27 October 2022
HENDERSON INTERNATIONAL INCOME TRUST PLC
Annual Financial Report for the year ended 31 August 2022
This announcement contains regulated information
PERFORMANCE TO/AT 31 AUGUST
| Total return performance for year to 31 August | 2022 % | 2021 % |
| NAV1 (debt at par) | 3.8 | 22.7 |
| NAV1 (debt at fair value) | 6.3 | 23.5 |
| Share price2 | 7.8 | 18.5 |
| MSCI ACWI (ex UK) High Dividend Yield Index (sterling adjusted)3 | 6.6 | 21.9 |
| MSCI World (ex UK) Index (sterling adjusted)3 | 0.6 | 26.9 |
| AIC Global Equity Income sector (NAV) | 3.6 | 26.1 |
| Performance to/at 31 August | 2022 | 2021 |
| NAV per share at year end (debt at par) | 181.5p | 181.7p |
| Discount (debt at par) | (5.3)% | (8.7)% |
| NAV per share at year end (debt at fair value) | 183.4p | 179.4p |
| Discount (debt at fair value) | (6.3)% | (7.5)% |
| Share price at year end | 171.8p | 166.0p |
| Net assets | £355.7m | £356.2m |
| Dividend in respect of year6 | 7.25p | 6.30p |
| Dividend yield at the year end7 | 4.2% | 3.8% |
| Ongoing charge for year8 | 0.83% | 0.83% |
| Gearing at year end | 6.5% | 4.5% |
| Dividend growth since launch to 31 August 2022 | |||||||||||||
| 20114 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | ||
| Total dividend (pence per share) | 1.40 | 4.00 | 4.05 | 4.25 | 4.50 | 4.65 | 4.90 | 5.30 | 5.70 | 6.00 | 6.30 | 7.25 | |
| Dividend yields at 31 August | 2022% | 2021% |
| Company7 | 4.2 | 3.8 |
| Benchmark3 | 3.9 | 3.4 |
| MSCI World (ex UK) Index3, 5 | 2.0 | 1.6 |
| AIC Global Equity Income sector | 3.6 | 3.2 |
1 Net asset value (“NAV”) total return per share (including dividends per share reinvested)
2 The Company’s share price total return (assuming the reinvestment of all dividends excluding dealing expenses) . Since inception share price return – launch price including discount (97.25p)
3 On 26 April 2022, the benchmark index was changed from the MSCI World (ex UK) Index to the MSCI ACWI (ex UK) High Dividend Yield Index. See chairman’s statement for details
4 Four-month period from launch on 28 April 2011 to 31 August 2011
5 MSCI World (ex UK) Index in US$
6 Includes the fourth interim dividend in respect of the year ended 31 August 2022 declared on 27 October 2022 to be paid to shareholders on 30 November 2022
7 Calculated based on the closing share price at 31 August
8 Calculated using the methodology prescribed by the Association of Investment Companies (“AIC”)
Source: Morningstar Direct, Funddata, Janus Henderson, Refinitiv Datastream
INVESTMENT OBJECTIVE
The Company’s investment objective is to provide shareholders with a growing total annual dividend, as well as capital appreciation.
INVESTMENT POLICY
The Company will invest in a focused and internationally diversified portfolio of 50-80 companies that are either listed in, registered in, or whose principal business is in countries that are outside the UK and will be made up of shares (equity securities) and fixed interest asset classes that are diversified by factors such as geography, industry and investment size. A maximum of 25% of gross assets may be invested in fixed interest securities. The Company does not hold investments in unlisted companies unless it is through subsequent delisting of an existing investment.
Investment in any single company (including any derivative instruments) will not, in gross terms, exceed 5% of net assets at the time of investment and no more than 15% of gross assets may be invested in other listed investment companies (including investment trusts) or collective investment schemes. No more than 10% of gross assets may be invested in companies that themselves invest more than 15% of their gross assets in UK listed investment companies or collective investment schemes.
The Company may use financial instruments known as derivatives for the purpose of efficient portfolio management, for investment purposes or to generate additional income while maintaining a level of risk consistent with the risk profile of the Company. The Company may hedge exposure to foreign currencies up to a maximum of 20% of gross assets and may generate up to a maximum of 20% of gross income through investment in traded options.
The Company can borrow to make additional investments with the aim of achieving a return that is greater than the cost of borrowing. The Company’s articles of association allow borrowings up to 100% of net asset value. In normal circumstances, the manager may only utilise gearing up to 25% of net assets at the time of drawdown or investment (as appropriate) in accordance with the board’s policy and for these purposes ‘gearing’ includes implied gearing through the use of derivatives.
CHAIRMAN’S STATEMENT
It is very difficult to summarise the events of the last year into a specific theme or trend. What started out as a period with the hope of the Covid pandemic abating and supply bottlenecks easing, ended with ongoing conflict in the Ukraine and persistently high inflation globally. In this complex economic environment, the Company’s diversified portfolio and value conscious approach has helped smooth some of the market turbulence.
Performance and markets
Over the year, the net asset value (“NAV”) total return per ordinary share has risen by 3.8% (debt at par) and by 6.3% (debt at fair value). The total return on the ordinary share price was 7.8%, this figure includes total dividends of 7.25p per ordinary share, an increase of 15% on the previous year. To represent better the objectives of the Company, the Company’s performance comparator has been changed to the MSCI ACWI (ex UK) High Dividend Yield Index (sterling adjusted), which generated 6.6% total return over the period. For comparative purposes, the previous benchmark, the MSCI World (ex UK) Index (sterling adjusted), returned 0.6%.
While the portfolio had no direct exposure to the conflict in Ukraine, in terms of Russian or Eastern European listed companies, the war has particularly impacted the valuation of European equity markets and, therefore, some portfolio holdings. The inability of China to find a solution to the pandemic has meant that Far East growth is lower than we expected, which has been a drag on the Far East exposure in the portfolio.
Equity markets have rotated towards less economically sensitive companies, including those in the pharmaceutical, consumer staples and telecommunications sectors, to which the portfolio has significant exposures. These defensive stocks have been the strongest performers. The increased energy exposure has also been a strong contributor to absolute performance. The decision taken a few years ago to take on a tranche of low fixed-rate debt to 2044 is looking increasingly prudent now that interest rates are rising.
Despite all the economic and political uncertainty, the portfolio’s income generation has been very strong. During the period, financial services regulators removed recent restrictions regarding dividend distributions, which allowed many companies to pay the dividends that were suspended in 2020/21. Commodity prices have generally been higher than expected over the year, which has benefited the portfolio’s materials and energy holdings’ earnings, and this has translated into higher than expected dividends. Currency trends have also been positive for dividends as sterling has weakened against a number of currencies, particularly during the second half of the year, and dividends are all paid in foreign currencies.
The board gives due focus to Environmental, Social and Governance (“ESG”) matters. Whilst the Company does not have an explicit mandate, the board and investment team are conscious that investors’ interest in ESG matters continues to grow. Details about the manager’s and investment team’s approach to ESG have been included in the annual report, please see the Business Model in the annual report.
Strategy, growth and corporate activity
Since your Company’s original listing, the board’s strategy has been to provide a high and rising level of dividends as well as long-term capital appreciation from an internationally diversified portfolio of securities outside the UK.
During the year, the board considered alternative benchmarks to ascertain whether there was a more appropriate index by which to assess the Company’s performance in relation to its objectives. The board concluded that, given the Company’s income objective, the MSCI ACWI (ex UK) High Dividend Yield Index (sterling adjusted) is a more appropriate performance comparator than the MSCI World (ex UK) Index, and has now adopted the former as its benchmark. This will provide a more relevant guide for investors to help understand the relative performance of the Company in the context of its objective.
The board has also reviewed the management fee arrangements and is pleased to have agreed with Janus Henderson a reduction in the management fee to a single rate of 0.575% per annum with effect from 1 September 2022, the first day of your Company’s new financial year. The previous fee was 0.65% per annum of net assets equal to or below £250m, and 0.60% for net assets above £250m. Since inception, management fee reductions combined with the increase in the size of the Company have been the two principal factors that have led to a fall in the ongoing charge from 1.38% (as at 31 August 2012) to 0.83% this year. We remain willing to issue further shares at appropriate times to provide greater liquidity in our shares, and to lower further our fixed costs per share.
Earnings and dividends
We are pleased to announce a total dividend increase from 6.30p to 7.25p per ordinary share for the year to 31 August 2022, a rise of 15%. The year’s pay out consisted of a first, second and third interim dividend of 1.80p per ordinary share, and a fourth interim dividend of 1.85p, which will be paid on 30 November 2022 to shareholders on the register at 4 November 2022.
The revenue returns increased year-on-year by 23% to £14,441,000. A combination of strong underlying dividend growth and currency appreciation when compared to sterling means that £232,000 has been added to revenue reserves.
The long-term objective of your Company since launch has been to provide shareholders with a growing total annual dividend, as well as capital appreciation. To date, we have increased the dividend each year and this positive growth trend is demonstrated in the table in the annual report. We continue to recognise the importance of dividend income to our shareholders, and if need be, we will utilise the Company’s reserves in the event of any temporary shortfall between the Company’s distributions and portfolio income.
Gearing
Well-judged gearing enhances returns to shareholders. The board’s current policy is to permit the fund manager to gear up to 25% of net assets at the time of drawdown. Borrowing limits for this purpose include implied gearing using derivatives. The gearing at the period end was 6.5% (31 August 2021: 4.5%).
Liquidity and discount management
The Company’s share price has traded at a discount to NAV of between 2-10% over the period and was 5.3% (with debt at par) at 31 August 2022. The uncertainty caused by the pandemic, and now the conflict in Ukraine has caused discounts to open up for many sectors and trusts over the last two years. The board continues to monitor the premium/discount to NAV and will consider appropriate action if it moves and remains out of line with the Company’s peer group. However, there is a limit to the board’s ability to influence the premium or discount. Accordingly, we believe it is not in shareholders’ interests to have a specific share issuance or buy-back policy. However, it is sensible to retain flexibility and we shall therefore consider share issuance and/or buy-backs where appropriate and subject to market conditions.
Ongoing charge
The ongoing charge for the year to 31 August 2022, as calculated in accordance with the Association of Investment Companies (“AIC”) methodology was unchanged at 0.83% (2021: 0.83%).
Annual general meeting
The eleventh annual general meeting (“AGM”) of the Company will be held on Wednesday, 7 December 2022 at the offices of Janus Henderson Investors, 201 Bishopsgate, London EC2M 3AE. The notice of meeting and details of the resolutions to be proposed are set out in a separate document which accompanies the annual report. Ben Lofthouse, the fund manager, will give a presentation at the meeting.
As an alternative, I invite shareholders to join by Zoom webinar, and details of how to register are set out in the notice of meeting. As is our normal practice, there will be live voting for those physically present at the AGM. However, due to technical restrictions, we cannot offer live voting by Zoom, and we therefore request all shareholders, and particularly those who cannot attend physically, to submit their votes by proxy to ensure that their votes are included.
Board composition
As previously reported, I will be standing down as chairman of the board and a director of the Company at the conclusion of the 2022 AGM. This will conclude five years’ service as chairman of the board, following six years’ service as audit committee chairman. The board is pleased to announce that, following a rigorous process, it has been agreed that Richard Hills will succeed me as chairman. Richard was appointed as a non-executive director of the Company in 2016 and has considerable experience in financial services. His succession will ensure a smooth transition of the chairmanship.
Outlook
The Company has a flexible mandate with which to achieve the aim of offering investors income and capital growth, with protection through diversification by sector and geography. This year has proved the benefits of that diversification in terms of both regions and currencies. The nature of an investment company gives it some advantages over other investment vehicles. These include a fixed pool of assets so sales are not forced at the wrong time, the ability to maintain distributions through the cycle and the ability to utilise gearing to enhance returns.
Economic growth is slowing and, until inflation peaks, central banks look likely to have to keep raising interest rates. It is not an easy investment environment for investors to navigate. The events of this year have surprised everyone, but to some extent they are now known, and the question is what happens next? If, in a year’s time, China has found a way to deal with Covid, the conflict in Ukraine has ceased and the Federal Reserve has finished raising rates, then things could feel very different, although the pain getting there may remain very uncomfortable.
Despite ongoing change, the Company will continue following its existing strategy of identifying attractively valued companies that have the capacity to grow their earnings and dividends over the medium to long term. The investment team remains vigilant for opportunities that might arise during these difficult times.
Simon Jeffreys
Chairman
27 October 2022