Henderson High Income HHI

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Henderson High Income (HHI). The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

HHI’s blend of equities and bonds has supported outperformance and dividend growth over the past decade.

Overview

Henderson High Income (HHI) has been managed by David Smith since 2012, with a clear focus: to deliver a dependable income stream alongside long-term capital growth. Unlike many peers that focus solely on equities, HHI blends equities with an allocation to bonds. This mix, managed in collaboration with Janus Henderson’s fixed-income team and funded largely through structural Gearing, has helped enhance the trust’s yield, smooth income streams and dampen overall volatility.

On the equity side, David takes a disciplined bottom-up approach. He targets businesses with straightforward, defensible models, strong cash generation and robust balance sheets, whilst keeping a close eye on valuation. Importantly, he looks for companies with the capacity to grow dividends over time. Rather than simply pursing the highest yielders, he focusses on his income sweet spot of 2–6% yields, where he finds payouts tend to be more sustainable and supported adequately by long-term growth potential. Recent Portfolio activity reflects this philosophy, with new positions in Aberdeen and Telecom Plus, both cash-generative businesses offering reliable dividends.

Performance has also proved resilient. Over the past year, HHI delivered a 15.6% NAV total return, outpacing its composite benchmark and comparable with the broader UK market, despite maintaining a near 12% allocation to bonds. Notable contributors included Phoenix, benefitting from stronger-than-expected cash generation, and M&G, buoyed by a new partnership with Japanese insurer Dai-Ichi Life.

Today, the trust offers a yield of 6.0%, well above the UK market and the AIC UK Equity Income sector average. At the same time, it trades on a 6.7% Discount, wider than its five-year average of 4.2%.

Analyst’s View

Over the past few years, the UK market has often been cast as a slow-growth story compared with the US. Concerns over economic uncertainty, escalating political tensions and the looming budget have only reinforced this view. Yet over the past year, UK equities have delivered returns comparable with many other global markets, despite the lack of high-profile tech names. Moreover, valuations remain historically low, whilst fundamentals across many companies continue to be robust. For investors seeking a differentiated route into this opportunity, HHI offers a distinctive solution.

A key strength of the trust lies in its blend of equities and bonds. Structural gearing funding the bond portfolio adds an extra layer of differentiation and with borrowing costs below the yield achieved on these assets, HHI benefits from positive carry, enhancing income without introducing undue risk. Its flexible approach spans large- and mid-cap UK companies, alongside selective overseas holdings, providing diversified exposure beyond the dominant dividend payers of the FTSE 100 Index. Disciplined stock selection, focussing on understandable business models, strong cash generation and sustainable dividend growth, underpins a portfolio that’s outperformed its composite benchmark over one, five, and ten years.

As rates on cash wane, we think HHI’s premium dividend yield of 6.0%, fully covered by earnings and supported by improving revenue reserves, stands out, offering both income and potential capital growth. With a wider-than-average discount, it presents as an attractive option for investors seeking a differentiated income profile with meaningful long-term upside potential. Investors should, however, be mindful of potential headwinds. In fast-rising equity markets, HHI may lag pure equity strategies, and periods of sharply rising inflation or pressure on credit markets could impact bond performance.

Bull

• Differentiated investment process combines equities and bonds to deliver a high, sustainable and growing income, alongside capital growth
• Merger with HDIV has increased liquidity and enhanced asset base, lowering costs and broadening appeal
• Unique approach to gearing helps boost income and capital growth, alongside reducing volatility in the portfolio

Bear

• Allocation to bonds may see the trust struggle to keep pace with a strongly rising market, relative to a pure equity strategy
• Tilt to mid-cap companies may bring more sensitivity to state of the UK economy
• Whilst the approach to gearing helps dampen some volatility through bond exposure, it will still magnify losses in down marke