14th Jan 2014 13:55
LONDON (Alliance News) - Henderson Diversified Income Ltd Tuesday said it beat its benchmark by a broad margin in its last financial year on a total return basis, and said default rates on its riskiest corporate bonds are likely to remain at their current very low levels.
Henderson Diversified Income, which invests in investment grade bonds, high yield bonds and specialist secured loans, said its net asset value total return was 12.0% in the year ended October 31, meaning its benchmark - a 1.25% over three-month sterling Libor income target - was soundly beaten.
The trust's net asset value per ordinary share increased to 87.9 pence from 83.3 pence over the year ended October 31.
"We expect the secured loan portfolio to generate a return of approximately 4.5-5.5% in 2014, through a combination of interest income, and attractive relative value trades. We also expect loan prices to continue to be supported by strong investor demand for the asset class given the floating rate return," John Pattullo and Jenna Barnard, portfolio managers, said in a statement.
Investors have been drawn to higher yielding bonds as a result of historically low interest rates, as central banks continue to keep the cost of borrowing low in order to encourage the nascent economic recovery in the aftermath of the 2008 financial crisis.
Chairman Paul Manduca said he expects to see the current prices to continue to receive the strong investor demand, while he also said the company would retain its focus on riskier high yield bonds until there is a rise in interest rates.
"In the event of an increase in interest rates, the income from our secured loan investments will rise even though potentially with a 3-6 months lag depending on how coupon payments are set by each borrower," Manduca said, adding that the trust doesn't expect interest rates to rise until "later in the year."
The portfolio managers warned that the income provided by its holdings in high yielding fixed rate coupons will "not rise as and when interest rates rise."
"Only the floating rate secured loan portfolio will benefit from a higher yield when this happens. At present the loan holdings are diversified across UK, European and US holdings, each of which will have differing interest rate dynamics. The managers will aim to... benefit from the variety of interest rate cycles but... given the high yield currently provided by the company, the ability to see the dividend rise in line with future UK only rate hikes will not be a one-for-one relationship," the portfolio managers said.
Over its last financial year, the trust made GBP5.8 million in gains on investments at fair value through profit or loss, compared with GBP1.7 million in the previous year. Pretax profit was marginally down at GBP8.3 million against GBP8.4 million.
"The primary driver remains the default rate on the company's investments. Fair value profit and loss will come and go but the ultimate determinant of the NAV over the long-term will be the level of losses experienced as a result of any defaults. In this context it is reassuring to note that default rates on the riskiest types of corporate bonds (speculative rated bonds) remain at very low levels and are likely to remain so over the coming year or more," the portfolio managers said.
In a separate document issued to the stock exchange, the trust published its prospectus for the 46.0 million new shares that are to be issued after shareholders gave their permission on December 17.
Shares in the trust were Tuesday quoted at 90.25 pence, down 0.25 pence, or 0.3%.
By Samuel Agini; [email protected]; @samuelagini
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