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Henderson Far East Income: December 2020 update

In this investment trust update, Senior Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, cost and performance of Henderson Far East Income.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • A focus on income from companies based across the Asia Pacific region
  • A value-driven approach means the trust has faced a tough period this year
  • Dividend income has continued to be strong, but this isn’t a guarantee of future income

How it fits in a portfolio

The main aim for Henderson Far East Income is to provide a growing income. As an increasing number of Asian companies are starting to pay dividends, this trust aims to take advantage of that. The trust could therefore be used as part of a more adventurous income portfolio, given it invests in some higher-risk emerging markets, or to diversify the Asian part of a global long-term investment portfolio. It also offers the potential for some capital growth, though investors should be aware the manager uses derivatives (in this case known as "options") in order to boost the income paid. This can erode some of the potential for capital growth, and increases risk. The ability to use gearing (borrowing to invest) also adds risk, if used.

Manager

Mike Kerley has managed this trust since the start of 2007. He joined Henderson (now Janus Henderson) in 2004 and has managed Asian equities ever since. Kerley has prior experience analysing and investing in Asian companies at ISIS Asset Management and Invesco Asset Management.

The manager’s main focus now is to invest in Asia for income. Alongside this trust he runs the open-ended Janus Henderson Asian Dividend Income Fund, which is run in a similar way. He works closely with and has support from Sat Duhra, who is co-manager on both Asian income portfolios. Kerley is based in London, while Duhra works in Singapore along with other Janus Henderson analysts that provide support to the managers.

Process

The trust aims to deliver a high level of dividends, which grow from year to year, along with modest capital growth over the long term. It does this by investing in dividend-paying companies across the Asia Pacific region, including countries such as China, Taiwan and Australia. The managers focus their attention on businesses with high dividends, which they think can be sustained, and even grow, over the long term.

Kerley and Duhra use a value-driven approach, looking for companies that have been overlooked by other investors and can be bought at a share price that’s lower than their future potential means it should be. Robust cash flows are important, as this is ultimately what should help support dividends over the long run. Low levels of debt plays an important part in this too. The managers frequently meet companies in the region, and aim to understand both the drivers and risks that these businesses face.

Over the past year the trust’s exposure to China has increased to 26.5%, where the managers added investments in China Railway Construction and China Resources Cement. On the other hand, exposure to Australia, which has seen some of the worst dividend cuts, has reduced to 13.0%. In particular, some Australian retail property companies have been sold.

The managers have been focusing more on domestic-facing companies, which don’t rely so much on business from, or exports to, the rest of the world. They think intra-Asian trade is likely to be more buoyant than exports to the West in the coming years.

Culture

Janus Henderson Investors is a large investment firm with offices all over the world. It was formed in 2017 from the merger of two long-established groups – US-based Janus Capital Group and Henderson Global Investors.

It values experience, and so fund managers at the group tend to have plenty of investment experience. Sharing knowledge and ideas between investment teams is an important part of the culture. Managers have the flexibility to tap into the wider group’s resources for ideas and insights, but also have the freedom to do their own research and form their own views without having a ‘house view’ placed on them.

Cost

The trust’s annual ongoing charge is 1.08%, which is a slight reduction from 1.11% in 2019. That said, it still has the joint highest ongoing charges in the AIC’s Asia Pacific Income peer group. Investors should refer to the latest annual reports and accounts and Key Investor Information for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform fee of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. Our platform fee doesn’t apply if held in a Fund and Share account.

Performance

It’s been a tough year for the fund, losing 3.2% in share price terms and 3.7% in NAV (Net Asset Value) terms over the 12 months to the end of November 2020. The broader Asia Pacific stock market has grown 13.4%* over this time. As always, past performance isn’t a guide to future returns.

The trust’s value-focused approach dented returns this year, as many investors favoured growth-oriented stocks, particularly those in the technology and internet-related sectors. Many of the big tech names don’t pay, or pay little, dividends, which means most income portfolios don’t tend to have much exposure here and missed out on gains made this year.

This trend reversed recently in November following news of coronavirus vaccines and the trust had a better month. This is over a short period though and there are no guarantees this will continue.

The trust does have some exposure to tech, including Taiwan Semiconductor Manufacturing, which has been one of its best performers this year. The managers took some profits and reduced the holding following this rise, though it’s still one of the trust’s largest holdings. Other key contributors to performance include those in the basic materials sector, such as BHP, Rio Tinto, Fortescue Metals, China Resources Cement and Taiwan Cement.

Some of the weakest investments included banks and property companies, two of the worst hit areas during the pandemic.

While overall performance has recently been weak, the trust stands out in terms of income. Many investment trusts had to dip into revenue reserves this year to avoid cutting their dividends. Henderson Far East Income didn’t need to do this, fully funding its dividend from portfolio income and growing the annual dividend by 2.7%. A small contribution was also made to its revenue reserve to help with potential future dividend growth.

This isn’t a guarantee of what income will be paid in future though, or that the dividend growth can continue. Option writing is used by the trust to boost income, but increases risk.

Annual percentage growth
Nov 15 -
Nov 16
Nov 16 -
Nov 17
Nov 17 -
Nov 18
Nov 18 -
Nov 19
Nov 19 -
Nov 20
Henderson Far East Income 28.3% 16.8% -2.7% 10.1% -3.2%
FTSE World Asia Pacific ex Japan 34.1% 17.3% -1.9% 10.2% 13.4%

Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2020.

Find out more about Henderson Far East Income Trust including charges

Henderson Far East Income Trust Key Information Document

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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