/ HENDERSON /
Effectively , investors were paying for the privilege of lending money to a company financials ( banks and life insurers ) and miners . While it is no surprise that when bond prices fall , so do bond proxies , it is the definition of what constitutes a bond proxy that intrigues me . Let ’ s recap – a bond pays a fixed coupon out to maturity , so for an equity to be classified as a bond proxy , it arguably should be a business that pays out the majority of its cash flow as a fixed dividend and offers no growth . Since bond yields bottomed in August , the worst performing sectors in the UK market include food producers , tobacco and beverages – or , as they are otherwise collectively known , consumer staples . These types of companies typically offer investors a low-volatility earnings stream from which they pay out dividends , hence they have bondtype characteristics . So is the market correct to sell these shares in-line with bonds ?
When bond yields troughed in the summer , these stocks traded on average valuations of 21x forward price-to-earnings ( a company ’ s share price expressed as a multiple of its predicted earnings in 12 months ’ time ). Not exactly cheap , but neither in excess territory versus their own history nor relative to the UK market . Also , one needs to consider the growth these companies offer . Remember , a bond offers no growth in the coupon , whereas the likes of Diageo , British American Tobacco and Imperial Brands have consistently raised their dividends over the longer term . These companies own very strong long-term brands ( think Johnnie Walker Whisky , the origins of which date back to 1820 , or American cigarettes Lucky Strike , which were introduced in 1871 ) which command pricing power and are likely to be around for decades to come . This should continue to support long-term dividend growth .
There are also other stocks that the Trust holds that have sold off aggressively as they were deemed bond proxies . Professional publisher RELX , software company Sage and contract caterer Compass Group have all underperformed in the last three months . The assumption that the companies have only benefited over the last five years from having bond-like characteristics seems disingenuous given each company has grown its dividend by 50 per cent , 63 per cent and 52 per cent respectively over that time period . These types of stable businesses which can sustain consistent dividend growth will always be at the core of the Trust as they add dividend certainty . While in the short term share prices have been weak , valuations are now more attractive and I will use this and any further underperformance due to rising bond yields as a buying opportunity given my confidence in the businesses and dividends into the longer term .•
HENDERSON HIGH INCOME TRUST
MANAGERS : David Smith & Alex Crooke ( Deputy )
ONGOING CHARGE : 0.79 % ( Dec 15 ) TOTAL ASSETS : £ 243m ( Nov 16 ) YIELD : 5.21 % ( Nov 16 ) LAUNCHED : 1989
DIVIDENDS : January , April , July , October
SECTOR : AIC UK Equity & Bond Income
Before investing in an investment trust referred to in this document , you should satisfy yourself as to its suitability and the risks involved , you may wish to consult a financial adviser . The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested . Nothing in this document is intended to or should be construed as advice . This document is not a recommendation to sell or purchase any investment . It does not form part of any contract for the sale or purchase of any investment . Issued in the UK by Henderson Investment Funds Limited ( reg . no . 2678531 ), incorporated and registered in England and Wales with registered office at 201 Bishopsgate , London EC2M 3AE , is authorised and regulated by the Financial Conduct Authority to provide investment products and services .
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