Doc re. Annual Financial Report

RNS Number : 2867F

Henderson Diversified Income TstPLC

11 July 2019

 

Legal Entity Identifier: 213800RV2228EO1JEN02

HENDERSON DIVERSIFIED INCOME TRUST PLC

Annual Financial Report for the year ended 30 April 2019

This announcement contains regulated information

PERFORMANCE HIGHLIGHTS:

	2019	2018
NAV per share	86.82p	87.44p
Share price	90.80p	91.80p
Revenue return per share	4.47p	4.19p
Net assets	£164.6m	£165.8m
Dividend	4.40p	4.55p
Dividend yield	4.85%	4.96%
Ongoing charge1	0.89%	1.48%
Gearing	9.8%	19.1%

Total return performance for the year to 30 April 2019
NAV2	4.7%
Benchmark3	2.8%
Share price4	4.2%

¹ The ongoing charge for 2018 included a performance fee. The Board agreed with the Manager to remove the performance fee with effect from 1 November 2017. The ongoing charge excluding the performance fee for the period ended 30 April 2018 was 0.90%

² Net asset value ('NAV') total return (including dividends reinvested and excluding transaction costs)

³ The benchmark is the average return on a rolling annual basis of three month sterling Libor + 2%

⁴ The share price total return using mid-market closing price

Sources: Morningstar for the AIC, Janus Henderson and DataStream.

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 + 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 corporate 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

Notwithstanding the dislocation of the market at the end of 2018, the Company generated a positive net asset value total return of 4.7% for the year. This reflected the active management of the portfolio during the period and the Managers' long held view that global interest rates had peaked.

Performance

The net asset value total return per ordinary share for the year ended 30 April 2019 was 4.7% whilst the share price total return per ordinary share was 4.2%.  

In the interim report the Managers reported on 'the nasty concoction of late cycle conditions' that had led to your Company incurring a total return loss of 1.2% in the period.  In light of market uncertainty the Board took the unusual step of agreeing with the Managers that as a temporary measure they could ignore the objective to generate sufficient income to cover the dividend, allowing them to reduce exposure to the market and hence gearing.

They took advantage of this, reducing exposure into the New Year before adding risk in the balance of the financial year.  The table below demonstrates how the full year result obscures the underlying variation during the year:

	NAV total return %	Share price %	Revenue per share p
Six months to 31 October 2018	(1.2)	(8.2)	2.39
Six months to 30 April 2019	6.0	13.5	2.08
Year to 30 April 2019*	4.7	4.2	4.47

* The full year returns are geometric so do not equal the total of the two half year results

I highlighted to shareholders in both the interim report and last years' Annual Report the Managers' scepticism about the return of inflation. At the time, this was not a consensus view. During the second half of the financial year the market and Central Banks increasingly coalesced around a similar outlook. This favoured the positioning of the portfolio and also the decision to add both duration and risk around the end of the calendar year.

Pleasingly, notwithstanding the measures described above the income of the portfolio was sufficient to cover the dividend for the full year. The full year results also benefited from the revised fee arrangements put in place on 1 November 2017.  

The Board is of the view that in the long term increasing the size of the Company is for the benefit of shareholders, since it should increase liquidity of the shares and spread costs across a wider base.  Expansion has typically been achieved through issuance of new equity when the Company's share price has traded at a sufficient premium to net asset value to cover the costs of issuance.   Since the start of the last financial year the Managers have not been comfortable that capital raised from such new issuance could be invested at the same yield as the existing portfolio. The Board concluded that in the short term issuance would not be in the interests of shareholders and therefore has not approved the issuance of new equity during the period. This position is monitored regularly and we hope that further issuance to grow the size of the Company will be possible soon.

Dividends

For the year ended 30 April 2019, a third interim dividend of 1.10p per ordinary share was paid on 29 March 2019 and a fourth interim dividend of 1.10p per ordinary share was paid on 28 June 2019 making a total of 4.40p per ordinary share for the year, in line with our expectations. 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 at www.hendersondiversifiedincome.com.

The Managers' view is that the current dividend level is consistent with their risk appetite. The Board have agreed that they would be willing to support the dividend with reserves in the short term if it allowed the Managers greater flexibility to reduce risk in volatile markets. This view takes into account the Managers' view of the economic cycle, however should significant systematic or secular risk emerge the dividend will need to be reviewed.

Board change

I am delighted that Win Robbins was appointed to the Board on 28 May 2019. Win has extensive investment management experience having held various senior positions including eight years as Director of Credit Suisse Asset Management Limited from 1996 until 2004 and Managing Director and Head of Non-US Fixed Income at Citigroup Asset Management from 2004 to 2006. Win is a non-executive Director of Polar Capital Holdings plc, a position she has held since 2017 and was a non-executive director of City Merchants High Yield Trust Limited until March 2019. She is also a non-executive member of the Investment Committee of St. James Place Partnership plc and an Independent Trustee of the Institute of Cancer Research Pension Fund. Win holds the Diploma in Investment Management from the London Business School.

Annual General Meeting ('AGM')

The Company's second AGM will be held at Janus Henderson's offices, 201 Bishopsgate, London EC2M 3AE on Tuesday 3 September 2019 at 2.30 pm. Full details of the business to be conducted at the meeting are set out in the Notice of Meeting which will shortly be available on the Company's website. 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 in person the AGM will be live streamed on the internet at www.janushenderson.com/trustslive.

Outlook

Benjamin Graham observed of bond investment that 'since the chief emphasis must be on the avoidance of loss, bond selection is primarily a negative art. It is a process of exclusion and rejection, rather than of search and acceptance'. This was written in an era prior to the inflationary challenge of the seventies and eighties, the conquest of which has shaped the market experience of most investors.

The market has now moved to a belief that interest rates will normalise around low levels for a prolonged period, similar to the period in which Graham was writing. The portfolio is being positioned by the Managers to capture what they describe as 'sensible income'. This involves the exclusion of illiquid, small capitalisation issuers, those with low returns on capital or cash flow and the avoidance of heavily cyclical industries and those sectors facing structural or disruptive challenge. Reflecting this, the majority of the portfolio is invested in US assets with very little exposure to Continental Europe.

In such markets there is limited potential for significant asset appreciation and a balance found between finding yield which has acceptable risk. Should asset appreciation occur, it will make it even harder to find assets to invest in which provide good yield with reasonable risk. While it increasingly appears the Managers have been proved correct in their view of the market, it is a market that does not offer easy opportunities for income investors.

Angus Macpherson

Chairman

11 July 2019

PORTFOLIO INFORMATION

Ten largest investments at 30 April 2019

Ranking 2019 (2018)	Investment	Country	Industry	Market value £'000	% of portfolio
1 (3)	Aramark	US	Consumer cyclical	4,566	2.53
2 (1)	Tesco	UK	Consumer non-cyclical	4,541	2.51
3 (47)	Service Corp	US	Consumer non-cyclical	4,531	2.51
4 (24)	Sirius	US	Communications	4,453	2.46
5 (-)	Constellation Brands	US	Consumer non-cyclical	4,440	2.46
6 (15)	Virgin Media	UK	Communications	4,415	2.44
7 (37)	Equinix	US	Financials	4,293	2.37
8 (12)	IMS	US	Technology	4,152	2.30
9 (8)	Center Parcs	UK	Consumer cyclical	4,029	2.23
10 (53)	Crown Castle	US	Industrials	4,028	2.23

FUND MANAGERS' REPORT 

Background

The twelve months under review were exceptionally volatile for equity and credit markets with records tumbling in both a downward and upward direction. Most notable for bond investors was the dramatic shift in both the market and Central Bank views surrounding the outlook for inflation and future interest rate rises. It was a seminal shift in mind-set which culminated in the US Federal Reserve acknowledging that for the last ten years, there has been a continual undershooting of inflation relative to target. 

It may seem obvious today but if one casts their mind back to mid-2018 there was an emotive tone to the debate surrounding the inflation outlook, US fiscal deficits and of course, the level to which long term bond yields could rise. The mind-set of observers, and their orthodox economic models, was squarely rooted in the upside risks to inflation and the end of the long term decline in bond yields. Luminaries such as Jamie Dimon, CEO of JPMorgan, fell into the trap of misforecasting bond yields in an ever higher direction. Dimon settled upon a 5% US ten year bond yield in October, having earlier forecast 4%. In reality yields could not sustain a level over 3% for more than two months proving that even this threshold was not a sustainable equilibrium for the US economy. We disagreed with this consensus narrative, believing the experience of 2018 replicated and accentuated a pattern of overforecasting of bond yields which has been repeating for at least 26 years (based on our reading of the data). The failure in our view has always been the economic models.

Portfolio review

The portfolio as a whole continues to adhere to our style of what we call 'sensible income' investing. This avoids heavily cyclical industries (airlines, commodities etc) and remains shy of structurally challenged areas of the market, not least Italian bonds. Instead we focus on locking in reliable yields from strong stable large cap non-cyclical companies.

The net asset value per ordinary share ended the year under review almost unchanged at 86.82p compared to a starting level of 87.44p. Dividends paid were 4.40p per ordinary share in total. The movement in the net asset value over the year under review reflected the inherent risk and sensitivities of the portfolio. For most of 2018 the average price of the assets in the portfolio drifted lower as both US government bond yields and credit spreads moved higher in tandem (lower in price). By December however, risk assets were in a tailspin and government bond prices moved substantially higher as bond yields tumbled. This combination of factors was a classic indication of risk. Our net asset value per ordinary share was relatively resilient. This serves to highlight that the addition of quality longer dated investment grade bonds and interest rate futures can help stabilise and diversify the portfolio in the most challenging of times. In our view, generating a steady income from a bond portfolio is well served by this barbell of lower quality credit risk (high yield bonds) and longer dated investment grade bonds which have more interest rate risk inherent in their structure as opposed to investing in more illiquid areas of the credit market to generate a desirable yield which are heavily exposed in risk off environments.

In late 2018 we began to use interest rate futures to tactically add duration (measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates) to the portfolio to reflect our view that government bond yields were likely to fall. We executed this strategy by purchasing five and ten year US bond futures from late November into early December and have subsequently made use of UK and Australian futures. This proved beneficial for Company performance.

Other than the addition of interest rate futures, the evolution of the Company's asset allocation changed relatively little over the course of the year. This reflects the fact that we have continued to favour fixed rate bonds (both high yield and investment grade) over the illusory attraction of floating rate assets which factored in interest rate increases that we did not think would happen. Consequently, the only minor change was a further reduction in the allocation to secured loans where we remain concerned about the quality of lending in this market as well as the floating rate nature of the asset class where income will fall as and when interest rates fall.

Outlook

Our outlook for bond markets has long been driven by the structural and thematic factors which have served to shape our expectation of continued low inflation and low interest rates. Some may view this as complacent and reference the experience of the 1980s as a counterpoint to which we do not attach enough weight. We can assure you that this is not the case. Rather we have taken a longer term perspective and a more internationalist one than our critics would imply. The most common equilibrium in the long and broad sweep of bond market history is one of low yields and a low if not outright deflationary environment. The recent experiences of Japan and Europe also serve to highlight how difficult it is for Central Bankers to escape the curse of adaptive expectations and zero or negative interest rate policy. Even the US is beginning to exhibit the tell-tale signs of inflation expectations becoming unanchored to the downside i.e. the public incrementally reducing their expectation of future inflation year by year. This is a most unusual and foreboding development which should be close to a peak in the cyclical recovery juiced by fiscal spending.

The outlook for default rates is one which feels more uncertain to us. We have been firmly entrenched in a low default regime since 2009 in developed credit markets. One which was only briefly interrupted by commodity defaults in the US in 2015-16 when the oil price crashed. This feels less sustainable as markets turn down. We continue to favour lending to companies with proven defensive business models which still exhibit structural growth, an increased proportion of which are now situated in the United States. The benefits of buying these quality US dollar bonds comes of course with associated currency hedging costs, which are accounted via the capital account. Our style of credit investing with added diversification from longer dated investment grade bonds, should help us weather any coming storm as well as possible for a Company whose target is income. As always, we remain focused on delivering a reliable, dependable and consistent dividend stream for shareholders.

John Pattullo and Jenna Barnard

Fund Managers

11 July 2019

PRINCIPAL RISKS AND UNCERTAINTIES

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity. The Board has considered the impact of Brexit on the Company and concluded that the current portfolio is suitably diversified and will therefore not be significantly affected by the outcome of Brexit. The Board will continue to monitor this position. 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 Paribas 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 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 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 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 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 receives analysis of duration at over time at each meeting to seek to capture the current interest rate risks in the portfolio, but is discussing additional reporting in this regard. During the year the Board supported the Managers use of interest rate derivatives to mitigate interest rate risk and manage duration. The 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 Annual 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 corporate 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 Managers. The credit rating table for the portfolio at the year end is disclosed in note 14 to the financial statements in the Company's Annual 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 Annual 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 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 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.
Reliance on credit standing and quality of service of BNP as the appointed depositary and custodian of assets and their execution and settlement of transactions (other than secured loans) The Board has appointed BNP as its depositary. As depositary BNP acts 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, global custody and middle office functions) and would be made aware promptly of any compliance failings and how they are remediated. On an annual basis the Board reviews the quality of the service received by BNP depositary and custodian 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 uses 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.

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, gearing 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 year were with the Directors and the Manager. There have been no material transactions between the Company and its Directors during the year and the only amounts paid to them were in respect of fees and expenses for which there were no outstanding amounts payable at the year end. Directors' shareholdings are disclosed in the Directors' Remuneration Report.

In relation to the provision of services by the Manager, 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 material transactions with the Manager affecting the financial position of the Company during the year under review. More details on transactions with the Manager, including amounts outstanding at the year end, are given in note 22 to the financial statements in the Company's Annual Report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES 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 European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

•     the Strategic Report and financial statements include 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

11 July 2019

 

STATEMENT OF COMPREHENSIVE INCOME

	Year ended 30 April 2019			Period ended 30 April 2018
	Revenue return £'000	Capital return £'000	Total return £'000	Revenue return £'000	Capital return £'000	Total return £'000
Gains/(losses) on investments held at fair value through profit or loss	-	8,943	8,943	-	(8,322)	(8,322)
(Losses)/gains on foreign exchange transactions at fair value through profit and loss	-	(9,541)	(9,541)	-	5,724	5,724
Investment income (note 3)	9,558	-	9,558	9,570	-	9,570
Other operating income (note 4)	27	-	27	5	-	5
	----------	----------	--------	----------	----------	----------
Total income	9,585	(598)	8,987	9,575	(2,598)	6,977
	----------	----------	--------	----------	----------	----------
Expenses
Management and performance fees (note 5)	(520)	(519)	(1,039)	(1,037)	(1,036)           1,036)	(2,073)
Other expenses	(426)	-	(426)	(471)	-	(471)
	----------	----------	--------	----------	----------	----------
Profit before finance costs and taxation	8,639	(1,117)	7,522	8,067	(3,634)	4,433
Finance costs	(184)	(185)	(369)	(210)	(209)	(419)
	----------	----------	--------	----------	----------	----------
Profit before taxation	8,455	(1,302)	7,153	7,857	(3,843)	4,014
Taxation (note 6)	15	-	15	40	-	40
	----------	----------	--------	----------	----------	----------
Profit after taxation	8,470	(1,302)	7,168	7,897	(3,843)	4,054
			====	======	======	======
Earnings per ordinary share (note 7)	4.47p	(0.69p)	3.78p	4.19p	(2.04p)	2.15p
	======	======	====	======	======	======

The total columns of this statement represent 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. The Company had no other comprehensive income. The profit after taxation is also the total comprehensive income for the year.

STATEMENT OF CHANGES IN EQUITY

	Year ended 30 April 2019
	Called-up share capital £'000	Share premium £'000	Distributable reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
Total equity at 1 May 2018	1,896	-	165,538	(3,843)	2,208	165,799
Total comprehensive income:
Profit after taxation	-	-	-	(1,302)	8,470	7,168
Transactions with owners, recorded directly to equity:
Expenses incurred in cancelling share premium	-	-	(5)	-	-	(5)
Dividends paid	-	-	-	-	(8,344)	(8,344)
	--------	-----------	-----------	---------	---------	----------
Total equity at 30 April 2019	1,896	-	165,533	(5,145)	2,334	164,618
	=====	======	======	======	=====	======

	Period ended 30 April 2018
	Called-up share capital £'000	Share premium £'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	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 2019 £'000	At 30 April 2018 £'000
Non current assets
Investments at fair value through profit or loss	180,797	197,439
	----------	----------
	180,797	197,439
Current assets
Other receivables	2,949	5,737
Cash and cash equivalents	525	370
	----------	----------
	3,474	6,107
	----------	----------
Total assets	184,271	203,546
	----------	-----------
Current liabilities
Other payables	(1,126)	(10,937)
Bank loan	(18,527)	(26,810)
	----------	----------
Total assets less current liabilities	164,618	165,799
Net assets	164,618	165,799
	======	======
Equity attributable to equity shareholders
Called-up share capital	1,896	1,896
Distributable reserve	165,533	165,538
Capital reserve	(5,145)	(3,843)
Revenue reserve	2,334	2,208
	----------	----------
Total equity	164,618	165,799
	======	======
Net asset value per ordinary share	86.82p	87.44p
	======	======

CASH FLOW STATEMENT

	Year ended 30 April 2019 £'000	Period ended 30 April 2018 £'000
Operating activities
Net profit before tax	7,153	4,014
Interest payable	369	419
(Gains)/losses on investments held at fair value through profit or loss	(8,943)	8,322
Losses/(gains) on foreign exchange transactions at fair value through profit and loss	9,541	(5,724)
(Receipts)/payments on settlement of forward foreign exchange contracts	(13,887)	10,484
Decrease in prepayments and accrued income	229	120
(Decrease)/increase in other creditors	(34)	491
Purchases of investments	(92,729)	(145,430)
Sales of investments	115,907	125,642
	----------	----------
Net cash inflow/(outflow) from operating activities before  finance costs*	17,606	(1,662)
	----------	----------
Interest paid	(398)	(372)
Tax recovered	58	54
Taxation on investment income	(43)	(5)
	----------	----------
Net cash inflow/(outflow) from operating activities	17,223	(1,985)
	----------	----------
Financing activities
Equity dividends paid	(8,344)	(6,542)
Issue of ordinary shares	-	6,869
Cash received from Henderson Diversified Income Limited	-	5,324
Expenses incurred in cancelling share premium	(5)	(361)
Loans repaid	(8,283)	(3,125)
	----------	----------
Net cash (outflow)/inflow from financing	(16,632)	2,165
	----------	----------
Increase in cash and cash equivalents	591	180
	----------	----------
Cash and cash equivalents at start of year/period	370	-
Exchange movements	(436)	190
	----------	----------
Cash and cash equivalents at 30 April	525	370
	======	======

* Cash inflow from interest income was £9,827,000 (2018: £9,733,000) and cash inflow from dividends was £264,000 (2018: £267,000).

NOTES TO THE FINANCIAL STATEMENTS:

1.   General information

The Company was incorporated on 23 February 2017. On 26 April 2017, the Directors of its predecessor company, Henderson Diversified Income Limited ('Jersey Company'), placed the Jersey domiciled company into a Jersey Summary Winding Up and transferred the shareholdings and assets and liabilities of the Jersey Company to the Company.

2.   Basis of preparation

The Company is a registered investment company incorporated and domiciled in the United Kingdom under the Companies Act 2006. The comparative figures are in respect of the period from incorporation to 30 April 2018. As the Company did not hold any assets prior to 27 April 2017 when its shares were admitted for trading, they principally reflect the period 27 April 2017 to 30 April 2018. The financial statements for the year ended 30 April 2019 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 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 February 2018 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 (see above) the Directors have decided that it is appropriate for the financial statements to be prepared on a going concern basis.

3.  Investment income

	2019 £'000	2018 £'000
Income from investments:
Dividend income	264	267
Bond and loan interest	8,870	8,998
Premiums on credit default swaps	424	305
	----------	----------
	9,558	9,570
	----------	----------

4.  Other operating income

		2019 £'000	2018 £'000
Bank and other interest		17	5
Other income		10	-
		----	----
		27	5
		----	----

5.   Management and performance fees

		2019		2018
	Revenue return £'000	Capital return £'000	Total £'000	Revenue return £'000	Capital return £'000	Total £'000
Investment management fee	520	519	1,039	540	539	1,079
Performance fee	-	-	-	497	497	994
	-------	-------	--------	-------	-------	--------
	520	519	1,039	1,037	1,036	2,073
	-------	-------	--------	-------	-------	--------

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

6.  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 year. 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 2019.

The standard rate of corporation tax in the UK was 19% for the year. However, the tax charge in the current year was lower than the standard corporation tax rate, largely due to the reduction in corporation tax from the interest distributions noted in 6(a). The effect of this and other items affecting the tax charge is shown in note 6(b) below.

 

a) Analysis of charge in the year/period

		2019		2018
	Revenue return £'000	Capital return £'000	Total £'000	Revenue return £'000	Capital return £'000	Total £'000
Current tax:
UK corporation tax	-	-	-	-	-	-
Overseas withholding tax	43	-	43	6	-	6
Tax recovered from dissolved subsidiary	(58)	-	(58)	(46)	-	(46)
	-------	-------	--------	-------	-------	--------
Total tax charge for the year/period	(15)	-	(15)	(40)	-	(40)
	====	====	====	====	====	====

b) Factors affecting the tax charge for the year/period

	2019			2018
	Revenue return £'000	Capital return £'000	Total £'000	Revenue return £'000	Capital return £'000	Total £'000
Net return before taxation	8,455	(1,302)	7,153	7,857	(3,843)	4,014
UK corporation tax charge at 19% (2018:19%)	1,606	(247)	1,359	1,493	(730)	763
Effects of:
UK dividends	(50)	-	(50)	-	-	-
Other non-taxable income	-	(88)	(88)	(5)	-	(5)
Non-taxable gains on investments	-	201	201	-	493	493
Excess not deductible for tax purposes	-	-	-	4	-	4
Income being paid as interest distribution	(1,585)	-	(1,585)	(1,477)	-	(1,477)
Excess management expenses and loan relationships	29	134	163	(15)	237	222
Irrecoverable overseas withholding tax	43	-	43	6	-	6
Tax recovered	(58)	-	(58)	(46)	-	(46)
	-------	-------	--------	-------	-------	--------
Total tax charge for the year/period	(15)	-	(15)	(40)	-	(40)
	====	====	====	====	====	====

c) Provision for deferred taxation

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

The Company has not provided for deferred taxation on capital gains or losses arising on the revaluation of investments as it is exempt from tax on these items because 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 £490,000 (2018: £413,000) based on the prospective corporation tax rate of 17%. 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.

7.  Earnings per ordinary share

The total earnings per ordinary share figure is based on the net profit attributable to the ordinary shares of £7,168,000 and on 189,618,240 ordinary shares (2018: £4,054,000 on 188,686,956 ordinary shares) being the weighted average number of ordinary shares in issue during the year.

The total earnings can be further analysed as follows:

	2019 £'000	2018 £'000
Revenue profit	8,470	7,897
Capital loss	(1,302)	(3,843)
	----------	----------
Profit for the year/period	7,168	4,054
	======	======
Weighted average number of ordinary shares	189,618,240	188,686,956
Revenue earnings per ordinary share	4.47p	4.19p
Capital earnings per ordinary share	(0.69p)	(2.04p)
	----------	----------
Earnings per ordinary share	3.78p	2.15p
	======	======

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

8. Dividends

Dividends on ordinary shares	Record date	Payment date	2019 £'000	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	29 March 2018	-	2,086
Fourth interim dividend (1.10p) for the period ended 30 April 2018	8 June 2018	29 June 2018	2,086	-
First interim dividend (1.10p) for the year ended 30 April 2019	7 September 2018	28 September 2018	2,086	-
Second interim dividend (1.10p) for the year ended 30 April 2019	7 December 2018	28 December 2018	2,086	-
Third interim dividend (1.10p) for the year ended 30 April 2019	8 March 2019	29 March 2019	2,086	-
			--------	--------
			8,344	6,542
			--------	--------

The 2019 fourth interim dividend has not been included as a liability in these financial statements as it was announced and paid after 30 April 2019.

	2019 £'000	2018 £'000
Revenue available for distribution by way of dividends for the year/period	8,470	7,897
First interim dividend (1.10p) (2018: 1.25p)	(2,086)	2,370
Second interim dividend (1.10p) (2018: 1.10p)	(2,086)	(2,086)
Third interim dividend (1.10p) (2018: 1.10p)	(2,086)	(2,086)
Fourth interim dividend (1.10p) paid on 28 June 2019 (2018: 1.10p paid on 29 June 2018)	(2,086)	(2,086)
Dividends paid from distributable capital reserve	-	853
	--------	--------
	126	122
	--------	--------

9. Share capital

	2019
	Number of shares entitled to dividend	Total number of shares	Nominal value of shares £'000
Ordinary shares of 1p each
At start of year	189,618,240	189,618,240	1,896
	----------------	----------------	----------------
Closing balance at 30 April	189,618,240	189,618,240	1,896
	----------------	----------------	----------------
	2018
	Number of shares entitled to dividend	Total number of shares	Nominal value of shares £'000
Ordinary shares of 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
	----------------	----------------	----------------
Closing balance at 30 April	189,618,240	189,618,240	1,896
	----------------	----------------	----------------

There were no shares issued in the year ended 30 April 2019.  During the period ended 30 April 2018 the Company issued 189,618,240 shares for net proceeds of £168,287,000. 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 assets and liabilities were transferred to the Company and investors in the predecessor company had their shares transferred to the Company at this date. 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 included 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.

During the period to 30 April 2018, the Company issued a further 7,425,000 ordinary shares for proceeds of £6,869,000 net of costs.

10. Share premium account

	2019 £'000	2018 £'000
At start of year/period	-	-
Premium on shares issued on 27 April 2017	-	160,056
Issue costs	-	(460)
Premium on shares issued subsequent to 27 April 2017	-	6,795
Transfer of distributable reserve following cancellation of share premium account	- ----------	(166,391) -------------
At 30 April	-	-
	======	========

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

11. 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 2019 of £164,618,000 (2018: £165,799,000) and on 189,618,240 (2018: 189,618,240) ordinary shares, being the number of ordinary shares in issue.

12. 2019 Financial Information

The figures and financial information for the year ended 30 April 2019 are extracted from the Company's Annual Report and financial statements for that year and do not constitute statutory financial statements for that period. The Company's Annual 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 Annual Report and financial statements for the year ended 30 April 2019 have not yet been delivered to the Registrar of Companies.

13. Annual Report and Financial Statements

Copies of the Company's Annual Report and financial statements for the year ended 30 April 2019 will be posted to shareholders in July 2019 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.

14. Annual General Meeting

The Annual General Meeting will be held on Tuesday 3 September 2019 at 2.30pm 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]

Laura Thomas

Investment Trust PR Manager

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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