Doc re. Annual Financial Report

RNS Number : 8009T

Henderson Diversified Income TstPLC

22 July 2020

 

HENDERSON INVESTMENT FUNDS LIMITED

HENDERSON DIVERSIFIED INCOME TRUST PLC

LEGAL ENTITY IDENTIFIER: 213800RV2228EO1JEN02

22 JULY 2020

HENDERSON DIVERSIFIED INCOME TRUST PLC

Annual Financial Report for the Year Ended 30 April 2020

This announcement contains regulated information

PERFORMANCE HIGHLIGHTS

Total return performance for the year to 30 April 2020
NAV1	2.9%
Benchmark2	2.8%
Share price3	-3.4%

	At 30 April 2020	At 30 April 2019
NAV per share	85.00p	86.82p
Share price3	83.00p	90.80p
Revenue return per share	4.40p	4.47p
Net assets	£162.6m	£164.6m
Dividend per share	4.40p	4.40p
Dividend yield	5.30%	4.85%
Ongoing charge	0.89%	0.89%
Financial gearing	15.38%	9.83%
Number of portfolio investments held	98	82

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 + 2%

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

Sources: Morningstar for the AIC and Janus Henderson.

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

Introduction

Writing in June, it seems as if we are reaching the end of the first Act of the COVID-19 pandemic.  We are only now starting to understand the real cost to society of this pervasive virus. 

The economic impact is unlike other recent crises, being "event" driven rather than being caused by speculative financial excess. In theory, recovery from event driven shocks should be more rapid than from a financial crisis; once the virus has been controlled, business could return to normal.  But as we saw in March, an event driven crisis can easily become a financial one. The decisive policy response by Central Banks which flooded the market with liquidity averted this, at least for the time being, allowing significant fundraising and a rally in asset prices.

This rally was selective. Again, this has been a period where the Fund Managers' focus on what they describe as "sensible income" has proved prescient. The private sector will emerge from lockdown with significant additional debt.  Companies that entered the crisis operationally and financially geared will face real challenges; the market seems to be judging that only those companies with a clear competitive advantage are likely to perform in the near future. Broadly, this is the universe your Fund Managers had focussed on even prior to the crisis.

Performance

Notwithstanding the extraordinary volatility of asset prices in March, the Company saw a positive NAV total return of 2.9% to shareholders for the year to 30 April 2020. This remarkable performance did not look likely in March when NAV per share had fallen to 71.0p.  As it turned out at the year end there had been only a modest decline in NAV per share to 85.0p from 86.8p, following the payment of a covered dividend to shareholders of 4.40p per share during the year.

Dividends

For the year ended 30 April 2020, a third interim dividend of 1.10p per ordinary share was paid on 31 March 2020 and a fourth interim dividend of 1.10p per ordinary share was paid on 30 June 2020 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.

As interest rates have fallen over the course of the last three decades there has been relentless downward pressure on the Company's income. The recent turmoil in markets allowed the Fund Managers to buy bonds at better yields. This has relieved the immediate pressure, but shareholders are warned that if the Fund Managers' outlook of continued low interest rates for at least the next decade proves correct, this relief will be only temporary.

Annual General Meeting (AGM)

Given the current ongoing restrictions and social distancing measures imposed by the UK government as a result of the COVID-19 pandemic, the Board advises shareholders that this year's AGM will take place at 11.30am on Tuesday 15 September 2020 as a "closed meeting", with only the Board and Registrar present to meet the quorum requirements as set out in the Company's Articles. Other shareholders, corporate representatives and proxies will not be able to attend the AGM.

This year's voting on the resolutions will therefore be conducted on a poll rather than a show of hands. The Board strongly encourages all shareholders to submit their proxy forms to ensure their vote counts at the AGM. Further instructions on proxy voting can be found in the proxy form sent to shareholders with this Annual Report (for those shareholders that hold shares in their own name) and/or pages 7 to 8 of the Notice of 2020 Annual General Meeting. Both documents will shortly be available on the Company's website www.hendersondiversifiedincome.com.

 

If you hold your shares in a nominee account, such as through a share dealing service or platform, you will need to contact your provider and ask them to submit the proxy votes on your behalf.

The Board encourages shareholders to submit any questions they may have in relation to the Annual Report for the year ended 30 April 2020 or the resolutions being proposed at the AGM, in advance, by contacting the Company Secretary at [e-mail] or calling 020 7818 2345. Questions received will be forwarded to the Board and/or the Fund Managers and individual responses will be provided.

The Board are pleased to invite shareholders to attend a virtual Fund Managers presentation for the year ended 30 April 2020 which will be held at 12 noon on Tuesday 15 September 2020. You can access the presentation using this link: https://jhi.zoom.us/j/94133800579.

Outlook

Pleasingly, a collective noun for swans is a bank. At this time there would appear to be any number of bad banks of black swans. Any one of these has the potential to disrupt our fragile steps towards normality and cause a more serious crisis. 

For the moment, markets have rallied which reflects the longer term view of an eventual recovery to economic growth, but it is clear that the range of outcomes is much broader and potentially more extreme than usual.

For those whose objective is to generate income, base rates are at an all time low and gilts have been auctioned on negative yields.  Many equities look much less attractive than before the pandemic as their yield has proved unsustainable and their capital has been impaired.  Careful investment in riskier credits, however, has been a successful strategy for our Fund Managers to date, delivering income in excess of inflation and largely protecting capital.

Shareholders would be wise to anticipate volatility and unforeseen shocks, but the Fund Managers continue to believe low interest rates may persist for the foreseeable future.  They remain confident that investing in credit for "sensible income" is the most attractive strategy in these circumstances.  As shareholders we should all wish them well.

Angus Macpherson

Chairman

FUND MANAGERS' REPORT 

As we are sure readers will agree, the twelve months through 30 April 2020 involved quite extraordinary developments for investors in response to the global health threat known as COVID-19 and the corresponding government reaction across the world. Whilst economies were put into induced comas via shutdown policies, fiscal and monetary authorities responded with remarkable largesse in order to try and minimise corporate and household financial distress.

The rationale for this was to ensure that as much of the economy as possible survived the economic crash such that the recovery phase would be vigorous. For policymakers, doing too much was viewed as a lesser risk to doing too little and as a result, the relationship between GDP declines and likely default rates was broken to the benefit of corporate bond investors. In addition to this general approach, corporate bond markets in which we invest became a specific target for Central Banks who committed to buying large quantities of not only investment grade corporate bonds (something that the ECB & BoE had been doing since 2016) but, in the case of the US Federal Reserve, also select high yield (lower rated) bonds. By doing so, Central Banks catalysed a surge in demand for corporate bonds as an asset class which were already trading at extremely cheap levels. Corporates took advantage of this demand and investment grade issuance broke all historic records between late March and mid-May.

Not only was the quantum of issuance record breaking but this liquidity was freely available for even lower rated corporates in high yield and those industries directly affected by the crisis (cruise lines, airlines, hotels). Central bank policies generated a willingness of investors to lend money made the crisis very different to 2008/09 when liquidity was not flowing for months at a time.

The COVID-19 pandemic and the policy response is still evolving at the time of writing (early June) and much of course, remains unknown about this situation. In the following paragraphs we will set out our thought process through the dislocations in March 2020, the actions that were taken and how this leaves the Company positioned going forward.

During the year under review, the NAV of the Company declined modestly from 86.8p to 85.0p through to 30 April 2020 but the drawdown in March 2020 was a historic extreme in terms of its speed and severity, reflected in the NAV declining as far as 71.0p. Much has been written about the unprecedented collapse in market liquidity and, as a result, prices during a few short weeks. Our favourite example to use to illustrate conditions is McDonalds 4.875% bond maturing in 2045 which was held by the Company.  This highly rated (single A), household name saw the price of its bonds plummet along with every other company, in this case from a high of 130c on the dollar in early March 2020 to 95c on the dollar on 20 March before subsequently recovering to its original price by mid-April 2020.

When thinking about the NAV of the Company we remained confident throughout the turbulence that the companies we have chosen to lend money to would survive this crisis. This reflects our radical style of credit investing which we have called "sensible income": it rules out half of the global high yield market as uninvestable and about a third of the investment grade market.  The reason we will not lend shareholders money to this much of the corporate bond market is due to their history of poor cash flow return on investment, excessive cyclicality and operational leverage. Combining these attributes with financial leverage (and hence corporate bonds) is clearly a recipe for defaults. Thus it is no surprise to know that we had no exposure to airlines, autos and non-food retailers let alone any commodity related businesses or emerging market exposure. Within the banking exposure, a large income pool for credit investors to fish in, we restrict ourselves broadly to UK, Swiss and US banks.

We did however, have exposure to a number of leisure companies that saw their businesses come to a complete halt as a result of the shutdown. These were through quality businesses with a history of growth and strong returns and which, as a result had a significant equity cushion sitting beneath the bond. In the case of Center Parcs, the private equity investor who on 24 March 2020 organised a call with bondholders to express commitment to the business and a willingness to fund it through the difficult period if needed. Other businesses that fall in this bucket would include Merlin (Legoland etc) in which we bought additional new bonds issued with a 7% coupon in April, Live Nation ($11bn market cap at the time of writing vs $5bn of debt) and Casino companies in the US. It is our belief that the rapid recovery in the NAV of the Company reflects the quality of the underlying investments and it will be pleasing to see these businesses thrive in the future.

The dividend was held constant at 4.40p for the year under review. The actions taken during the sell-off have served to put the dividend in a more comfortable position going forward. As Fund Managers we viewed the rapid rise in corporate bond yields in March as a unique opportunity to increase the income of the company by adding credit risk. This was done through direct high yield and investment grade corporate bond purchases (funded by the sale of low yielding investment grade bonds, often short dated). In addition, we used credit derivatives to add gearing to the Company and take advantage of generic valuation levels in the European high yield market via an instrument known as the Itraxx Crossover Index. This is the benchmark credit derivative index in this area and is highly liquid for a company the size of Henderson Diversified Income as it trades in sizes of billions of euros a day. We had reduced the dividend and leverage over time and expressed an ambivalence to credit market valuations in the last annual report. However, we are pragmatists at heart, despite a level of realism about the global economy and interest rates that some have found depressing at times, and excited by the valuations on offer in March. In essence, the corporate bond market had priced in far too many defaults at this time.

At this point it is we should turn to the outlook. Having increased the gearing of the Company to take advantage of cheap valuation levels in the corporate bond market and boost income, the Company is also clearly a more risky proposition in terms of the performance of riskier assets more generally. As mentioned earlier, the virus remains unknown in many regards, but we are today armed with a greater degree of knowledge regarding the public health measures needed to confront it. That is to say, the catastrophic "denial" phase of late January to mid-March will not be returned to. For credit markets specifically, a large degree of the move higher in credit spreads in every economic or market downturn is related to liquidity and systemic risk. Authorities in this unique crisis have served to underwrite credit markets in both respects. In Central Bank parlance you could say that there is no "moral hazard" i.e. there is no bad apple which caused this crisis and hence Central Banks are willing to provide support freely to companies, markets and the economy. Default risk will continue to plague the lower end of the credit market in sectors which have proven vulnerable for many years: retail, energy, airlines and which as a result, neither bond nor equity investors are willing to bailout.  We find these easy to ignore and continue to focus on generating income in a sustainable and sensible manner in a world in which interest rates are unlikely to rise meaningfully if at all for yet another decade.

John Pattullo and Jenna Barnard

Fund Managers

PORTFOLIO INFORMATION

Ten largest investments at 30 April 2020

Ranking 2020 (2019)	Investment	Country	Industry	Market value £'000	% of portfolio
1 (25)	American Tower	US	Financials	5,192	2.77
2 (2)	Tesco1	UK	Consumer non-cyclical	4,731	2.52
3 (11)	Elanco	US	Consumer non-cyclical	4,708	2.51
4 (3)	Service Corp	US	Consumer non-cyclical	4,703	2.51
5 (21)	Verizon Communications	US	Communications	4,668	2.49
6 (10)	Crown Castle	US	Industrials	4,577	2.44
7 (4)	Sirius	US	Communications	4,335	2.31
8 (8)	IMS	US	Technology	4,328	2.31
9 (1)	Aramark	US	Consumer cyclical	4,108	2.19
10 (35)	McAfee	US	Technology	4,020	2.14

¹ Total holding disclosed (investment grade bond and asset backed security)

 

MANAGING RISKS

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 COVID-19 on the Company and concluded that the current portfolio is in a strong position to weather the market with the Fund Managers' long standing philosophy of thematic investing, long-term duration management and "sensible income" credit investing. The Board will continue to monitor this position.

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 ('BNPPSS'). However, certain risks and functions cannot be delegated and are retained by the Board.

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. This reflects the Company's risk map.

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 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 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 supports the use of interest rate derivatives to increase, as well as, manage and mitigate interest rate risk. 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 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 Fund Managers have 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 Fund Managers. The credit rating table for the portfolio at the year end is disclosed in Note 14.3 to the financial statements in the 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 14.1.2 to the financial statements in the 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 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 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. The Board also receives an annual report on internal controls from  BNPPSS Collateralized Loan Obligations 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 BNPPSS as the appointed Depositary and Custodian of assets and their execution and settlement of transactions (other than secured loans) The Board has appointed BNPPSS as its Depositary.  As Depositary BNPPSS acts as the Company's investment custodian, with responsibility for transaction execution and settlement. The Company is reliant on BNPPSS 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 BNPPSS's credit rating does not deteriorate or the Custodian fails such that assets are not immediately recoverable.	The Board assesses the credit standing of BNPPSS 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 BNPPSS (Fund Administration, Global and Local Custody, Middle Office Functions and Collateralized Loan Obligations) 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 BNPPSS Depositary and Custodian and discusses any issues in person with BNPPSS representatives.
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 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 loan covenants, asset allocation limits and currency hedging exposure. 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 positions

VIABILITY STATEMENT

The Company seeks to provide shareholders with income and capital growth such that the total return on the net asset value of the Company exceeds the average return on rolling annual basis of three month sterling Libor + 2%. The Board aims to achieve this by pursuing the Company's business model and strategy through the investment objective and policy. The Board will continue to consider and assess how it can adapt the business model and strategy of the Company to ensure its long-term viability in relation to its principal risks as detailed above.

In assessing the viability of the Company, the Board also considers the prospects of the Company including the liquidity of the portfolio (which is mainly invested in readily realisable listed securities), the level of borrowings (which are restricted), the closed-ended nature as an investment company (therefore there are limited liquidity issues arising from unexpected redemptions) and a low ongoing charge (0.89% for the year ended 30 April 2020 (2019: same)). The Company retains title to all assets held by the Custodian (under the terms of the formal agreement with the Depositary), cash is held with approved banks and revenue and expenditure forecasts are reviewed monthly by the Board.

The Board therefore believes it is appropriate to assess the Company's viability over a three-year period, taking account of the Company's current position and the assessment factors detailed above.

When assessing the viability of the Company over the next three years the directors considered its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's borrowing facilities and how a breach of the loan covenants could impact on the Company's NAV and share price. In March 2020, the dramatic falls in credit markets, fuelled by liquidity concerns as a result of the COVID-19 pandemic, were the largest falls seen by the Fund Managers surpassing even those of the financial crisis in 2008/09. The Company's NAV fell significantly at this time as a result of the pandemic (in line with the rest of the market). The Fund Managers continued to seek investment opportunities, for example buying into the secondary market and rotating out of higher quality grade bonds. One advantage to the crisis has been that the Fund Managers have been able to obtain attractive yield levels on credit investments, better than those seen for a number of years. The directors continue to support the Fund Managers investment strategy and hold the view that the Company should come out of this crisis relatively well, and in a better position to meet the ongoing income requirements for shareholders, having taken advantage of falls in the bond market and investing in opportunities where good value for money has been identified. The Company's NAV has subsequently rebounded. The directors consider the pandemic to highlight the advantages of holding an investment trust.

The directors do not envisage any change in strategy or investment objective, or any events that would prevent the Company from continuing to operate over the next three years as the Company's assets are liquid, its commitments are limited, and the Company intends to continue to operate as an investment trust. The Board takes comfort in the robustness of the Company's position, performance, liquidity and the well-diversified portfolio designed by our Fund Managers. The Board is assured that the Company is well equipped to navigate a substantial global financial crisis and therefore has a reasonable expectation that the Company will continue in operation and meet its liabilities as they fall due over the next three-year period.

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 Annual Report.

The directors confirm that in accordance with Listing Rule 9.8.4(7) there are no further disclosures that need to be made in this regard.

DISCLOSURE GUIDANCE AND TRANSPARENCY RULE 4.1.12 STATEMENT

Each of the directors confirm that, to the best of his/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

 

STATEMENT OF COMPREHENSIVE INCOME

	Year ended 30 April 2020			Year ended 30 April 20191
	Revenue return £'000	Capital return £'000	Total return £'000	Revenue return £'000	Capital return £'000	Total return £'000
Gains on investments held at fair value through profit or loss	-	1,683	1,683	-	2,790	2,790
Losses on foreign exchange transactions at fair value through profit or loss	-	(4,514)	(4,514)	-	(3,388)	(3,388)
Investment income (note 3)	9,548	-	9,548	9,558	-	9,558
Other operating income (note 4)	11	-	11	27	-	27
	----------	----------	--------	----------	----------	--------
Total income	9,559	(2,831)	6,728	9,585	(598)	8,987
	----------	----------	--------	----------	----------	--------
Expenses
Management fee (note 5)	(535)	(534)	(1,069)	(520)	(519)	(1,039)
Other expenses (note 6)	(414)	-	(414)	(426)	-	(426)
	----------	----------	--------	----------	----------	--------
Profit before finance costs and taxation	8,610	(3,365)	5,245	8,639	(1,117)	7,522
Finance costs (note 7)	(233)	(232)	(465)	(184)	(185)	(369)
	----------	----------	--------	----------	----------	--------
Profit before taxation	8,377	(3,597)	4,780	8,455	(1,302)	7,153
Taxation (note 6)	(5)	-	(5)	15	-	15
	----------	----------	--------	----------	----------	--------
Profit after taxation	8,372	(3,597)	4,775	8,470	(1,302)	7,168
	=====	======	====	======	======	=====
Earnings/(loss) per ordinary share (note 7)	4.40p	(1.89p)	2.51p	4.47p	(0.69p)	3.78p
	======	======	====	======	======	======

¹ For the year under review the Company's accounting policies have not varied from those described in the Annual Report for the year ended 30 April 2019. However, the foreign currency components in the 'gains/(losses) on investments held at fair value through profit or loss' and the 'losses on foreign exchange have been reclassified together in the year ended 30 April 2020 and year ended 30 April 2019 to better reflect the movements in foreign currency value associated with investments.

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 2020
	Called-up share capital £'000	Share premium £'000	Distributable reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
Total equity at 1 May 2019	1,896	-	165,533	(5,145)	2,334	164,618
Total comprehensive income:
Profit after taxation	-	-	-	(3,597)	8,372	4,775
Transactions with owners, recorded directly to equity:
Proceeds from the issue of shares (note 9)	17	1,576	-	-	-	1,593
Dividends paid (note 8)	-	-	-	-	(8,362)	(8,362)
	--------	-----------	-----------	---------	---------	----------
Total equity at 30 April 2020	1,913	1,576	165,533	(8,742)	2,344	162,624
	=====	======	=======	======	=====	======

	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 (note 8)	-	-	-	-	(8,344)	(8,344)
	--------	-----------	-----------	---------	---------	----------
Total equity at 30 April 2019	1,896	-	165,533	(5,145)	2,334	164,618
	=====	======	======	======	=====	======

 

STATEMENT OF FINANCIAL POSITION

	At 30 April 2020 £'000	At 30 April 2019 £'000
Non current assets
Investments at fair value through profit or loss	187,645	180,797
Current assets
Other receivables	6,127	2,949
Cash and cash equivalents	3,735	525
	----------	----------
	9,862	3,474
	----------	----------
Total assets	197,507	184,271
	----------	----------
Current liabilities
Other payables	(2,248)	(1,126)
Bank loan	(32,635)	(18,527)
	----------	----------
Total assets less current liabilities	162,624	164,618
	======	=======
Net assets	162,624	164,618
	======	======
Equity attributable to equity shareholders
Called-up share capital (note 9)	1,913	1,896
Share premium (note 10)	1,576	-
Distributable reserve	165,533	165,533
Capital reserve	(8,742)	(5,145)
Revenue reserve	2,344	2,334
	----------	----------
Total equity	164,624	164,618
	======	======
Net asset value per ordinary share (note 11)	85.00p	86.82p
	======	======

STATEMENT OF CASH FLOWS                                                                                                   

	Year ended 30 April 2020 £'000	Year ended 30 April 2019 £'000
Operating activities
Net profit before tax	4,780	7,153
Interest payable	465	369
Gains on investments held at fair value through profit or loss	(1,683)	(2,790)
Losses on foreign exchange transactions at fair value through profit or loss	4,514	3,388
Net payments on settlement of forward foreign exchange contracts	(8,849)	(13,887)
Net payments on credit default swaps	(1,573)	(267)
(Decrease)/increase in prepayments and accrued income	(19)	(38)
Increase/(decrease) in other creditors	7	(34)
Purchases of investments	(92,690)	(92,729)
Sales of investments	91,120	115,907
	----------	----------
Net cash (outflow)/inflow from operating activities before  finance costs1	(3,928)	17,072
	----------	----------
Interest paid	(452)	(398)
Tax recovered	-	58
Taxation on investment income	(5)	(43)
	----------	----------
Net cash (outflow)/inflow from operating activities	(4,385)	16,689
	----------	----------
Financing activities
Equity dividends paid	(8,362)	(8,344)
Issue of ordinary shares	1,593	-
Issue costs	-	(5)
Drawdown of bank overdraft	317	-
Drawdown/(repayment) of loans	14,108	(8,283)
	----------	----------
Net cash inflow/(outflow) from financing activities	7,656	(16,632)
	----------	----------
Increase in cash and cash equivalents	3,271	57
	----------	----------
Cash and cash equivalents at start of year	(9)	370
Exchange movements	(61)	(436)
	----------	----------
Cash and cash equivalents at 30 April	3,201	(9)
	======	======

1Cash inflow from interest income was £9,302,000 (2019: £9,827,000) and cash inflow from dividends was £264,000 (2019: £264,000).

 

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. The Company is a registered investment company incorporated and domiciled in the United Kingdom under the Companies Act 2006.

2.  Basis of preparation

The financial statements 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.

These policies have been applied consistently throughout the year. Where presentational guidance set out in the Statement of Recommended Practice (SORP) for investment trusts issued by the Association of Investment Companies (AIC) in October 2019 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 directors have performed a COVID-19 analysis which included cash flow forecasting, a review of covenant compliance including the headroom above the most restrictive covenants and an assessment of the liquidity of the portfolio and have concluded that they are able to meet their financial obligations, including the repayment of the bank loan, as they fall due for a period of at least twelve months from the date of issuance. Having assessed these factors, as well as the principal risks and other matters discussed in connection with the Viability Statement (above) the directors confirm that 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.

3.  Investment income

	2020 £'000	2019 £'000
Income from investments:
Dividend income	264	264
Bond and loan interest	8,831	8,870
Premiums on credit default swaps	453	424
	----------	----------
	9,548	9,558
	----------	----------

4.  Other operating income

		2020 £'000	2019 £'000
Bank and other interest		11	17
Other income		-	10
		----	----
		11	27
		----	----

5.  Management fee

		2020		2019
	Revenue return £'000	Capital return £'000	Total £'000	Revenue return £'000	Capital return £'000	Total £'000
Investment management fee	535	534	1,069	520	519	1,039
	-------	-------	--------	-------	-------	--------

A summary of the fee arrangements with the Manager are given in the Annual 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 2020.

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 effective tax rate, largely due to the reduction in corporation tax from the interest distribution noted above. 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

		2020		2019
	Revenue return £'000	Capital return £'000	Total £'000	Revenue return £'000	Capital return £'000	Total £'000
Current tax:
Overseas withholding tax	5	-	5	43	-	43
Tax recovered from Luxembourg subsidiary	-	-	-	(58)	-	(58)
	-------	-------	--------	-------	-------	--------
Total tax charge for the year	5	-	5	(15)	-	(15)
	====	====	====	====	====	====

b) Factors affecting the current tax charge for the year

	2020			2019
	Revenue return £'000	Capital return £'000	Total £'000	Revenue return £'000	Capital return £'000	Total £'000
Net return before taxation	8,377	(3,597)	4,780	8,455	(1,302)	7,153
UK corporation tax charge at 19% (2019:17%)	1,592	(683)	909	1,606	(247)	1,359
Effects of:
UK dividends	(50)	-	(50)	(50)	-	(50)
Currency gains/losses	-	1,693	1,693	-	2,721	2,721
Realised/unrealised gains/losses on investments	-	(1,155)	(1,555)	-	(2,608)	(2,608)
Income being paid as interest distribution	(1,592)	-	(1,592)	(1,585)	-	(1,585)
Excess management expenses and loan relationships	50	145	195	29	134	163
Irrecoverable overseas withholding tax	5	-	5	43	-	43
Tax recovered	-	-	-	(58)	-	(58)
	-------	-------	--------	-------	-------	--------
Total tax charge for the year	5	-	5	(15)	-	(15)
	====	====	====	====	====	====

c) Provision for deferred taxation

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

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 £744,000 (2019: £490,000) based on the prospective corporation tax rate of 19% (2019:17%). On 11 March 2020 it was announced (and substantively enacted on 17 March 2020) that the UK corporation tax rate would remain at 19% and not reduce to 17% (the previously enacted rate) from 1 April 2020. 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/(loss) per ordinary share

The total earnings per ordinary share figure is based on the net profit attributable to the ordinary shares of £4,775,000 and on 190,017,557 ordinary shares (2019: £7,168,000 on 189,618,240 ordinary shares) being the weighted average number of ordinary shares in issue during the year.

The total earnings can be further analysed as follows:

	2020 £'000	2019 £'000
Revenue profit	8,372	8,470
Capital loss	(3,597)	(1,302)
	----------	----------
Profit for the year	4,775	7,168
	======	======
Weighted average number of ordinary shares	190,017,557	189,618,240
Revenue earnings per ordinary share	4.40p	4.47p
Capital earnings per ordinary share	(1.89p)	(0.69p)
	----------	----------
Earnings per ordinary share	2.51p	3.78p
	======	======

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	2020 £'000	2019 £'000
Fourth interim divided (1.10p) for the year ended 30 April 2019 (2018 - 1.10p)	7 June 2019	28 June 2019	2,086	2,086
First interim dividend (1.10p) for the year ended 30 April 2020 (2019 - 1.10p)	6 September 2019	30 September 2019	2,086	2,086
Second interim dividend (1.10p) for the year ended 30 April 2020 (2019 - 1.10p)	6 December 2019	31 December 2019	2,086	2,086
Third interim dividend (1.10p) for the year ended 30 April 2020 (2019 - 1.10p)	6 March 2020	31 March 2020	2,104	2,086
			--------	--------
			8,362	8,344
			--------	--------

The fourth interim dividend has not been included as a liability in these financial statements as it was announced and paid after 30 April 2020.

	2020 £'000	2019 £'000
Revenue available for distribution by way of dividends for the year	8,372	8,470
First interim dividend	(2,086)	(2,086)
Second interim dividend	(2,086)	(2,086)
Third interim dividend	(2,104)	(2,086)
Fourth interim dividend	(2,104)	(2,086)
	--------	--------
	(8)	126
	--------	--------

9. Share capital

	2020
	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
Issue of shares	1,700,000	1,700,000	17
	----------------	----------------	----------------
Closing balance at 30 April	191,318,240	191,318,240	1,913
	----------------	----------------	----------------
	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
	----------------	----------------	----------------

During the year to 30 April 2020 1,700,000 ordinary shares were issued for proceeds of £1,593,000 (2019: nil).
 

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.

10. Share premium account

	2020 £'000	2019 £'000
At start of year	-	-
Issue of shares	1,576	-
	======	========
At 30 April	1,576	-
	======	========

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 2020 of £162,624,000 (2019: £164,618,000) and on 191,318,240 (2019: 189,618,240) ordinary shares, being the number of ordinary shares in issue at the year end.

12. 2020 Financial Information

The figures and financial information for the year ended 30 April 2020 are extracted from the Company's Annual Report and financial statements for that year and do not constitute statutory financial statements for that year. 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 2020 have not yet been delivered to the Registrar of Companies.

13. 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 for the year ended 30 April 2019 have been audited and delivered to the Registrar of Companies. The Independent Auditors' Report on the 2019 financial statements was unqualified and did not contain any statements under sections 498(2) and 498(3) of the Companies Act 2006.

14. Annual Report and Annual General Meeting

Copies of this document and the Company's Annual Report and financial statements for the year ended 30 April 2020 will be posted to shareholders in late July 2020 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.

Given the current ongoing restrictions and social distancing measures imposed by the UK government as a result of the COVID-19 pandemic, the Board advises shareholders that this year's AGM will take place at 11.30am on Tuesday 15 September 2020 as a "closed meeting", with only the Board and Registrar present to meet the quorum requirements as set out in the Company's Articles. Other shareholders, corporate representatives and proxies will not be able to attend the AGM.

This year's voting on the resolutions will therefore be conducted on a poll rather than a show of hands. The Board strongly encourages all shareholders to submit their proxy forms to ensure their vote counts at the AGM. Further instructions on proxy voting can be found in the proxy form sent to shareholders with this Annual Report (for those shareholders that hold shares in their own name) and/or pages 7 to 8 of the Notice of 2020 Annual General Meeting. Both documents will shortly be available on the Company's website www.hendersondiversifiedincome.com.

 

If you hold your shares in a nominee account, such as through a share dealing service or platform, you will need to contact your provider and ask them to submit the proxy votes on your behalf.

The Board encourages shareholders to submit any questions they may have in relation to the Annual Report for the year ended 30 April 2020 or the resolutions being proposed at the AGM, in advance, by contacting the Company Secretary at [e-mail] or calling 020 7818 2345. Questions received will be forwarded to the Board and/or the Fund Managers and individual responses will be provided.

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

 

 

FR UUVSRROUBUAR