Henderson High Income Half-year Report

INTERIM MANAGEMENT REPORT

CHAIRMAN'S STATEMENT

Markets/Performance

The first half of 2022 has been a difficult and volatile period for financial markets. The Company's investment performance has been impacted by this with the net asset value total return falling by 6.1% during the first half, exactly in line with the Company's investment benchmark (80% FTSE All-Share Index/20% ICE BofAML Sterling Non-Gilts Index) return of  -6.1%. The backdrop of the war in Ukraine, surging inflation and higher interest rates have all combined to make investors concerned about weaker economic prospects and the negative impact on corporate profitability and share prices.

The Company holds the majority of its assets in UK equities. Of some comfort is the fact that the UK equity market has performed relatively better than other global markets during the first half of the year. For example, whilst the FTSE All-Share Index returned -4.6% during the period, the MSCI World Index returned -11.6%, in sterling terms.

Gearing/Asset Allocation

The Company started 2022 with an overweight position in equities and an underweight position in fixed interest investments as compared with its benchmark. Overall this proved to be of benefit as whilst equity markets have struggled, fixed interest markets have performed worse as interest rates and bond yields have risen. For example, the FTSE All-Share Index return of -4.6% compares with a return of -12.4% for the ICE BofAML Sterling Non-Gilts Index. This benefit was offset however by the Company's positive gearing which was not helpful due to the absolute falls in both equity and fixed interest markets.

During the first half of the year the allocation towards equities was reduced by some £11 million with £4 million being added to fixed interest investments and the balance used to pay down borrowings.  Gearing which commenced the year at 22.4% fell to 21.5% at the end of June.  The Board regularly reviews the level of gearing with the Company's fund manager as it seeks to balance appropriate risk with the requirement to deliver the high income returns at the heart of the Company's strategy.

Dividends

The first interim dividend of 2.525 pence per share was paid on 29 April 2022 and the second interim dividend for the same amount was paid on 29 July 2022.

A third interim dividend, to be paid from the Company's revenue account, of 2.525 pence per share was announced on 20 July 2022 and this dividend will be paid on 28 October 2022 to shareholders registered at the close of business on 16 September 2022 (with the shares being quoted ex-dividend on 15 September 2022).

It is encouraging to note the improvement in UK company dividend payouts during 2022 following the reduction or suspension of dividends during the pandemic. By way of illustration, in the first half of 2022 the Company's revenue return was 5.93 pence per share. This compares with a revenue return of 5.57 pence per share in the first half of 2019, before the onset of the pandemic. There has been a particularly strong recovery in sectors such as energy and materials due to buoyant commodity prices and more recently companies in the financials sector such as the banks have also boosted payouts. Whilst it remains to be seen if this trend is curtailed as companies become more cautious on prospects, it is important to stress that UK corporate balance sheets are generally in good health.

David Smith, the Company's Fund Manager, regularly analyses prospective income levels from the Company's portfolio of investments and together with the healthy dividend reserves which the Company has built up over the years, leads the Board to have confidence in the Company's ability to continue to deliver a high income return for shareholders.

Issue of Shares

Whilst the first half of 2022 has undoubtedly been a challenging one, it is certainly encouraging that the Company's share price has generally traded close to the underlying net asset value and at times has traded at a premium. This has enabled the Company to periodically issue new shares at a small premium to asset value when underlying investor demand has been forthcoming. In total, the Company issued 1,200,000 shares during the first half of 2022. The Board believes that it is very much in the interests of shareholders for the Company to grow as it will help to improve the liquidity in the Company's shares and help to spread the Company's costs over a larger number of shares in issue which benefits all holders.

Outlook

The near-term outlook for markets is dictated by the likely path of inflation and therefore global interest rates (as policy makers attempt to bear down on inflation) and the impact on economic activity. The Bank of England is currently forecast to increase the UK base rate to around 4% in 2023, a sharp increase from 0.25% where it started 2022. Undoubtedly the next several months will prove a very challenging time for both consumers and companies. However, UK companies are generally in good financial health having repaired balance sheets during the pandemic and the valuation of the UK market continues to look relatively attractive in a global context. The Company has a good balance of both economically sensitive and non-cyclical investments and David Smith, the Company's fund manager, will strive as always to position the portfolio to deliver superior income generation whilst also seeking to deliver longer term capital appreciation.