Final Results

RNS Number : 1319D

Henderson Diversified Income Ltd

26 January 2015

 



26 January 2015

This announcement contains regulated information.

HENDERSON DIVERSIFIED INCOME LIMITED

Annual Financial Report for the year ended 31 October 2014

PERFORMANCE HIGHLIGHTS

	2014	2013
NAV per share at year end	88.82p	87.92p
Share price at year end	91.25p	91.50p
Dividend for the year1	5.10p	5.05p
Dividend yield2	5.59%	5.52%
Ongoing charge for the year3	1.08%	1.40%
Financial gearing at year end4	4.68%	9.22%
Number of investments held at year end	129	128
Performance fee paid5	£845,000	£703,000

¹This represents ordinary dividends declared but not yet paid for the year ended 31 October 2014

²Based on the ordinary dividends paid and share price at the year end

³ The ongoing charge excludes the performance fee

⁴This represents financial gearing only.

⁵The 2013 performance fee was paid in the financial year ended 31 October 2014. The 2014 performance fee will be paid in the financial year ending 31 October 2015

Sources: Morningstar for the AIC, Morningstar FundData, Henderson, DataStream

STRATEGIC REPORT

Extract from the Chairman's Statement

Introduction

I am pleased to report a positive year for your Company against a background of continuing low interest rates. Demand for the Company's shares was strong and following a successful placing and offer for subscription in February and further tap share issues since that date, your Company's net assets have grown 54% over the year from £80.9m to £124.6m and as a consequence your Company's ongoing charge has reduced from 1.40% to 1.08% over the same period. At the year end, the ordinary shares were yielding 5.59% and your Board is pleased to be able to once again increase the fourth interim dividend by a modest amount and place a small amount of income in reserve to underpin future dividends.

Performance

Your Company's net asset value per ordinary share increased from 87.92p to 88.82p over the year and the share price remained largely unchanged at 91.25p as compared to 91.50p.

Dividends and dividend policy

Dividends remained flat at 1.25p per quarter as a consequence of the continuing low levels of Libor and Euribor. However, a fourth interim dividend of 1.35p was declared on 27 November 2014 making a total of 5.10p for the year compared to 5.05p in the prior year. Your Board recognises the importance of maintaining a stable dividend flow and, in the absence of a change in interest rates, the Board plans to continue with 1.25p per quarter dividend payments for the financial year ended 31 October 2015.

STRATEGIC REPORT (continued)

Gearing

Your Board has maintained its active gearing policy during the year under review given the attractive arbitrage between the cost of debt and the yields that can be achieved in the portfolio. This is delivered through a combination of traditional financial gearing, which is funded using a loan facility provided by Scotia Bank, and synthetic gearing, being the gearing effect of investing in credit derivatives and interest rate futures and swaps. At the year end financial gearing was 4.68% compared to 9.22% a year ago and synthetic gearing was 8.30% compared to 15.10% a year ago. It is the Board's policy that total gearing, being the sum of financial gearing and synthetic gearing, cannot exceed 30% of net assets.

Share issues

On 6 February 2014, an aggregate of 23,751,762 new shares were issued pursuant to a placing and offer for subscription by the Company at an issue price of 88.50p per share. The gross proceeds of this issue were £21,020,309. From 7 February 2014 to 31 October 2014 the Company issued a further 24,525,000 new ordinary shares for cash at a premium to net asset value. As at 23 January 2015 a further 8,451,216 new ordinary shares had been issued since 31 October 2014.

Management fee arrangements

Following the reduction in the management fee and performance fee arrangements announced a year ago, your Board has further reviewed the performance fee with Henderson. Accordingly, with effect from 1 November 2014, the performance benchmark will be the total return of three month sterling Libor plus 2.00% increased from three month sterling Libor plus 1.25%. Your Board will continue to review the management fee arrangements on an annual basis. For the year under review, a performance fee of £845,000 will be paid compared to £703,000 for the year ended 31 October 2013.

Alternative Investment Fund Managers Directive

I reported last year on our plans for complying with the Alternative Investment Fund Managers Directive, a new piece of EU legislation which captures investment companies within its scope. We have appointed HIFL as our Alternative Investment Fund Manager and BNP Paribas Securities Services as our depositary. The new arrangements are adding modestly to your Company's cost base.

Annual general meeting

Our eighth annual general meeting will be held on Thursday 5 March 2015 at 11.00 a.m. at our registered office in Jersey. As in previous years an open presentation to shareholders, including the opportunity to meet the Fund Managers, will be held on Tuesday 17 March 2015 at 10.30 a.m. at Henderson's offices in London and will be followed by light refreshments.

The Directors welcome shareholders' attendance at both meetings and recommend shareholders support the resolutions to be proposed.

Outlook

Looking forward, the market backdrop remains familiar with low economic growth, low inflation and little likelihood of any increase in interest rates in the short term. That said, the continuing low default environment has meant that credit has performed well. Going forward the majority of return is expected to be driven by income. Against that we must reconcile ourselves to the occasional spike in volatility. Our policy of actively asset allocating between fixed rate bonds and floating rate loans is proving to be beneficial and we anticipate at least maintaining the level of dividend in the year ahead.

STRATEGIC REPORT (continued)

Principal risks and uncertainties

The Board has drawn up a matrix of risks facing the Company and has put in place a schedule of investment limits and restrictions appropriate to the Company's investment objective and policy, in order to mitigate risks as far as practicable. The principal risks which have been identified and the steps taken by the Board to mitigate these are as follows:

Investment strategy

An inappropriate investment strategy, for example, in terms of asset allocation or level of gearing, may result in under performance against the companies in the peer group, and also in the Company's shares trading on a wider discount.

The Board manages these risks by ensuring a diversification of investments and a regular review of the extent of gearing. Henderson operates in accordance with an investment limits and restrictions policy determined by the Board, which includes limits on the extent to which gearing may be employed. The Board reviews the limits and restrictions at each meeting and Henderson confirms adherence to them each month by way of completion of a schedule that is based on a traffic light system to easily identify areas for concern. Henderson provides the Board with management information, including performance data, reports and shareholder analyses. The Directors monitor the implementation and results of the investment process with Henderson at each Board meeting and monitor risk factors in respect of the portfolio. Investment strategy is reviewed regularly at Board meetings.

Market

Market risk arises from uncertainty about the future prices of the Company's investments.

Accounting, legal and regulatory

The Company is regulated by the Jersey Financial Services Commission and complies with the regulatory requirements in Jersey. The Company must comply with the provisions of the Companies (Jersey) Law 1991 and since its shares are listed on the London Stock Exchange, the UK Listing Authority (''UKLA'') Rules. A breach of company law could result in the Company and/or the Directors being fined or the subject of criminal proceedings, all with the potential for financial and reputational damage. A breach of the UKLA Rules could result in the suspension of the Company's shares. The Board relies on its Company Secretary and advisers to ensure adherence to company law and the UKLA Rules.

Operational

Disruption to, or the failure of Henderson or BNP Paribas Securities Service accounting, dealing, or payment systems or the custodian's records could prevent the accurate reporting or monitoring of the Company's financial position. BNP Paribas Securities Service S.C.A (Jersey) sub-contracts some of the operational functions (principally relating to trade processing, investment administration and accounting) to BNP Paribas Securities Service. Details of how the Board monitors the services provided by Henderson, BNP Paribas Securities Service and other suppliers, and the key elements designed to provide effective internal control, are explained further in the internal controls section of the Corporate Governance Statement in the Annual Report.

Financial

The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk and credit risk.  Disclosures are provided in accordance with IFRS 7, Financial Instruments: Disclosures.

REPORT OF THE DIRECTORS

Related party transactions

The Company's current related parties are its Directors, Henderson and the subsidiary. 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 expenses and remuneration for which there were no outstanding amounts payable at the year end. In relation to the provision of services by Henderson, other than fees payable by the Company in the ordinary course of business and the provision of marketing services there have been no material transactions with Henderson affecting the financial position of the Company during the year under review.

STATEMENT OF DIRECTORS RESPONSIBILITIES

Statement under DTR 4.1.12

The Directors, who are listed in the Annual Report, confirms that to the best of his or her knowledge that:

a)   the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union on a going concern basis, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

b)   the Strategic Report (comprising the Performance Highlights, Business Model, Chairman's Statement, Fund Managers' Report, Investment Portfolio, Portfolio Information, Historical Performance and Financial Information, Key Information, Corporate Information and Glossary), the Report of the Directors, Corporate Governance Statement, Directors' Remuneration Report, Report of the Audit Committee and financial statements include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

The full Strategic Report can be found in the Annual Report on pages 1 to 17.

For and on behalf of the Board

Helen Green

Director

26 January 2015

FUND MANAGERS' REPORT:

Introduction

The Company's net asset value per ordinary share made modest progress over the financial year with the bulk of the return coming from the significant yield the portfolio continues to generate in a virtually zero cash deposit world. The Company's ordinary shares have traded at a healthy premium to net asset value over the period reflecting, we think, the persistent demand for a more diversified income stream. In particular the formula of income with a degree of protection in a potential rising interest rate environment, unlike the majority of mainstream bond fund offerings, is proving particularly attractive. Indeed, we would describe this portfolio as an antithesis of a Gilt fund as it is highly exposed to credit risk, but with limited exposure to interest rate sensitivity.

Markets

Turning to markets, the final months of 2013 provided strong returns for credit sensitive areas of the fixed income markets but not interest rate sensitive areas such as Gilts. The reduction in the amount of quantitative easing stimulus known as 'tapering', was announced by the US Federal Reserve, and was taken positively by equity markets but less so by the sovereign bond markets. This caused US and UK benchmark 10-year bond yields to breach the September 2013 highs thereby exceeding the psychological 3% levels at 2013 calendar year end. This provided an opportunity for those higher yielding assets that we favour and which are not highly correlated to Government bonds (loans, high yield bonds and higher yielding financials) to rally. This environment of relatively low growth, low inflation and very low defaults is almost perfect for being exposed to credit risk. The Gilt market reversed its severe weakness of late 2013 in January 2014, as it was felt that global bond markets had overly discounted the threat of future interest rate rises. This bounce back in lower Gilt yields and higher Gilt prices was exacerbated by extreme positioning as a lot of investors had already sold the market. This was further exacerbated by some weaker than expected weather induced US data and weak Chinese growth, all of which helped bond assets to perform.

As 2014 progressed there was a growing realisation by market participants that the slow growth was not just a weather related problem. Larry Summers' 'secular stagnation' thesis which suggested that a persistent lack of demand meant growth could continue to be sub-par for many years to come, started to pervade mainstream thinking. Christine Lagarde of

The International Monetary Fund described this as 'new mediocre'. This is primarily due to the lack of demand for credit by individuals who are keener to pay off debt than borrow. This is also generally true of European corporations who currently have record amounts of cash on their balance sheets but have no great capital investment desires, nor are they keen to buy back shares as their US counterparts have been doing. It is at last becoming generally accepted that cutting interest rates has little effect in such 'balance sheet recession' scenarios, whereas increased Government spending may have some merit.

In addition, it is worth noting that inflation has generally risen more slowly than many commentators expected. This is in part due to weaker global demand, especially from commodity hungry China and other emerging economies, but has also manifested itself in the oil price, helped by increased supply from the Middle East and the American shale gas revolution. We feel the oil price is a great proxy for global demand and obviously a weaker pump price will cause significant re-distribution effects around the world. This backdrop of slower growth and lower inflation caused a stealth rally in global bond prices, meaning lower yields and higher prices, which was very much against consensus thinking and positioning. Investment grade credit performed well in this environment as did high yield bonds. However, the latter asset class displayed greater volatility over the period. Loans behaved as expected providing modest to reasonable returns but with limited volatility.

The other big consensus for the year was that equity markets were going to outperform bonds. But after the strong equity returns experienced in 2013, equity markets have been fairly range bound for much of the year. However, markets did experience two volatility spikes towards the end of the financial year. In August, a valuation shakeout in high yield bonds caused by excessive positioning and Janet Yellen, chairman of the US Federal Reserve, describing valuations as being 'stretched'. This caught the headlines as billions of dollars were removed from US mutual funds in a few quiet summer weeks but with the benefit of hindsight this amount of money was actually quite modest when put in the context of the whole market. Broadly speaking yields rose from 5% to 6% and whilst some retail investors did exit, they were replaced by institutional investors, representing approximately three quarters of the market, who were attracted back to the enhanced yields available. Mid October also experienced a significant sell off and an even harder rebound in risk assets. We felt this shakeout was a mixture of a growth scare, as witnessed by the oil price, and a shaking out of short positions in sovereign bond markets manifesting itself in falling equity and high yield bond prices. Over this period there was also a considerable overhang of new corporate bonds being supplied into the market coupled with the markets somewhat bi-polar attitude to the eventual threat of rising interest rates from the US Federal Reserve. Political tensions in Scotland, Ukraine and the Middle East did not help market anxiety nor did the Ebola crisis. The even greater surprise was the rally in risk assets in November 2014 which set new record highs in the S&P. This spike coincided with a significant rise in credit specific problems with a number of companies reporting tough trading conditions. Phones 4U, the UK mobile phone provider, which the portfolio did not hold, defaulted virtually overnight. Tesco had numerous profit warnings and disclosed significant accounting irregularities, highlighting how hard it is for companies to achieve top line growth in a deflationary environment. We remain very wary of retailers and energy related credit opportunities.

Asset allocation

Turning to asset allocation, we are conscious of the portfolio not having enough floating note assets if interest rates were to rise. However, in the short term we expect rate rises to be fairly muted and be broadly priced in, and that better value can be gained for shareholders from fixed rate bonds. Longer term, and subject to the interest rate environment, we would expect to have more floating rate assets. Over the period Gilts, investment grade and high yield bonds returned 6.67%, 6.62% and 6.99% respectively whilst European loans achieved 3.55%. Holding more fixed rate investment grade and high yield bonds than floating rate loans has been the correct strategy as investment grade bonds and high yield bonds have materially outperformed the more stable but steady loan performance. The portfolio has had a modest exposure to some mainstream and high yield equities which have performed very well. A few equities were selectively added in the October 2014 sell off and gearing was materially increased over this period having been run down into the more buoyant markets of midsummer. This was successfully executed using cost efficient credit derivative indices.

Stock selection

Two major themes influenced our stock selection over the period. Firstly, we increased exposure to long dated old style tier 1 banking bonds as these bonds lose their ability to be treated as regulatory capital over time but from a bond holders' perspective these bonds are not redundant in any way given their long maturities. These bonds have been hugely sought after and have performed very well. We locked in some very appealing long term yields in names such as Lloyds at yields of around 7% for over 20 years. In addition, we have selectively participated in the new CoCo market, (capital contingent convertible securities). These bonds do qualify as loss absorbing capital for the banks as in a severe downturn they either get converted to equity or are written down to zero. We see this market as a structural growth story as the banks need to issue these securities but we also see them as highly cyclical and should not be seen as a permanent asset class. Nationwide, the building society, issued an equity-like instrument with a yield of 10.25% in late November 2013. This proved to be one of the best performing bonds of the year. Other names include Credit Suisse, UBS, Barclays and Credit Agricole.

The other major theme was one of selectivity regarding stock selection for high yield bonds. The team have examined many high yield new deals but we have only recommended for purchase a small percentage. We have had a major bias to large deals over smaller deals as small deals tend to have worse liquidity, be more cyclical and historically have much higher default rates. Larger deals tend to come with a bigger new issue concession. Over the period, the Company invested in the largest high yield deal ever, Altice, which was a takeover by French cable TV operator of the second largest mobile phone operator, SFR at yields of 7.25%. Telecom convergence continues to be a major theme pervading the bond and equity markets. We expect ongoing convergence of mobile operators with cable TV providers to offer quad play services with resulting synergies and lower churn rates. Further, a number of European four player mobile phone markets have moved to three player markets with a general uplift in margins and profitability. We have favoured the Telecommunications, Media and Technology ('TMT') sector, packaging and US healthcare amongst others whilst we have been very shy of the heavy cyclical industries. US healthcare companies have performed very well given the extra throughput of patients due to the Obamacare reforms. Other big issuers we favour include the AA, the roadway service company, which floated on the London Stock Exchange during the period (for interest we also hold the RAC, which was sold  privately during the period) and Arqiva, the UK broadcast towers transmission business. Over time we have had a leaning towards bonds at the expense of loans.

Secured loans portfolio

At the beginning of the year under review, the sell-off in Government bond markets, driven by fears over the pace of rate rises in the major economies and led by the USA, provided a

robust backdrop for loans. Indeed, loans returned 1.63% in the three months from November 2013 to end January 2014, compared with (0.1%) for UK Gilts (source Henderson). However, strong demand for loans from both Collateralised Loan Obligations ('CLO') and institutional investors manifested itself in borrowers being able to re-price and re-finance their loans at lower interest rates during the following three to six months, which had two effects on the portfolio. Firstly, the re-financing reduced the income from loans (lower spreads over Libor); and secondly, some issuer's loans reduced in price as the return was no longer as attractive. This position reversed towards the end of the period with credit spreads widening somewhat from August onwards and we were able to add a number of new positions to the portfolio paying attractive coupons.

Performance

We maintained an active investment approach to the loan portfolio as the best way of achieving our objective of delivering excess performance over the broader loan market. Our focus on fundamental credit analysis meant the portfolio experienced no defaults in the period, whilst the European loan market experienced annualised defaults to the end of October 2014 of 5.3% (source LCD and S&P), although a significant component of this was Vivarte, a large French retailer. In the three months to end October 2014, the European loan market returned 0.25%, approximately 1% below its running yield, but almost 0.5% more than the European high yield market. This is what we should expect to see from loans given their higher level of seniority and security compared with the average high yield bond during periods of financial market risk aversion.

Performance from the European loan market was below our expectations for the period, with the market delivering a return of 3.5%. Returns were compressed largely by the strong re-pricing and re-financing activity through the middle part of the year as mentioned above and the recent risk asset market volatility. Looking forward we expect loans to deliver a return closer to 5% over the next 12 months broadly in line with the average coupon. This is underpinned by the following key points:

1.   The running yield on the loan portfolio is 5% (European loan market 4.6% (source Henderson, Credit Suisse 31 October 2014));

2.   We see the potential for modest capital gains as the majority of European loan prices are again below par (100) (source Credit Suisse 31 October 2014);

3.   We expect a low default environment as companies continue to maintain their profitability in the current low growth, albeit relatively stable, macro environment and given they continue to limit capital expenditure spend and other drains on cash flow; and

4.   We see a supportive technical backdrop to the European loan market given the continued growth of CLO demand - issuance in 2014 to date being Euro11.9bn as compared to Euro 5.7bn a year ago (source LCD 10 November 2014).

Outlook

Credit has performed well over the period. Defaults remain at very low levels but we are aware of a pick-up in stock volatility. It is for this reason that the portfolio remains biased to larger non-cyclical stocks in the main. Going forward, the bulk of the bond returns will continue to come from the coupons. In the short to medium term, we expect the portfolio to have more investment grade and high yield bonds pending more clarity about the future direction and magnitude of interest rate rises, if any. In conclusion, it is anticipated that the

Company should be able to outperform the new income target of three month sterling Libor plus 2.00% over the year ahead.

Summary of Portfolio

Ten Largest Investments at 31 October 2014

Ranking 2014	Ranking 2013	Investment	Principal activities	Type of investment	Geographical area	Valuation 2014 £'000	Percentage of portfolio
1	2	Lloyds Group	Diversified banking	High Yield Bond	UK	3,375	2.59
2	-	Nationwide Preference Shares	Banks	High Yield Bond/Equity	UK	2,356	1.81
3	10	Scottish Widows	Insurance	Investment Grade Bond	UK	2,354	1.80
4	60	Arqiva	Media	High Yield Bond	UK	2,209	1.69
5	13	Gala Clubs	Leisure	Secured Loan	UK	2,152	1.65
6	-	Wind	Telecommunications	High Yield Bond/Secured Loan	Italy	2,146	1.65
7	1	Alliance Boots	Retail	Secured Loan	UK	1,999	1.53
8	62	BNP Paribas	Banks	Investment Grade Bond	France	1,962	1.50
9	-	Altice	Telecommunications	High Yield Bond	France	1,946	1.49
10	44	Intertrust	Diversified financial services	Secured Loan	Luxembourg	1,942	1.49

Consolidated Statement of Comprehensive Income

		Year ended 31 October 2014			Year ended 31 October 2013
Notes		Revenue return £'000	Capital return £'000	Total return £'000	Revenue return £'000	Capital return £'000	Total return £'000
	(Losses)/gains on investments at fair value through profit or loss	-	(1,399)	(1,399)	-	5,785	5,785
	Gains/(losses) on foreign exchange transactions at fair value through profit or loss	-	2,590	2,590	-	(1,076)	(1,076)
3	Investment income	7,727	-	7,727	5,493	-	5,493
4	Other income	1	-	1	1	-	1
		-----	---	----	----	---	----
	Total Income	7,728	1,191	8,919	5,494	4,709	10,203
		====	====	====	====	====	=====
	Expenses
	Management and performance fees	(393)	(1,238)	(1,631)	(294)	(997)	(1,291)
	Other expenses	(514)	-	(514)	(484)	-	(484)
		-------	---	--------	--------	---	--------
	Profit/(loss) before finance costs and taxation	6,821	(47)	6,774	4,716	3,712	8,428
		--------	--------	--------	--------	--------	--------
	Finance costs	(78)	(78)	(156)	(86)	(86)	(172)
		------	--------	--------	-----	-----	-----
	Profit/(loss) before taxation	6,743	(125)	6,618	4,630	3,626	8,256
		--------	--------	--------	--------	--------	--------
	Taxation	(39)	-	(39)	(42)	-	(42)
		--------	---	--------	--------	--	--------
	Profit/(loss) for the year	6,704	(125)	6,579	4,588	3,626	8,214
		====	====	====	====	====	====
5	Earnings/(loss) per ordinary share	5.57p	(0.10)p	5.47p	5.32p	4.20p	9.52p
		====	====	====	====	====	====

The total column of this statement represents the Consolidated Statement of Comprehensive Income, prepared in accordance with IFRS. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

All items in the above statement derive from continuing operations.

All income is attributable to the equity holders of Henderson Diversified Income Limited. There are no non-controlling interests.

The Group does not have any income or expense that is not included in the profit for the year and therefore the 'profit for the year' is also the 'total comprehensive income for the year'.

Consolidated Statement of Changes in Equity

Notes	Year ended 31 October 2014	Stated capital £'000	Distributable reserve £'000	Other capital reserves £'000	Revenue reserve £'000	Total £'000
	Total equity at 31 October 2013	45,008	39,862	(6,114)	2,133	80,889
	Total comprehensive income:
	(Loss)/profit for the year	-	-	(125)	6,704	6,579
	Transactions with owners, recorded directly to equity:
6	Dividends paid	-	-	-	(5,703)	(5,703)
7	Share issues	42,839	-	-	-	42,839
		----------	----------	--------	--------	----------
	Total equity at 31 October 2014	87,847	39,862	(6,239)	3,134	124,604
		=====	=====	====	====	=====

Notes	Year ended 31 October 2013	Stated capital £'000	Distributable reserve £'000	Other capital reserves £'000	Revenue reserve £'000	Total £'000
	Total equity at 31 October 2012	37,677	39,862	(9,740)	1,848	69,647
	Total comprehensive income:
	Profit for the year	-	-	3,626	4,588	8,214
	Transactions with owners, recorded directly to equity:
6	Dividends paid	-	-	-	(4,303)	(4,303)
7	Share issues	7,331	-	-	-	7,331
		--------	--------	--------	---------	---------
	Total equity at 31 October 2013	45,008	39,862	(6,114)	2,133	80,889
		====	=====	=====	====	=====

Consolidated Balance Sheet

Notes		At 31 October 2014        £'000	At 31 October 2013 £'000
	Non current assets
	Investments designated at fair value through profit or loss	130,434	88,347
	Current assets	-----------	---------
	Other receivables	5,872	3,416
	Cash and cash equivalents	803	733
		--------	--------
		6,675	4,149
		--------	--------
	Total assets	137,109	92,496
		======	=====
	Current liabilities
	Other payables	(2,548)	(5,911)
		--------	--------
	Total assets less current liabilities	134,561	86,585
		======	=====
	Non current liabilities
	Bank loan (net of issue costs)	(9,957)	(5,696)
		----------	--------
	Net assets	124,604	80,889
		======	=====
	Equity attributable to equity shareholders
7	Stated capital	87,847	45,008
	Distributable reserve	39,862	39,862
	Retained earnings:
	Other capital reserves	(6,239)	(6,114)
	Revenue reserve	3,134	2,133
		--------	--------
	Total equity	124,604	80,889
		======	=====
8	Net asset value per ordinary share	88.82p	87.92p
		=====	=====

Consolidated Cash Flow Statement

	At 31 October 2014 £'000	At 31 October 2013 £'000
Operating activities
Profit before taxation	6,618	8,256
Add back interest payable	156	172
Add/(less): losses/(gains) on investments designated as fair value through profit or loss	1,399	(5,785)
(Less)/add: (gains)/losses on foreign exchange transactions at fair value through profit or loss	(2,590)	1,076
(Increase)/decrease in prepayments and accrued income	(685)	143
Increase in other payables	231	302
Net purchases of investments	(43,616)	(5,442)
Increase in sales settlement debtor	(1,425)	(746)
(Decrease)/increase in purchase settlement creditor	(3,593)	2,522
Amortisation of loan expenses	19	71
	--------	--------
Net cash (outflow)/inflow from operating activities before finance costs	(43,486)	569
	======	=====
Interest paid	(156)	(172)
Taxation on investment income	1	(99)
	--------	--------
Net cash (outflow)/inflow from operating activities	(43,641)	298
	======	=====
Financing activities
Equity dividends paid	(5,703)	(4,303)
Issue of ordinary shares	42,839	7,331
Loan expenses paid	-	(21)
Net loan drawdown/(repayment)	4,242	(2,089)
	--------	--------
Net cash inflow from financing	41,378	918
	=====	=====
(Decrease)/increase in cash and cash equivalents	(2,263)	1,216
Cash and cash equivalents at the start of the year	733	372
Exchange movements	2,333	(855)
	--------	--------
Cash and cash equivalents at the year end	803	733
	=====	=====

Notes the financial statements:

1. General Information

The entity is a closed-ended company, registered as a no par value company under the Companies (Jersey) Law 1991, with its shares listed on the London Stock Exchange. The Company was incorporated on 5 June 2007.

2. Accounting Policies

Basis of preparation

This consolidated financial information for the year ended 31 October 2014 has been prepared in accordance with International Financial Reporting Standards ('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 International Accounting Standards Committee ('IASC') that remain in effect, to the extent that IFRS have been adopted by the European Union ('EU').

The financial statements have been prepared on the historical cost basis, except for the revaluation of financial assets designated at fair value through profit or loss, loans that are held at amortised cost using the effective interest method and derivative financial instruments that are measured at fair value.

The principal accounting policies adopted are set out below and in the notes to the financial statements in the Annual Report. Where consistent with IFRSs the financial statements have also been prepared in accordance with the guidance set out in the Statement of Recommended Practice ('SORP') for the Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued in January 2009.

Standards, amendments and interpretations to existing standards that become effective in future accounting periods and have not been adopted by the Group:

IFRS 9: Financial Instruments - Classification and Measurement 1 January 2018

IFRS 10: Consolidated Financial Statements 1 January 2014

IFRS 12: Disclosure of Interests in Other Entities 1 January 2014

The Directors do not expect that the adoption of these standards will have a material impact on the consolidated financial statements of the Group in future periods.

Derivative financial instruments

The Group's activities expose it primarily to the financial risks of changes in market prices, foreign currency exchange rates and interest rates. Derivative transactions which the Group may enter into include forward foreign exchange contracts (the purpose of which is to manage currency risk arising from the Group's investing activities) and interest rate futures and swaps (the purpose of which is to take a position in relation to government bond yields). The Group may also use credit derivatives, for example buying or selling protection on credit default swaps in order to manage credit risk.

The use of financial derivatives is governed by the Group's policies as approved by the Board, which has set written principles for the use of financial derivatives.

Derivative financial instruments are initially recognised at fair value on the date on which the derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

Changes in the fair value of derivative financial instruments are recognised in the Consolidated Statement of Comprehensive Income as they arise. If capital in nature, the associated change in value is presented as a capital item in the Consolidated Statement of Comprehensive Income.

3. Investment income

	2014 £'000	2013 £'000
Income from investments:
UK dividend income	432	225
Bond and loan interest	6,617	4,755
Premiums on credit default swaps	678	513
	--------	--------
	7,727	5,493
	=====	=====

4. Other income

	2014 £'000	2013 £'000
Bank and other interest	1	1
	====	====

5. Earnings per ordinary share

The earnings per ordinary share figure is based on the net profit for the year after taxation of £6.579 million (year ended 31 October 2013: profit of £8.214 million) and on 120,316,298 (2013: 86,285,257) being the weighted average number of ordinary shares in issue during the year.

The earnings per ordinary share figure detailed above can be further analysed between revenue and capital, as below.

The Company has no securities in issue that could dilute the return per ordinary share. Therefore the basic and diluted earnings per ordinary share are the same.

	2014 £'000	2013 £'000
Net revenue profit	6,704	4,588
Net capital (loss)/profit	(125)	3,626
	------	-------
Net total profit	6,579	8,214
	====	====
Weighted average number of ordinary shares in issue during the year	120,316,298	86,285,257
Revenue earnings per ordinary share	5.57p	5.32p
(Loss)/capital earnings per ordinary share	(0.10)p	4.20p
	-----	-------
Total earnings per ordinary share	5.47p	9.52p
	====	====

6. Dividends

Dividends on ordinary shares		Record date	Payment date	2014 £'000	2013 £'000
Fourth interim dividend -	1.25p	7 December 2012	31 December 2012	-	1,046
First interim dividend -	1.25p	8 March 2013	28 March 2013	-	1,057
Second interim dividend -	1.25p	7 June 2013	28 June 2013	-	1,095
Third interim dividend -	1.25p	6 September 2013	30 September 2013	-	1,105
Fourth interim dividend -	1.30p	6 December 2013	31 December 2013	1,196	-
First interim dividend -	1.25p	7 February 2014	31 March 2014	1,150	-
Second interim dividend -	1.25p	6 June 2014	30 June 2014	1,643	-
Third interim dividend -	1.25p	5 September 2014	30 September 2014	1,714	-
				-------	-------
				5,703	4,303
				====	====

The fourth interim dividend has not been included as a liability in these financial statements as it was announced and paid after 31 October 2014.

The table below sets out the total dividends paid and to be paid in respect of the financial year and the previous year. The revenue available for distribution by way of dividend for the year is £6.704 million (2013: £4.588 million).

	2014 £'000	2013 £'000
First interim dividend for 2014 - 1.25p (2013: 1.25p)	1,150	1,057
Second interim dividend for 2014 - 1.25p (2013: 1.25p)	1,643	1,095
Third interim dividend for 2014 - 1.25p (2013: 1.25p)	1,714	1,105
Fourth interim dividend for 2014 - 1.35p (paid 31 December 2014 with record date of 5 December 2014) (2013: 1.30p)	1,940	1,196
	-------	------
	6,447	4,453
	====	====

7. Stated capital

		2014		2013
	Authorised	Issued and fully paid	£'000	Issued and fully paid	£'000
Ordinary shares of no par value	Unlimited
Opening balance at 1 November		92,004,964	45,008	83,640,877	37,677
Issued during the year		48,276,762	42,839	8,364,087	7,331
		---------------	---------	--------------	-------
Closing balance at 31 October		140,281,726	87,847	92,004,964	45,008
		=========	=====	========	=====

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 year, the Company issued 48,276,762 (2013: 8,364,087) shares for proceeds of £42,839,000 (2013: £7,331,000) net of costs.

8. 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 the 2014 year end of £124.604 million (2013: £80.889 million) and on 140,281,726 (2013: 92,004,964) ordinary shares, being the number of ordinary shares in issue at the year end.

9. Duration of the Company and Going Concern

The assets of the Company consist mainly of a portfolio of diversified securities that are readily realisable, and the Company has adequate financial resources to meet its liabilities and continue in operational existence for the foreseeable future. This was reviewed by the Audit Committee at its meeting in January 2015 after considering revenue forecasts for the following twelve months. For these reasons, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the financial statements. In reviewing the position as at the date of this report, the Board has considered the 'Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009' published by the Financial Reporting Council in October 2009.

10. Financial information 2014

The figures and financial information for the year ended 31 October 2014 are compiled from an extract of the latest financial statements and do not constitute statutory accounts. These accounts included the report of the auditors which was unqualified.

11. Financial information 2013

The figures and financial information for the year ended 31 October 2013 are compiled from an extract of the latest published accounts and do not constitute the statutory accounts for that year. The accounts included the report of the auditors which was unqualified.

12. Annual Report

The Annual Report will be posted to shareholders in early February 2015 and copies will be available on the Company's website (www.hendersondiversifiedincome.com) or in hard copy format from the Company's registered office, Liberté House, 19-23 La Motte Street, St Helier, Jersey, JE2 4SY.

For further information please contact:

John Pattullo and Jenna Barnard

Fund Managers, Henderson Diversified Income Limited

Telephone: [phone]

James de Sausmarez

Director and Head of Investment Trusts, Henderson Global Investors

Telephone: [phone]

Sarah Gibbons-Cook

Investor Relations and PR Manager, Henderson Global Investors

Telephone: [phone]

Jeremy Hamon

BNP Paribas Securities Services S.C.A., Jersey Branch, Company Secretary

Telephone: [phone]

Henderson Diversified Income Limited has its registered office at Liberté House, 19-23 La Motte Street, St Helier, Jersey JE2 4SY and it is regulated by the Jersey Financial Services Commission.

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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