port­fo­lio for some time, and an eco­nomic re­cov­ery has seen strong per­for­mance over the past year from a num­ber of Euro­pean stocks.

Some of last year’s largest div­i­dend in­creases came from the likes of Dutch bank Van Lan­schot, and French banks Natixis and BNP Paribas.

Stronger bal­ance sheets and clearer reg­u­la­tory re­quire­ments re­gard­ing cap­i­tal lev­els en­abled those names to pay larger dis­tri­bu­tions.

Driven by earn­ings growth, oth­ers to ma­te­ri­ally in­crease their share­holder re­wards in­cluded smart­phones leader Sam­sung, lo­gis­tics leviathan Deutsche Post and soft drinks dis­trib­u­tor Coca-Cola Euro­pean Part­ners.


Not averse to a turn­around tale, Loft­house seeks to avoid value traps by ‘fo­cus­ing on free cash flow’, a fac­tor in the trust’s out­per­for­mance of peers since launch as ‘it is one way to avoid bal­ance sheet prob­lems’.

An­other way of es­chew­ing stock mar­ket dis­as­ters is ‘not reach­ing for too much yield’; since op­ti­cally high yields are of­ten a red flag for im­pend­ing div­i­dend cuts.

Loft­house prefers to put in­vestors’ money to work with in­dus­try lead­ers which ben­e­fit from economies of scale, di­ver­si­fi­ca­tion of earn­ings streams and also pric­ing power.

Ex­em­plars in the port­fo­lio in­clude Sam­sung, of­fer­ing a com­pelling com­bi­na­tion of free cash flow growth, in­creased di­ver­si­fi­ca­tion and ris­ing share­holder re­turns, soft­ware giant Mi­crosoft and Best Buy, the num­ber one US con­sumer elec­tron­ics re­tailer.

‘We look for businesses that have con­sol­i­dated,’ he says of the lat­ter, a suc­cess­ful turn­around tale and div­i­dend growth stock which has 30% mar­ket share, ‘and where there has al­ready been a lot of pain.’


Last year’s most sig­nif­i­cant change in port­fo­lio com­po­si­tion was the in­crease in emerg­ing mar­kets ex­po­sure. This was mainly driven by new Chi­nese in­vest­ments such as food man­u­fac­turer Dali and sports­wear man­u­fac­turer/ re­tailer Anta Sports.

‘Buying rea­son­ably at­trac­tive in­come stocks through time has gen­er­ally out­per­formed,’ in­sists Loft­house, ar­gu­ing his strat­egy has the po­ten­tial to pro­vide good re­turns to in­vestors in a va­ri­ety of mar­ket con­di­tions.

‘It takes you away from bub­bles, so you avoid ex­ces­sive val­u­a­tions,’ says Loft­house, while even in a down mar­ket, div­i­dends pro­vide down­side pro­tec­tion for pa­tient port­fo­lio builders. (JC)

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