“If you want to know how healthy a company’s balance sheet is, look at its dividend policy,” says Ben Lofthouse, manager of the Henderson International Income Trust (HINT).
“Royal Bank of Scotland still pays no dividend after cutting it after the credit crisis, and Barclays keeps cutting and pushing back its dividend pay-outs.”
You will not find Barclays (BARC) or RBS (RBS) in Lofthouse’s portfolio – not just because his dividend policy metric, the companies do not look as if they are faring well. The five-star HINT only invests in companies listed outside of the UK, excluding dual listed stocks too.
“Before we launched the trust in 2011 we asked invested what they wanted from a new closed-end fund,” says Lofthouse. “We found that many of them had UK equity trusts and global trusts with a UK allocation. What they needed was true diversification – you think you have diversified by buying three different funds and then an event such as the BP (BP.) Macondo oil spill happens and you realise you have a triple holding in a tanking stock. So we hold absolutely no UK listed companies.”
Lofthouse cautions that diversification only outs over the long-term, and urges investors to abandon short-termism.
“Short-term all stocks are correlated. You can invest in three very different pharmaceutical companies, and think you have diversified but actually they all have the same profit pool – and short-term they are all vulnerable to a tweet from a presidential candidate,” he said. “Longer-term, fundamentals will out.”
Financial Stocks Offer Income
HINT invests in companies with a high return on equity – companies whose management have a track record for adding value. Although Lofthouse says he is not an activist investor, he does look for turnaround stories, saying: “We don’t agitate, we don’t assume we could run a company better than those in charge, but I do look for signs of change – companies which are investing in their future.”
Although many financial stocks – especially across Europe are still troubled, there are banks displaying these characteristics. Lofthouse likes banks which do things “a little differently” – those which offer more than just bread-and-butter banking. He holds ING Groep (ING), for example, which is a challenger bank, and French bank Natixis (KN), which has an asset management firm. We highlight five of HINT’s financial holdings, and including Morningstar equity analysis where applicable, below.
Natixis (KN)
Yield: 6.09%
Natixis provides investment and financial services. The Company's three core businesses are: Wholesale Banking, Investment Solutions, Specialized Financial Services. This is Lofthouse’s eighth largest holding in the trust.
ING Groep (ING)
Yield: 4.94%
ING is well positioned to focus on improving its core banking operations, as the bank has completed the majority of its restructuring efforts, says Morningstar equity analyst Stephen Ellis. In 2014, ING floated its European insurance arm, NN Group, and its U.S. insurance group, Voya Financial, and has repaid its obligations to the Dutch government.
The shift from a universal model of banking, joint insurance and banking operations, into a commercial and retail bank is beneficial for the business. It should be easier to achieve consistent profitability by allowing managers to focus on a narrower set of operating activities that they have executed well in the past.
JP Morgan (JPM)
Yield: 2.25%
JPMorgan’s combination of scale, diversification, and sound risk management seems like a simple path to competitive advantage, but few other firms have been able to execute a similar strategy, says Morningstar’s Jim Sinegal. Through acquisitions and organic growth, JPMorgan has become the largest bank in the United States. The firm’s diversified business model stabilises results, increases customer switching costs, and allows the company to generate more revenue per dollar of assets than smaller peers.
Van Lanschot (LANS)
Yield: 1.98%
Van Lanschot NV is an independent, specialised wealth manager, providing private banking, asset management and merchant banking services. Lofthouse first bought this Dutch company in September last year, adding £3 million worth of shares resulting in a 1.28% position in the portfolio. It has proved a savvy investment – the shares are up an impressive 14% year to date. He has recently added to his position.
Macquarie Group (MQG)
Yield: 5.72%
Macquarie is the largest investment bank, investment advisory, asset-management firm listed on the Australian Securities Exchange. Macquarie Group began trading in 1969 as Hill Samuel Australia, obtained its bank licence in 1985, and listed in 1996.
It's Australia's only sizeable listed investment bank, now internationally diversified, operating in corporate finance, treasury, and commodities, equity markets, and funds management. This is a new acquisition for Lofthouse, adding £3.5 million shares in December. The Australian company is up 2% year to date.
