Ben Lofthouse’s non-UK trust has remained focused on value and maintaining an attractive yield despite a difficult start, and he recently made a bold move into China.
His allocation has risen from 9% at the end of May 2014 to 15% in July, when taking into account Taiwan Cement and Singapore-listed Mapletree Greater China Commercial Trust, which Lofthouse regards as plays on China.
‘Two years ago, I did not really want much Chinese exposure because I was worried about the direction of [economic] growth,’ he said. ‘At that time, the government wanted to get inflation under control, but more recently we have seen signs of it doing a bit more to promote growth, by reducing the reserve requirement for banks lending to small and medium enterprises and social housing, for example.’
In mid-July Lofthouse bought SJM Holdings, the Macau-based casino operator, taking advantage of a drop in its share price of 24% since the beginning of this year. ‘At the moment it is spending money to increase in size, but in due course there’ll be a lot of cash generated from that,’ he said.
Lofthouse has also bought Beijing-based online gaming business NetEase, which licenses games from World of Warcraft creator Blizzard.
The trust aims to provide a high and rising level of dividends as well as capital growth over the long-term; SJM yields 5% and NetEase 2.2%.
‘[NetEase] is our lowest-yielding stock at the moment; 2% is about as low as we go,’ said Lofthouse. ‘We look for stocks with an annual initial yield from 2.5% up to about 8%. At the higher end we are looking for those that have been really beaten up and unloved, at the lower end we are looking for growth.’
Bombed out Europe
Henderson International Income Trust has done well from buying into bombed-out European equities. Having had around 32% in Europe at launch in April 2011, Lofthouse reduced exposure to around 24% at the height of Europe’s sovereign debt crisis. One of the biggest changes to the portfolio came in mid-2012 when valuations in Europe hit rock-bottom levels.
‘We were able to find stocks with price-earnings (P/E) ratios of 10 times and yields of between 7% and 8%. Delta Lloyd got down to a ridiculous valuation, trading at six times P/E and a yield of 10%,’ said Lofthouse.
He used gearing to increase exposure to Europe to 45%, but this summer he has been taking profits, selling stocks such as Delta Lloyd, the Dutch insurer once owned by Aviva that floated in 2009, and Luxembourg satellite business SES.
Overall, he has taken exposure to Europe back down to around 35%, a level he feels more comfortable with given that economic growth has not come through as strongly as he had hoped.
Lofthouse bought Delta Lloyd in the summer of 2012 for around €10 (£8) and sold in May this year for €18.5 (£15). SES, held from inception, resembled a ‘dead patient’ through 2011 and 2012 with its share price flat-lining at €18 (£14). Lofthouse sold in July when the shares traded at €27 (£21).
Henderson International Income Trust raised £42 million in its IPO, but its net asset value (NAV) tumbled in its early days amid concerns over Europe breaking up and the US debt ceiling being removed. Since inception in April 2011, its share price is up 22.3% and NAV 30.4%, compared with a 29.4% rise in the FTSE World index.
For the first 18 months of its life, the trust had 7% net cash.
‘It was quite a tough period to get a good view of what economic growth was doing,’ said Lofthouse.
Gearing peaked at 16% in April but has since fallen to nearer 8% due to profit-taking. Lofthouse forecast it increasing to 10% as he takes advantage of opportunities arising. However, to get back up to 16%, or even the trust’s maximum of 20%, he said he would want to see an equity market sell-off or greater evidence that economic growth was improving.
The trust is unique in the Global Equity Income sector for its lack of exposure to the UK.
Lofthouse, who has managed the fund since launch, said: ‘During the crisis, a lot of people found their favourite income stocks, such as Royal Bank of Scotland, Lloyds and Barclays, cut their dividends. It became apparent that there was quite a lot of concentration across portfolios, with global equity income funds traditionally having quite a lot of exposure to the UK too. We wanted to provide something totally ex-UK.’
The trust’s largest geographical weighting is to the US, which has remained relatively constant at around 35%, although holdings have rotated out of telecoms and consumer goods (names such as Verizon, Kraft and Mattel) into industrials and IT (hydraulics manufacturer Eaton, Microsoft and Seagate Technology).
‘There has been a big rerating in areas like consumer goods, where valuations are now hard to justify, whereas industrials and tech have derated because people have been nervous of growth,’ said Lofthouse. ‘Over the past year-and-a-half growth is coming through in the US despite the political impasse between the Democrats and Republicans.’
Around 8% of the portfolio is currency hedged, 6% euro and 2% Australian dollar, over fears of these currencies weakening against sterling.
Paul Milburn, investment analyst, Lowes Financial Management
There has been strong demand for global equity income from investors over the past few years, particularly from those who wish to avoid the concentrated nature of the UK equity income market.
The Henderson International Income Trust, which launched in April 2011, has achieved its objective of a progressive dividend policy and currently offers an attractive yield of around 4%.
Until May 2013, the total return was in line with the sector average and the MSCI World index, but the trust suffered a sharp correction in June 2013 and, although the NAV has posted a recovery, it has yet to regain its May 2013 high.
Consequently, the trust has underperformed both the sector average and MSCI World from a total return perspective since launch.
However, it has a bias toward value investing – stocks that are currently unloved by the market – and should these rerate, we should see an improvement in underlying NAV performance.
The trust’s discount plus high yield might represent an interesting proposition for investors looking to achieve income from global equities while still capturing some growth.
Innes Urquhart, analyst, Winterflood Securities
The Henderson International Income Trust is clearly differentiated from its peers by not investing in the UK and we believe its global ex-UK mandate is an attractive one, particularly given the fund’s historic yield of 3.8%.
Ben Lofthouse, the trust’s manager, selects stocks on a best ideas basis as contributed by Henderson’s specialist regional managers. The portfolio consists of 60 holdings and the 10 largest positions account for 25% of assets.
The fund also makes use of gearing, which currently stands at around 8%. Since its launch in April 2011, the fund’s NAV is up 34% on a total return basis, broadly in line with its benchmark, the MSCI World ex-UK index.
Holdings such as Deutsche Post and Reynolds American have performed particularly strongly for the fund.
The trust has subscription shares in issue that expire at the end of August this year. These are in the money and have been one of the reasons why the ordinary shares have been derated this year and are currently trading at a discount. We believe that this provides a short-term value opportunity as we would expect the fund to be rerated following the expiry.