Henderson High Income (HHI) is true to its name. The board has no set policy to grow the fund’s income each year in real terms, but it is committed to producing a high dividend income stream for investors, while retaining the prospect of capital growth. Under the management of Alex Crooke, John Pattullo and more recently David Smith, we think this obligation is being met.
Crooke is responsible for asset allocation—the fund’s benchmark is 20% fixed income—and he outsources the management of the bond portfolio to Pattullo. Both Crooke and Smith are responsible for selecting the equities. Every stock they buy for the fund must pay a yield as that income target is forefront in their minds at all times. They pay particular attention to cash flow and balance-sheet strength as an indicator of a company’s financial health; not only are they looking for a dividend, but they also want that dividend to be sustainable and capable of growing.
The board hasn’t always been able to increase the dividend and occasionally they’ve been forced to cut it—for example in 2010.But the board and the managers are conscious of adding to the revenue reserve account incrementally, to give a buffer in tricky years, and the bond portfolio helps to generate extra income for the fund. Indeed, the managers use gearing at this fund, and those borrowings are used to buy fixed-income securities; not only does this help to generate more income, but the bond portfolio also helps to offset the headline gearing and bring it down to single digits. They also borrow in euros and dollars as Pattullo holds some Eurobonds.
The fund’s gearing caused problems in 2008, and a number of the bond holdings were in financials, which compounded the problems. Crooke tried to keep sufficient cash to stop the gearing from escalating, but it led to a painful year for investors. Overall, though, the managers have done a decent job for shareholders and, while the dividend has fluctuated, it has been kept high; indeed, the fund has one of the highest yields in its Morningstar Category.
We think the stability at the helm of this fund has been a key contributor to its success. Crooke and Pattullo are long-serving Henderson employees, and they bring a solid working relationship. In Jan 2014 Crooke was joined by a comanager in David Smith. It’s likely that his responsibilities will increase going forward and we are monitoring his involvement in the fund. We see no cause for concern, though, and we think the extra resources for Crooke are welcome, given his increased team responsibilities.
We do think the performance fee structure could be more shareholder-friendly. It’s only calculated over a 12-month period; there is no hurdle rate; it’s levied at 15%; and, although there is a cap on total fees, any excess can be carried forward. There is an obligation to make good on underperformance, which we like, but overall we’re not enamoured by it.
Nonetheless, Crooke and Pattullo are steady hands at this fund, and they have delivered for shareholders. These results have come with added risk, but we have sufficient conviction to retain the fund's Bronze rating.
To select Henderson High Income as the Fund in Focus we used the Morningstar Investment Trust Screener. We screened for closed-end funds which carried a Gold, Silver or Bronze Analyst Rating and sat in the UK Equity & Bond Income Association of Investment Companies sector
