A Top Performing Global Income Fund
August 16, 2016
by Robert Huebscher
Henderson’s Dividend & Income Builder Fund (HDAVX, HDCVX, HDIVX and HDRVX) seeks to provide current income from a portfolio of securities that exceeds the average yield on global stocks, and aims to provide a growing stream of income per share over time. The Fund’s secondary objective is to seek to provide long-term capital appreciation. It has outperformed its Morningstar peer-group benchmark by over 400 basis points since its inception four years ago.
Alex Crooke joined Henderson Global Investors in 1994 as an associate director of investment trusts. He was named Director of UK Investment Trust in 2001 and has managed several funds during his 26-plus years at Henderson. He currently serves as the co-manager of the Henderson Global Equity Income Fund and lead portfolio manager of the Henderson Dividend & Income Builder Fund. In 2013 he was appointed Head of Global Equity Income.
John Pattullo joined Henderson Global Investors in 1997 and is co-head of strategic fixed income. He co-manages the Strategic Income Fund and the fixed-income portion of the Dividend & Income Builder Fund alongside Jenna Barnard.
I spoke with Alex and John on August 8.
As managers of the Dividend & Income Builder Fund (HDAVX), what is the mandate of your fund?
Alex: The mandate for the Fund is to deliver an attractive dividend yield to investors and to grow that over time from investment in both bonds and equities from around the world.
Since its inception on August 1, 2012, your fund has had an annualized return of 7.85%, as compared to 3.53% for its Morningstar peer-group benchmark, the world-group average, earning it a five-star rating. What have been the key contributors to its outperformance over this period?
Alex: One of the keys is we’ve favored equities predominantly over bonds throughout most of that period. Though bonds have done very well, overweighting equities has grown the dividends very strongly. Some of the global equity exposures has done very well as well for us.
We were higher weighted to the U.S. in the front end of that period, which did well. We’ve also had a good exposure to the Pacific region in the early years of the Fund. We reduced that in 2015, which saved us a bit of underperformance.
From the stock picking in the equity portfolio, dividend-paying shares have been attractive to investors in a lot of markets as interest rates have fallen. We’ve been definitely favored some of the more defensive sectors. Utilities have outperformed in most markets. Some property exposures we have also been doing well.
John: The bond section is fairly modest, but essentially we haven’t been short duration. We’ve been longer duration than many in our peer group.
We’ve held a mixture a large-cap, consumer-facing defensive high-yield bonds, specifically double-B and some non-cyclical single-Bs. Double-B and single-B have been a good place to be in high-yield over the years. We have had some triple-Bs, because they tend to be in larger cap and longer duration investment-grade names, which have been a great duration bet over the period. The bond market has been very strong recently as well, and we haven’t been shy of taking duration risk with a mixture of lower-end investment-grade and top-end of high-yield bonds.
In terms of your asset allocation, your portfolio has approximately 84% in equities, 12% in fixed income and the remainder in cash and some other asset classes. How do you decide the allocation between the equities and fixed income?
Alex: There are a couple of indicators we look at that define how we split the asset allocation. The first one is a valuation-based metric where we are looking at the equity risk premium, the value of equities relative to bonds. When we find that equity risk premium is above about 7%, which is its long-term average, then it’s telling us that equities are a good value relative to bonds. We are still in that area with bias toward equities over bonds.
The other thing we view is the change in expectations of economic growth around the world. When you look at previous periods and you compare economic activity and growth with stock market performance, it’s a very poor correlation. Actually, the better correlation is the second derivative of that growth – the change in expectations of economic growth. Over the last 12 months or so, that indicator has been shining a bit red, with economic growth expectations falling. It’s in China, obviously, but also the European markets.
We haven’t quite changed the allocation yet, but new money coming into the Fund is going 20% into fixed interest and 80% into equities. That will over time begin to skew the overall allocation. But until the equity risk premium falls a bit further, then we are likely to keep the allocation where it is now.
Looking at the equity portion, in your most recent quarterly commentary, you stated that you were taking a defensive position given your projections for lower global economic growth. Why are you pessimistic about the prospects for growth?
Alex: It comes down to a few factors in different regions. If you look at Europe, we have worries about the composition of the region and with the U.K. having its recent vote to leave the European Union. Consumer confidence is down and that has a roll-on the effect on the prospect for economic growth. Inflation prospects are very low in the region, and that’s limiting companies’ abilities to increase prices and volumes. That’s hitting sales there.
If you go into Asia, there are more worries about the Chinese economy funded on lots of debt and the marginal improvements in growth coming from increasing levels of debt are fading away. The big engine for incremental growth around the world has been Asia and China in particular, and that is easing. That’s not helping prospects.
In the U.S., we’ve had one hike in interest rates. Whether that was right or wrong won’t be known for a long time. We don’t know if it will have an impact on consumer sentiment and growth prospects, or if rates go up and cut back economic activity.
Adding all those dynamics in different regions makes us more cautious. We think that a lot of companies are well positioned, though. They’re taking market share from their peers or they are in segments or sectors of the market that have incremental growth. In areas like telecom, consumers are more data hungry and want more packages on their mobile phone. They’re using 4G. We are seeing incremental growth coming from there.