Annual Financial Report

RNS Number : 0569U

Henderson Diversified Income TstPLC

09 July 2018

 

Legal Entity Identifier: 213800RV2228EO1JEN02

HENDERSON DIVERSIFIED INCOME TRUST PLC

Financial Report for the period ended 30 April 2018

This announcement contains regulated information

PERFORMANCE HIGHLIGHTS:

Total return performance for the year to 30 April 2018	2018
NAV1	1.8%
Benchmark2	2.4%
Share price3	4.4%

1  Net asset value ('NAV') total return (including dividends reinvested and excluding transaction costs)

2 The benchmark is the average return on a rolling annual basis of three month sterling Libor plus 2%

3 The share price total return using mid-market closing price

Sources: Morningstar Direct, Janus Henderson, DataStream and the AIC. All data is either as at 30 April 2018 or for the year ended 30 April 2018

 

INVESTMENT OBJECTIVE AND POLICY

The Company's investment objective is to seek income and capital growth such that the total return on the net asset value of the Company exceeds the average return on a rolling annual basis of three month sterling Libor plus 2%.

The Company aims to deliver this outcome by investing in a diversified portfolio of global fixed and floating rate income asset classes including secured loans, government bonds, high yield (sub-investment grade) corporate bonds, unrated corporate bonds, investment grade corporate bonds and asset backed securities. The Company may also invest in high yielding equities and derivatives.

The Company uses a dynamic approach to portfolio allocation across asset classes and is permitted to invest in a single asset class if required. The Company seeks a sensible spread of risk at all times. It can invest in assets of any size, sector, currency or issued from any country.

The Company has adopted the following allocation limits:

•     secured loans 0 to 100% of gross assets

•     government bonds 0 to 100% of gross assets

•     investment grade bonds 0 to 100% of gross assets

•     high yield corporate bonds 0 to 100% of gross assets

•     unrated corporate bonds 0 to 10% of gross assets

•     asset backed securities 0 to 40% of gross assets

•     high yielding equities 0 to 10% of gross assets

As a matter of policy, the Company will not invest more than 10% in aggregate of its net assets in a single issue or issuer.

The Company may use financial instruments known as derivatives to enhance returns. They may also be used to reduce risk or to manage the Company's assets more efficiently. The use of derivatives may include credit derivatives (including credit default swaps) in addition to interest rate futures, interest rate swaps and forward currency contracts. The credit derivatives, interest rate futures and swaps are used to take a synthetic exposure to, or to hedge, an investment position where the derivative contract is more efficient or cost effective than a position in the underlying physical asset. The Company's exposure to derivatives is capped at a maximum net long or net short position of 40% of net assets. The Company may also employ financial gearing for efficient portfolio management purposes and to enhance investment returns but total gearing (both financial gearing and synthetic gearing combined) may not exceed 40% of net assets. Forward currency contracts are used to hedge other currencies back to sterling.

Any material change to the investment policy of the Company will only be made with the approval of shareholders.

CHAIRMAN'S STATEMENT

This is the first full report to shareholders since your Company was redomiciled to the United Kingdom from Jersey. Consequently, we are publishing this report for the period from incorporation to 30 April 2018. As the Company did not hold any assets or earn any income prior to 27 April 2017 when its shares were admitted for trading following the transfer of assets and liabilities from the predecessor company, these audited results principally reflect the period 27 April 2017 to 30 April 2018.

Performance

The net asset value total return per ordinary share for the year ended 30 April 2018 was 1.8% whilst the share price total return per ordinary share was 4.4% reflecting a widening in the premium to net asset value at which the ordinary shares trade. This weak return reflected market conditions which were to some extent evident: as I commented in the outlook in the interim report "there are obvious, potentially disruptive, political and economic threats". As the Fund Managers report, volatility increased substantially after the interim report.

I would also like to take this opportunity to remind you that the year-end of your Company is 30 April, which is different to the predecessor Jersey domiciled company, Henderson Diversified Income Limited, which had a year-end of 31 October.

Dividend policy and dividends

On 7 September 2017 the Board announced its intention to rebase the dividend to no less than 1.10p per ordinary share on a quarterly basis, effective from the dividend payable in December 2017. This represented a reduction of 12% in the quarterly dividend and assumes that there is not a further significant fall in market yields. This dividend target takes into account the revenue benefits to the Company of the revised fee arrangements described below and the cost reductions arising from the re-domicile of the Company into the UK.

On 30 March 2018 a third interim dividend of 1.10p per ordinary share for the period ended 30 April 2018 was paid. A fourth interim dividend of 1.10p per ordinary share for the period ended 30 April 2018 was declared on 30 May 2018 and was paid to shareholders on 29 June 2018. These dividends have been paid as interest distributions for UK tax purposes. More information about interest distributions can be found on the Company's website:

www.hendersondiversifiedincome.com.

Material events or transactions during the period

As previously announced, the Board undertook a formal review of the management fee arrangements in September 2017 and mutually concluded that a performance fee was no longer appropriate in this low yielding environment. With effect from 1 November 2017 the performance fee was removed. The eighteen month performance period to 30 April 2018 was truncated at this point. The final performance fee payable under this arrangement was equivalent to 0.53p per share or 0.60% of NAV.

It was further agreed that the base management fee be increased from 0.60% to 0.65%. In effect, from 1 November 2017 the annual management fee payable has been capped at 0.65% of the Company's net assets as opposed to 1.20%. I would remind shareholders this is the third downward revision to management fees since the company was first launched in 2007 and the Board would like to thank Janus Henderson for their collaborative approach to ensuring the management fees evolve with best market practice.

The Board has authority to allot up to 100 million New Shares, in aggregate, under the Share Issuance Programme detailed in the Company's Prospectus dated 3 March 2017. In the period 23 February 2017 to 30 April 2018 the Company has issued a further 7,425,000 ordinary shares. As at 30 April 2018 the Company's issued share capital was 189,618,240 ordinary shares.

Whilst demand for the shares continues to be strong, your Board will only issue shares at a premium to net asset value, thereby giving shareholders a modest uplift in the net asset value per ordinary share, improved liquidity in the shares and the fixed costs spread over a wider shareholder base, and where the Fund Managers are confident that the proceeds can be invested at a yield no less than the average yield on the portfolio. Between 1 May 2018 and 9 July 2018, no new ordinary shares have been issued.

Board change

On 30 April 2018 Roderick Davidson resigned as a non-executive Director of the Company. Rod, who joined the Board on 23 February 2017, accepted the unanticipated offer of a role which might represent a conflict of interest with his role as a member of the Board. Correctly he took the decision to stand down from the board. I thank him for his contribution, albeit brief, to the Company.

Annual General Meeting ('AGM')

The Company's first AGM will be held at Janus Henderson's offices, 201 Bishopsgate, London EC2M 3AE on Tuesday 21 August 2018 at 11.30 am. Full details of the business to be conducted at the meeting are set out in the Notice of Meeting which has been sent to shareholders with this report. Directions and a map showing the location of the AGM can also be found in the Notice of Meeting. At the AGM, John Pattullo and Jenna Barnard will present their investment views and how these are reflected in the portfolio. Following the formal business of the meeting light refreshments will be served. The Board looks forward to seeing many of you at the AGM. For those that cannot attend the AGM in person the AGM will be live streamed on the internet at www.janushenderson.com/trustslive.

Outlook

The Fund Managers have been consistent in their belief that the probability of significant increases in rates is less than the market had forecast. It is important for shareholders to understand that this scepticism about cyclical change in either growth or inflation is a carefully considered judgement of the Fund Managers which is not shared by many market participants. In this view they have to date been proved correct, to the benefit of shareholders.

Should the facts change, and the Fund Managers not be able to anticipate or recognise this change in time, there is the potential for significant volatility in the value of the portfolio. The Board is comfortable with the potential downside this view entails since in our view active investment management to generate excess return by necessity involves taking such risks. It is important however that shareholders recognise these risks exist.

The Fund Managers' core assumption is that in the immediate future actual default risk will remain low but that risk more generally may be repriced by the market. In such circumstances there will potentially be some downside risk to capital.

Angus Macpherson

Chairman

9 July 2018

PORTFOLIO INFORMATION

Ten largest investments at 30 April 2018

Ranking 2018	Investment	Principal activities	Type of investment	Geographical area	Valuation £'000	% of portfolio
1	Tesco	Food	High yield bond/Asset backed security	UK	4,733	2.40
2	Ardagh	Packaging & containers	High yield bond	Ireland	4,196	2.13
3	Aramark	Food service	High yield bond	US	4,139	2.10
4	Iron Mountain	Commercial services	High yield bond	US	4,134	2.09
5	PGH Capital	Insurance	Investment grade bond	UK	4,100	2.08
6	Nationwide Building Society VAR Perpetual	Banks	Equity	UK	4,043	2.05
7	HCA	Consumer, Non-Cyclical	High yield bond	US	4,038	2.05
8	CPUK Finance	Diversified financial services	High yield bond	UK	4,023	2.04
9	Co-Operative Group	Food	High yield bond	UK	3,991	2.02
10	Barclays	Banks	High yield bond	UK	3,940	2.00

 

FUND MANAGERS' REPORT 

Over the period under review, the Company produced a modest positive net asset value total return of 1.8% reflecting a continued healthy income stream offset by a 2% erosion of the capital value of the assets in which we invest. A number of factors are serving to make capital preservation more challenging. Firstly, we are in the late stages of the current global business and credit cycle dating back to 2009 in which valuations in credit markets became increasingly stretched, culminating in a record low yield of 1.9% for European high yield bond index in November 2017. In addition, over the course of 2018 a much more risk averse attitude from investors has emerged as it became clear that global liquidity conditions are tightening and market volatility across many asset classes is rising. The US Federal Reserve has been tightening global monetary conditions through the combination of interest rates rises, a policy of "quantitative tightening" (selling back bonds bought during the crisis) and as a result, a much stronger US dollar. The combination has meant that investors demand an ever rising level of yield for taking equivalent risk in credit markets.  It should be noted that it was in the environment of close to record low corporate bond and loan yields that, in late 2017 the decision was taken to rebase the dividend from 1.25p per quarter to 1.10p.

The decline in net asset value per ordinary share equated to a 2% reported loss of capital over this period but it is perhaps helpful for shareholders to place this movement in a broader context. As shown in the graph below, since mid-2014 the NAV of the Company has essentially tracked sideways whilst the Company's share price has traded at a premium to this NAV reflecting the relatively high income generated by the assets in which we are invested. The lack of capital growth is reflective of the sharp recovery in credit markets in the period 2009-2013 and a subsequent period of consolidation (interrupted by a commodity crash in late 2015). As a result income has provided the primary driver of returns over this period. Our focus on high quality companies has meant that we have had no defaults and continue to focus on lending to those high quality companies with sustainable and predictable cash flows. By definition this means we avoid the more cyclical industrial, commodity and retail companies that tend to disappoint in good economic times as well as bad and would have dented the NAV performance further. Looking forward we are increasingly cautious as to whether this relative stability of the capital performance can persist. This is not to say that we expect defaults amongst the companies that we lend money to but rather, that the market price of these bonds may well decline should volatility continue to increase. Our investment approach seeks to dampen this risk through credit selection but cannot be immune.

The reduction in the dividend was a marked contrast to previous years and needs more explanation. In essence, this move reflected our view on the yields available in the market at the time of the reduction (December 2017). We felt that in order to have continued paying the same level of dividend, as fund managers we would have been forced to compromise either on the quality of companies that we lend money to or to have increased the gearing of the Company. Neither of these options felt sensible given that we are in the late stages of an economic cycle. This move was not undertaken lightly given that the primary attraction of the Company for its shareholders is income. It is perhaps worth mentioning that at the time of this reduction we also reduced the total management fees of the Company for its shareholders by scrapping the performance fee entirely.

The investing environment was benign in the first half of the year to 30 April 2018 but volatility became more challenging in the second six month period. This reflected developments in non-credit markets: an equity volatility spike in early February 2018, a rapid rise in short dated US government bond yields and sharp depreciations in emerging market currencies to name a few. Fundamental changes in corporate bond and loan markets moved at a more glacial pace. We continued to spend much time thinking about the disruption of industries driven by technological change and a more austere consumer environment in many countries. In addition, elements of the credit market suggest a build-up in leverage which requires us to be vigilant to the risks. For example, lower quality investment grade bonds as a % of the market and the leverage levels in the syndicated loan market. Typically however, a rise in default rates requires a sharp economic downturn or commodity crash something which it is difficult to see with more than a six month window.

The asset allocation remains focused on high yield bonds, with 10% in floating rate loans and around 24% in investment grade bonds. The preponderance of fixed rate coupon bonds and a relatively low floating rate element reflects our scepticism that we are entering a regime shift for growth or inflation. It also reflects the fact that current interest rates in the UK & Continental Europe remain relatively unattractive. The recent backtracking by the Bank of England on a hike which had been fully priced for May 2018 highlights how difficult it has been for most central bankers in the developed world to follow the Federal Reserve in a more 'normal' hiking cycle. The current guidance from the Bank of England of three hikes over three years is hardly more credible, given how limited such moves are and the inherent lack of visibility over such a medium term horizon.

Outlook

The broad outlook remains unchanged from our semi-annual commentary whereby we continue to feel that the economic cycle in the UK and US feels relatively late stage whereas Continental Europe is still in its earlier stages for now (albeit with many structural fragilities). A flattening yield curve in the US government bond market is a warning signal to the Federal Reserve that their rate hikes are affecting the longer term growth and inflation outlook negatively. Meanwhile, rising US interest rates are beginning to cause problems for lower quality emerging market borrowers, suggesting that liquidity conditions are tightening. This is also reflected in the synchronised downturn in residential property prices in many global cities. At present this doesn't translate into a direct increase in default rates, but rather a rise in market volatility, effectively a repricing of risk by investors. We are currently comfortable that our gross income can be maintained but we must remain vigilant to any further changes in conditions.

John Pattullo and Jenna Barnard

Fund Managers

9 July 2018

PRINCIPAL RISKS AND UNCERTAINTIES

The Board has carried out a robust assessment of the risks and uncertainties facing the Company with the assistance of the Company Secretary and the Manager. The following summary identifies those risks and uncertainties that the Board believes are the most significant and explains whether, and if so how, they are mitigated.

The Company is an Investment Trust and the Board is wholly non-executive. The Board has delegated many of its functions to third party service suppliers including Janus Henderson and BNP Securities Services ('BNP'). However, certain risks and functions cannot be delegated and are retained by the Board. The Board has analysed risk from the perspectives of the markets in which it invests and its operations.

Principal market risks

The Board has agreed with the Manager that it seeks an average total return on a rolling three month basis of Libor + 2%. To achieve a return over Libor + 2% the Fund Managers identify risk assets that they believe adequately compensate the Company for the risks that arise.

The Board has set limits on the class of debt and equity assets that may be utilised by the Manager and given permission for the Manager to leverage the portfolio through significant on balance sheet and synthetic gearing. As a result investors are exposed to a number of risks which are not mitigated and may give rise to gains and losses which may be significant.

The Board is conscious that predictable dividend distributions are particularly important to shareholders. Dividends are principally declared from net revenue income although the Board does have the power to declare dividends out of capital.

Net revenue income arises in the main from seeking interest rate and credit returns from investments. The selection of such investments is based on the judgment of the Fund Managers as to current and expected market conditions. The Board believes that the principal market risks faced by the Company and its shareholders arise from interest rate, credit and currency risks.

Market Risk

Mitigation

Interest rate risk The Company takes on interest rate risk so as to deliver portfolio returns. Reductions in market interest rates will reduce gross and net revenue income and this effect may be amplified by the use of leverage. Such falls may be mitigated for a period if the Company has invested in longer term fixed rate assets prior to such market movements. The Company invests in Secured Loans. Whilst such Secured Loans may contain fixed interest rates, they may also contain prepayment provisions that reduce their effectiveness at mitigating interest rate risk. Increases in market interest rates can reduce net asset value if interest rates rise whilst holding fixed rate assets of longer duration. Interest rate risk also arises from an investment in credit derivatives and the use of rolling forward foreign exchange contracts.

The Board has not set any limits on the amount of interest rate risk that may be taken by the portfolio manager other than to limit the gross on balance sheet and synthetic leverage to 40% of net assets. The Board discusses interest rate risk with the Fund Managers at each Board meeting and probes their assessment of market conditions and their judgment as to the direction of interest rates and speed of development. The Board receives a projection of net income on a monthly basis and probes the income realised to date and forecast to the financial year end. The Board receives a list of the assets in the portfolio which contains details of interest rates and periods to maturity at each Board meeting. The Board is currently discussing additional reporting to be provided at each Board meeting to capture the current interest rate risks in the portfolio. Interest rate risk profile of the portfolio as at the year end is set out in Note 14 to the financial statements in the Company's Report.

Credit risk The Company takes on credit risk so as to deliver portfolio returns. Investing in debt securities and secured loans exposes the Company to credit risk from company defaults and restructurings. Whilst it may be possible to hold a debt instrument to maturity, and be paid out in full, the Manager has discretion to sell a distressed asset which would give rise to realised losses without a default having occurred. Reductions in credit spreads will reduce gross and net income and this effect may be amplified by leverage. Reductions in spreads may also reduce the availability of assets which the Manager believes would appropriately compensate the Company and its shareholders for the credit risk assumed leading to reduced flexibility if the portfolio needs to be repositioned. The Company is also exposed to counterparty credit risk through the use of derivatives.

The Board has not set any limits on the credit quality of the portfolio other than to limit asset backed securities to 40% of gross assets and high yielding equities to 10% of gross assets. Further, the Company will not, as a matter of policy, invest more than 10% in aggregate of its net assets in any single issue or issuer. The Board receives a report of the assets held in the portfolio at each Board meeting and discusses credit quality and default trends with the Fund Managers. The Board is currently discussing how to enhance the reporting provided at each Board meeting to better convey the trend of credit quality in the portfolio. The credit rating table for the portfolio at the year end is disclosed in Note 14 to the financial statements in the Company's Report.

Currency risk The Company invests in assets of fixed amounts denominated in currencies other than sterling which give rise to currency risk. Significant gains and losses would likely be incurred on the liquidation of such assets when repatriating capital to sterling. Less significant gains and losses are incurred on repatriating interest and other income to sterling. The custodian undertakes a rolling programme of forward sales of foreign currency which gives rise to elements of interest rate risk and credit default risk with the counterparty.

The Board has set a requirement that the capital amount of any investment denominated in a foreign currency be hedged to sterling so as to mitigate currency gains and losses. The Board receives a report of gross and hedged currency positions at each Board meeting so it can monitor the level of hedging actually undertaken. Gross and net hedging currency exposures are set out in Note 14 to the financial statements in the Company's Report.

Principal operational risks

In terms of operational risk the Board has determined that the principal risks arise from its relationship and management of third party service suppliers and from the nature of the activities of the Company to the degree that they are unusual when compared to other Investment Trusts.

Operational risk	Mitigation
Continued interest and commitment of Jenna Barnard and John Pattullo as Fund Managers. Jenna and John have directed the portfolio since its launch and the portfolio reflects their assessment of current economic conditions and likely market opportunities and developments. It may prove difficult to replace either or both of them should they decide to step down or if Janus Henderson allocates them to alternative funds under management. Any replacements may have a different style and different view of how the benchmark return may best be met.	The Board has an extensive and ongoing dialogue with Jenna and John on a quarterly basis and seeks to ensure that they remain interested and committed to the portfolio. The Board discusses this risk regularly with Janus Henderson management and seeks to ensure that Jenna and John remain allocated to the portfolio and are appropriately rewarded for their services.
Continued interest and commitment of Janus Henderson as Investment Manager and its operation of effective systems of internal control and management reporting (and execution and settlement of secured loans) The Board appointed Janus Henderson as its Manager at inception and the group has supported shareholders since listing the predecessor Jersey Company. The Board benefits from the extensive knowledge and experience of Janus Henderson who manage a substantial portfolio of Investment Trusts and the economies of scale from contracting with other Investment Trusts for services. The Board relies on the knowledge and expertise of Janus Henderson in ensuring that the Company complies with all relevant laws and regulations which include company law, securities legislation, data protection, anti-bribery and corruption and anti-tax evasion legislation. It may prove difficult to replace the Manager with an alternative provider that would bring the same knowledge, experience and economies of scale should Janus Henderson decide to exit the Investment Trust business or to cease trading.	The Board has a regular dialogue with representatives of Janus Henderson about their support for the Company and annually assesses their performance to ensure that economies of scale and other benefits from the relationship are in fact being delivered. The Board receives regular reports on compliance with laws and regulations and receives regular updates as new legislation is enacted. The Board receives an annual report on internal controls in operation at Janus Henderson and is promptly made aware of any compliance failings and how they are remediated. On an annual basis the Board reviews the quality of the service it has received and any issues and provides feedback to Janus Henderson.

 

Operational risk	Mitigation
Reliance on credit standing and quality of service of BNP Paribas Securities Services as the appointed Depositary ('BNP') and custodian of assets and their execution and settlement of transactions (other than secured loans) The Board has appointed BNP as its Depositary. The Depositary has in turn appointed BNP as the Company's investment custodian, with responsibility for transaction execution and settlement. The Company is reliant on BNP operating effective systems to ensure the Company's transactions are undertaken promptly, that they are properly recorded, that assets are kept segregated from those of other clients, and that BNP's credit rating does not deteriorate or the custodian fails such that assets are not immediately recoverable.	The Board assesses the credit standing of BNP on a regular basis and keeps aware of market commentary should adverse events and circumstances begin to appear. The Board receives an annual report on internal controls in operation at BNP (fund accounting and global custody functions) and would be made aware promptly of any compliance failings and how they are remediated. On an annual basis the Board meets with a representative of BNP Depositary and Custodian to review the quality of the service received and discusses any issues.
Reliance on service providers to manage and control certain features of the portfolio The investment portfolio contains certain assets and liabilities (that are not present in most Investment Trusts) that require specific procedures and internal controls to be present for the Company, as follows: The Company invests in Secured Loans which are individually documented and require additional systems and controls to manage. The Company uses forward foreign exchange contracts to hedge currency exposure and may use future interest rate agreements to manage interest rate risk which require specialised reports to be produced to monitor net risks. The Company has borrowed funds and given covenants to the lender regarding certain ratios which require monitoring to ensure they are met.	The Board receives a regular report on net income earned to date and a projection of net income to the end of the year. The Board uses this to obtain comfort that the portfolio and its risks are being managed as intended. It also receives a monthly investment limits and restrictions schedule that confirms that the Manager has complied with the Board set investment limits and restrictions each month that includes borrowing covenants. On a quarterly basis the Board receives and reviews detailed reports with Janus Henderson including: - Balance sheet - Income statement - Asset listing including purchases and sales - Revenue forecast - Gross and net currency position

 

VIABILITY STATEMENT

The Directors have assessed the viability of the Company over a three year period taking account of the Company's current position and the potential impact of the principal risks and uncertainties documented in the Strategic Report in the Company's Report.

The Directors consider this to be an appropriate period over which they do not expect there to be any significant changes in the current principal risks and adequacy of the mitigating controls in place.

In assessing viability, the Directors have considered the impact of the likelihood of the principal risks and uncertainties facing the Company in severe but reasonable scenarios, and the effectiveness of any mitigating controls in place, over the relevant period.

The Directors also took into account the liquidity and maturity of the portfolio and the income stream from the portfolio in considering the viability of the Company and its ability to meet liabilities as they fall due. This included consideration of how the forecast income stream, expenditure and levels of reserves could impact on the Company's ability to pay dividends to shareholders over that period in line with its current policy. Whilst detailed forecasts are only made over a shorter time frame, the nature of the Company's business as an investment trust means that such forecasts are equally valid to be considered over the longer three year period as a means of assessing whether the Company can continue in operation.

Based on their assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three year period. Only a substantial financial crisis affecting the global economy could have an impact on this assessment.

RELATED PARTY TRANSACTIONS

The Company's transactions with related parties in the period were with its Directors, its subsidiary and Janus Henderson.

On the transfer of the assets and liabilities from Henderson Diversified Income Limited (the 'predecessor company'), the Company acquired beneficial ownership of the investments held through Henderson Diversified Income (Luxembourg) S.a.r.l (the 'subsidiary'). On 24 October 2017 the subsidiary was subject to a deed of dissolution, without liquidation, with immediate effect in accordance with the Luxembourg Civil Code. Any remaining assets and liabilities of the subsidiary were transferred to the Company as a result of this dissolution.

There have been no material transactions between the Company and its Directors during the period other than the amounts paid to them in respect of fees for which there were no outstanding amounts payable at the period end. In relation to the provision of services by Janus Henderson, other than fees payable by the Company in the ordinary course of business and the provision of sales and marketing services there have been no transactions with Janus Henderson affecting the financial position of the Company during the period under review. More details on transactions with Janus Henderson, including amounts outstanding at the period end, are given in note 22 to the financial statements in the Company's Report.

STATEMENT OF DIRECTORS' RESPONSIBILITES UNDER DISCLOSURE GUIDANCE AND TRANSPARENCY RULE 4.1.12

Each of the Directors confirms that, to the best of his or her knowledge:

•     the Company's financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

•     the Strategic Report in the Company's Report and financial statements includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Angus Macpherson

Chairman

9 July 2018
 

STATEMENT OF COMPREHENSIVE INCOME

Period ended 30 April 2018
	Notes		Revenue return £'000	Capital return £'000		Total £'000
Losses on investments held at fair value through profit or loss			-	(8,322)		(8,322)
Gains on foreign exchange transactions at fair value through profit or loss			-	5,724		5,724
Investment income	2		9,570	-		9,570
Other operating income	3		5	-		5
			----------	----------		----------
Total income			9,575	(2,598)		6,977
			----------	----------		----------
Expenses
Management and performance fees	4		(1,037)	(1,036)		(2,073)
Other expenses			(471)	-		(471)
			----------	----------		----------
Profit before finance costs and taxation			8,067	(3,634)		4,433
Finance costs			(210)	(209)		(419)
			----------	----------		----------
Profit before taxation			7,857	(3,843)		4,014
Taxation	5		40	-		40
			----------	----------		----------
Profit for the period			7,897	(3,843)		4,054
			======	======		======
Earnings per ordinary share	6		4.19p	(2.04p)		2.15p
			======	======		======

The total columns of this statement represents the Statement of Comprehensive Income, prepared in accordance with IFRSs as adopted by the European Union. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.
 

STATEMENT OF CHANGES IN EQUITY

	Called-up share capital £'000	Share premium account £'000	Distributable reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
Total equity at 23 February 2017	-		-	-	-	-
		-
Proceeds from issue of shares on 27 April 2017	1,822	159,596	-	-	-	161,418
	--------	-----------	--------	--------	--------	-----------
Total equity at 27 April 2017	1,822	159,596	-	-	-	161,418
Total comprehensive income:
Profit after taxation	-	-	-	(3,843)	7,897	4,054
Transactions with owners recorded directly to equity:
Proceeds from issue of shares on 27 April 2017	74	6,795	-	-	-	6,869
Transfer for cancellation of share premium	-	(166,391)	166,391	-	-	-
Dividends paid	-	-	(853)	-	(5,689)	(6,542)
	--------	-----------	-----------	---------	---------	----------
Total equity at 30 April 2018	1,896	-	165,538	(3,843)	2,208	165,799
	=====	======	=====	=====	=====	======

STATEMENT OF FINANCIAL POSITION

	At 30 April 2018 £'000
Non current assets
Investments designated as fair value through profit or loss	197,439
	----------
Current assets
Other receivables	5,737
Cash and cash equivalents	370
	----------
	6,107
	----------
Total assets	203,546
	----------
Current liabilities
Other payables	(10,937)
Bank loan	(26,810)
	----------
Total assets less current liabilities	165,799
Net assets	165,799
	======
Equity attributable to equity shareholders
Called-up share capital	1,896
Distributable reserve	165,538
Capital reserves	(3,843)
Revenue reserve	2,208
	----------
Total equity	165,799
	======
Net asset value per ordinary share	87.44p
	======

CASH FLOW STATEMENT

	Period ended 30 April 2018 £'000
Operating activities
Net profit before tax	4,014
Interest payable	419
Losses on investments held at fair value through profit or loss	8,322
Gains on foreign exchange transactions at fair value through profit or loss	(5,724)
Payment on settlement of forward exchange contracts	10,484
Increase in prepayments and accrued income	120
Increase in other creditors	491
Purchases of investments	(145,430)
Sales of investments	125,642
	----------
Net cash outflow from operating activities before finance costs	(1,662)
	----------
Interest paid	(372)
Taxation on investment income	49
	----------
Net cash outflow from operating activities	(1,985)
	----------
Financing activities
Equity dividends paid	(6,542)
Issue of ordinary shares	6,869
Cash received from Henderson Diversified Income Limited	5,324
Issue costs	(361)
Loans repaid	(3,125)
	----------
Net cash inflow from financing	2,165
	----------
Increase in cash and cash equivalents	180
	----------
Exchange movements	190
	----------
Cash and cash equivalents at end of the period	370
	======

 

NOTES TO THE FINANCIAL STATEMENTS:

1.   Basis of preparation

The Company is a registered investment company incorporated and domiciled in the United Kingdom under the Companies Act 2006. The financial statements for the period ended 30 April 2018 have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRSs. These comprise standards and interpretations approved by the International Accounting Standards Board  ('IASB'), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the IFRS Interpretations Committee ('IFRSIC') that remain in effect, to the extent that IFRSs have been adopted by the European Union.

The financial statements have been prepared on a going concern basis and on the historical cost basis, except for the revaluation of certain financial instruments held at fair value through profit or loss.

These policies have been applied consistently throughout the period. Where presentational guidance set out in the Statement of Recommended Practice ('SORP') for investment trusts issued by the Association of Investment Companies ('AIC') in November 2014 and updated in January 2017 with consequential amendments is consistent with the requirements of IFRSs, the Directors have sought to prepare the financial statements on a basis consistent with the recommendations of the SORP.

The assets of the Company consist mainly of securities that are listed and readily realisable and, accordingly, the Directors believe that the Company has adequate financial resources to continue in operational existence for at least twelve months from the date of approval of the financial statements. Having assessed these factors, the principal risks and other matters discussed in connection with the viability statement, the Directors have decided that it is appropriate for the financial statements to be prepared on a going concern basis.

2.  Investment income

	2018 £'000
Income from investments:
Dividend income	267
Bond and loan interest	8,998
Premiums on credit swaps	305
	----------
	9,570
	----------

3.  Other operating income

	2018 £'000
Bank and other interest	5
	--
	5
	--

 

4.   Management and performance fees

	2018
	Revenue return £'000	Capital return £'000	Total £'000
Investment management fee	540	539	1,079
Performance fee	497	497	994
	-------	-------	--------
	1,037	1,036	2,073
	-------	-------	--------

A summary of the terms of the management agreement is given in the Strategic Report of the Company's Report.

The Board and the Manager undertook a formal review of the management fee arrangements in September 2017 and mutually concluded that a performance fee is no longer appropriate in this low yielding environment. With effect from 1 November 2017 the performance fee was removed; the 18 month performance period to 30 April 2018 was truncated at 31 October 2017 and the performance fee for this period calculated and the performance fee was paid; the base management fee has been increased from 0.60% to 0.65% per annum of the Company's net assets. This means that with effect from 1 November 2017, the cap on total fees payable is 0.65% per annum of the Company's net assets rather than 1.20%.

The performance fee for the period ending 31 October 2017 has been calculated and totals £994,000.

5.  Taxation

In the opinion of the Directors, the Company has complied with the requirements of Section 1158 and Section 1159 of the Corporation Tax Act 2010 and will therefore be exempt from corporation tax on any capital gains reflected in the capital return during the period. The Company has elected to designate all of the proposed and paid dividends as an interest distribution to its shareholders. This distribution is treated as a tax deduction against taxable income in the revenue return and results in a reduction of corporation tax being payable by the Company at 30 April 2018.

The standard rate of corporation tax in the UK was 19% for the period. However, the tax charge in the current period was lower than the standard effective tax rate, largely due to the reduction in corporation tax from the interest distributions noted in 5(a). The effect of this and other items affecting the tax charge is shown in note 5(b).

a) Analysis of charge in the period

		Revenue return £'000	Capital return £'000	Total £'000
	Current tax:
	UK corporation tax	-	-	-
	Irrecoverable overseas withholding tax	6	-	6
	Tax recovered	(46)	-	(46)
		-------	-------	-------
	Total tax charge for the period	(40)	-	(40)
		====	====	====

b) Factors affecting the tax charge for the period

		2018
		Revenue return £'000	Capital return £'000	Total   £'000
	Net return before taxation	7,857	(3,843)	4,014
	UK corporation tax charged at 19%	1,493	(730)	793
	Effects of:
	Income being paid as interest distributions	(1,477)	-	(1,477)
	Other non-taxable income	(5)	-	(5)
	Non-taxable gains on investments	-	493	493
	Excess not deductible for tax purposes	4	-	4
	Excess management expenses and loan relationships	(15)	237	222
	Irrecoverable overseas withholding tax	6	-	6
	Tax recovered	(46)	-	(46)
		--------	-----------	-----------
	Total tax charge on ordinary activities	(40)	-	(40)
		=====	======	=====

c) Provision for deferred taxation

No provision for deferred taxation has been made in the current period.

The Company has not provided for deferred taxation on capital gains or losses arising on the revaluation or disposal of investments as it is exempt from tax on these items because of its status as an investment trust company, which it intends to maintain for the foreseeable future.

d) Factors that may affect future tax charges

The Company has not recognised a deferred tax asset totalling £413,000 based on a prospective corporation tax rate of 17.0%. The deferred tax asset arises as a result of having unutilised management expenses and unutilised non-trade loan relationship deficits. These expenses will only be utilised, to any material extent, if the Company has profits chargeable to corporation tax in the future because changes are made either to the tax treatment of the capital gains made by investment trusts or to the Company's investment profile which require them to be used.

6. Earnings/(loss) per ordinary share

The total earnings per ordinary share is based on the net profit attributable to the ordinary shares of £4,054,000 and on 188,686,956 ordinary shares, being the weighted average number of shares in issue during the period.

The total earnings can be further analysed as follows:

	2018 £'000
Revenue profit	7,897
Capital loss	(3,843)
	----------
Profit for the period	4,054
	======
Weighted average number of ordinary shares	188,686,956
Revenue earnings per ordinary share	4.19p
Capital earnings per ordinary share	(2.04p)
	----------
Earnings per ordinary share	2.15p
	======

The Company does not have any dilutive securities therefore basic and diluted earnings are the same.

7. Dividends

Dividends on ordinary shares	Record Date	Payment date	2018 £'000
First interim dividend (1.25p) for the period ended 30 April 2018	15 September 2017	29 September 2017	2,370
Second interim dividend (1.10p) for the period ended 30 April 2018	8 December 2017	29 December 2017	2,086
Third interim dividend (1.10p) for the period ended 30 April 2018	9 March 2018	30 March 2018	2,086
			--------
			6,542
			--------

The fourth interim dividend has not been included as a liability in these financial statements as it was announced and paid after 30 April 2018.

The table below sets out the total dividends paid and to be paid and revenue available for distribution by way of dividend for the period.

Dividends on ordinary shares	2018 £'000
Revenue available for distribution by way of dividends for the period First interim dividend (1.25p) for the period ended 30 April 2018	7,897 (2,370)
Second interim dividend (1.10p) for the period ended 30 April 2018 Third interim dividend (1.10p) for the period ended 30 April 2018	(2,086) (2,086)
Fourth interim dividend (1.10p) for the period ended 30 April 2018 Dividends paid from distributable capital reserve	(2,086) 853
	--------
	122
	--------

8. Share capital

	Number of shares entitled to dividend	Total number of shares	Nominal value of shares £'000
Ordinary shares 1p each
At start of period	-	-	-
Issued on 27 April 2017	182,193,240	182,193,240	1,822
Shares issued subsequent to 27 April 2017	7,425,000	7,425,000	74
	----------------	----------------	----------
At 30 April 2018	189,618,240	189,618,240	1,896
	=========	=========	====

On 27 April 2017, 182,193,240 shares were issued when Henderson Diversified Income Limited, a closed-ended company registered under the Companies (Jersey) Law 1991 was subject to a scheme of reconstruction. All its assets and liabilities were transferred to the Company at this date.

During the period under review the Company issued 189,618,240 shares for net proceeds of £168,287,000. Included in the issue of 189,618,240 ordinary shares during the period were 182,193,240 ordinary shares issued following the scheme of reconstruction and voluntary winding up of Henderson Diversified Income Limited whereby investors in the predecessor company had their shareholdings transferred to the Company. The net proceeds of £161,418,000 received from this transaction comprised £180,302,000 investments, £5,324,000 cash and £24,208,000 other net current liabilities, these include all assets and liabilities held in the subsidiary.

The holders of ordinary shares are entitled to all the capital growth in the Company and all the income from the Company that is resolved by the Directors to be distributed. Each shareholder present at a general meeting has one vote on a show of hands and on a poll every member present in person or by proxy has one vote for each share held.

9. Share premium account

	2018 £'000
At start of period	-
Premium on share issued on 27 April 2017	160,056
Issue costs	(460)
Premium on share issued subsequent to 27 April 2017	6,795
Transfer to distributable reserve following cancellation of share premium account	(166,391) ----------
At end of period	-
	======

On 20 September 2017 the Company announced that the High Court confirmed the cancellation of the Company's share premium account and that the Company's distributable reserve can be applied in any manner in which the Company's profits available for distribution may be applied.

10. Net asset value per ordinary share

The net asset value per ordinary share is based on the net asset value attributable to ordinary shareholders at 30 April 2018 £165,799,000 and on 189,618,240 ordinary shares, being the number of ordinary shares in issue at the period end.

11. 2018 Financial Information

The figures and financial information for 2018 are extracted from the Company's Report and Financial Statements for the period 27 April 2017 to 30 April 2018 and do not constitute the statutory accounts for the period. The Company's Report and Financial Statements includes the Independent Auditor's Report which is unqualified and does not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006.  The Company's Report and Financial Statements has not yet been delivered to the Registrar of Companies.

12. Company Report and Financial Statements

Copies of the Company's Report and Financial Statements for the period ended 30 April 2018 will be posted to shareholders mid-July 2018 and will be available thereafter on the Company's website www.hendersondiversifiedincome.com or from the Company's registered office, 201 Bishopsgate, London, EC2M 3AE.

13. Annual General Meeting

The Annual General Meeting will be held on Tuesday 21 August 2018 at 11.30 am at the offices of Janus Henderson, 201 Bishopsgate, London EC2M 3AE. The Notice convening the Annual General Meeting will shortly be available on the Company's website www.hendersondiversifiedincome.com 

For further information please contact:

James de Sausmarez

Director and Head of Investment Trusts

Janus Henderson Investors

Telephone: [phone]

Simon Longfellow

Head of Marketing, Investment Trusts

Janus Henderson Investors

Telephone: [phone]

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

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