Emma Wall: Hello, and welcome to the Morningstar Series, 'Why Should I Invest With You?' I am Emma Wall and I am joined today by Ben Lofthouse, manager of the Henderson International Income Trust (HINT).
Hi, Ben.
Ben Lofthouse: Good Morning.
Wall: So, we're looking at income this week and its very important for people to not just stick to the devil that they know, U.K. equity income is very widely held in the U.K., but of course, globally there are great companies paying dividends and your trust is it could compliment to U.K. Equity Income trust or open-ended fund because it only looks for companies that have a compelling case for income outside the U.K.
Having said that, your largest geographical exposure is in the U.S. where I think quite a lot of people have been saying it's time to get out of, so why you are liking the U.S. so much?
Lofthouse: That's a good question. I think what we are finding in the U.S. are really good quality companies at attractive valuations and I think what you've seen since the taper tantrum a few years ago is actually that income stocks have not been performing well this year and that's given an opportunity for – and actually money has been coming out of the U.S market.
It's been – one of the biggest outflows this year has been from the U.S. market and that in my opinion is offering value in certain areas. So, areas like telecommunications, you can buy some things like Verizon which are cheaper than almost any other telecommunications company in the world at the moment. You can buy things like General Electric on good valuations, within over 3% yield. I just feel that actually there are some really good companies there on similar valuations to other companies around the world in certain key areas.
Wall: Coming then across upon to Europe which is quite some way behind the U.S. in terms of the economic story, but presenting as good opportunities for income investors.
Lofthouse: Yeah, Europe is really fascinating at the moment. So Europe is really struggling to grow ever since the crisis, some would say before. If you look at the last year, number of things have happened, one of them being quantitative easing, the currency has fallen, fuel costs have fallen.
To me, its' feels very much like the U.S. in 2011 and maybe the U.K. when quantitative easing started and in that environment what we found was that income delivering stocks were actually quite strong. So, what QE did was not particularly drive very strong growth, but more often reflated financial assets. So, in areas like Europe, we're finding, companies like Zurich Insurance Group, 6% yield, the Swiss long bond is almost zero.
There are a lot of companies like that and I think we will see gradually over time more money flow towards European equities from both Europeans and elsewhere.
Wall: So, this is like the U.K. equity income sector a couple of years ago where we had those bond proxies which have done so incredibly well, very steady-eddie companies, high quality that just chuck off income.
Lofthouse: Yes. I think that's right, and then, perhaps, again similar to the U.K., the banking system in Europe has taken a lot longer to be recapitalised and we've just got to a point where lending is picking up, capital ratios have got to the levels that the regulators have said there might be more capital required, but we're seeing lending picking up. Again, that's been an interesting point in the other markets around the world over the last five years; it's been good time to invest.
Wall: So jumping around the globe, you have an international mandate which means you can get into emerging markets, but you're choosing not to do that much, aren't you? Why is that?
Lofthouse: Yeah, I think there are two factors in that consideration. One, a large part of the emerging market investible universe is linked to commodities and we've seen a very strong period of growth for a decade in commodities and I feel we're just seeing the start of the slowdown. So, I don't know how long it lasts, but I think what we've seen in places like Europe, in the U.K. sometimes it takes longer for the full consequences of that to become clear.
The second part is linked to that. Actually, we're not finding a lot of what I would say interesting high-quality companies that aren't commodity-based or finance-based in those markets that are cheap.
So, I think people can see the issues with emerging markets, those people who kind of are practitioners there have bought the high-quality stocks. I'm just not finding the opportunities yet in the kind of stocks that we like to buy with high barriers to entry, high free cash flow and particularly not necessarily reliant on commodities or finance.
Wall: Ben, thank you very much.
Lofthouse: Thank you very much.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
