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Henderson High Income Trust - Annual Financial Report

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HENDERSON HIGH INCOME TRUST PLC

Annual Financial Report for the year ended 31 December 2019

This announcement contains regulated information

PERFORMANCE HIGHLIGHTS

Total return performance to

31 December 2019

One year

%

Five years

%

Benchmark 1

17.2

40.2

NAV 2

25.6

41.7

Share price3

27.0

39.7

 

 

2019

2018

NAV per share4

 

189.76p

159.46p

Mid-market price per share

 

191.75p

159.50p

Revenue return per share

 

10.59p

10.06p

Net assets

 

£251.1m

£210.8m

Dividend for the year

 

9.80p

9.60p

Dividend yield5

 

5.1%

6.0%

Ongoing charge for the year

 

0.80%

0.80%

Gearing

 

21.5%

27.1%

The benchmark is a composite of 80% of the FTSE All-Share Index (total return) and 20% of the ICE BofAML Sterling Non-Gilts Index (total return) rebalanced annually

2   Net asset value with debt at fair value per ordinary share total return (including dividends reinvested and excluding transaction costs)

Includes dividends reinvested

Net asset value with debt at fair value as published by the AIC

Based on the dividends paid or announced for the year and the share price at the year-end

Sources:  Morningstar for the AIC, Janus Henderson and Refinitiv DataStream. All data is either as at 31 December 2019 or for the year-ended 31 December 2019 .

CHAIRMAN'S STATEMENT

Performance

As I write this now, in the midst of the rapid spread of COVID-19 across the globe, I appreciate that these are unsettling times, particularly for some of our more elderly investors and, above all, I hope that each of you is keeping well and managing through this difficult period of self-isolation and social distancing.

Following the dramatic falls in financial markets, in response to this pandemic, we should try not to forget that 2019 finished on such a positive note for investors. In fact, over the year, the FTSE All-Share Index experienced its best performance since 2013. It was particularly pleasing that for the year of its 30th anniversary, the Company performed so well, both on a relative and absolute basis, delivering a NAV total return of 25.6% for 2019. This is a significant outperformance of its benchmark, at over 8.0%. Over the year the Company's shares moved to a small premium to their NAV (with debt at fair value), finishing the year at a 1.0% premium (2018: 0.0%). This resulted in the Company's shares delivering a total return, including dividends, of 27.0% for the full year.

2019 was a remarkable year for investments in general with most asset classes generating attractive returns in local currency terms, buoyed by the continuing easy monetary policy of the major central banks. These external influences should not, however, detract from the achievement of our Fund Manager, David Smith, who improved upon our benchmark's performance by a substantial margin. He will explain the reasons for this in more detail in his Fund Manager's Report.

Events have since taken an unexpected and very dramatic change of direction as the COVID-19 pandemic has spread quickly beyond Asia and markets are currently digesting the impact of this simultaneous supply and demand shock upon global growth and the participants in our economies. In these volatile conditions, it is important to remember the long-term benefits of income investing. Please refer to the Annual Report to read the 'Henderson High Income Story' which celebrates the significant milestone of the Company's 30th birthday in 2019 and powerfully demonstrates the superior returns that can be achieved over a long-term horizon. Over the past 30 years the Company has navigated its way through various financial storms ranging from Black Wednesday in 1992 and the Global Financial Crisis of 2007/08, through to the current Brexit negotiations, and has managed throughout to pay regularly a comparatively high level of dividend. A £10,000 investment in Henderson High Income Trust plc at its launch would have generated a total income of £24,000 over this period. By comparison the same £10,000 would only have earned £12,000 interest in a bank account, based on the Bank of England's base rate. If investors had reinvested the Company's dividends in the Company's shares, that £10,000 would be worth about £148,000, based on the Company's NAV total return over the 30 years to the end of 2019. The same £10,000 invested in the FTSE All-Share Index on a total return basis over those 30 years would be worth £93,000, less than two-thirds of the Company's total return over the same period. This certainly shows the advantages of the compounding effects of dividend reinvestment, but also the benefits of gearing and active portfolio management, as practised by the Company.

Dividends

During 2019 the Company's revenues remained healthy and grew by 5.3% with revenue return per ordinary share rising from 10.06p in 2018 to 10.59p in 2019. At the interim stage we were sufficiently confident in the cash generation of the portfolio to increase the Company's third interim dividend for the financial year-ended 31 December 2019 from 2.425p to 2.475p per ordinary share. We announced the fourth interim dividend at the same level, making a total of 9.80p per ordinary share for 2019, representing growth of 2.1% on the previous year. The dividend yield on the Company's share price as at year-end was 5.1%, comfortably higher than the FTSE All-Share Index yield of 4.1%.

We have now steadily increased our annual total dividend for the last seven years and over this period the Company's dividends have grown by more than inflation, as measured by the consumer price index (CPI). Our revenue reserves have now exceeded £10 million and represent nearly 10 months' worth of dividend cover, providing a reassuring cushion for any difficult times ahead.

It remains the Board's investment objective to increase the Company's dividend gradually, but it is subject to investment conditions at the time and whether we determine such an increase to be sustainable in the future. We are entering unchartered territory following the recent introduction of government measures, unprecedented in peace times, including building closures, home-working, travel restrictions, self-isolation and social distancing. All these will have an impact on the revenue generation of companies in our portfolio. In such circumstances some of our investee companies may take the decision to preserve cash in preference to maintaining their dividend. We will carefully monitor the level and sustainability of income received by the Company over the coming year and will assess this together with the level of our own revenue reserves to determine the Company's own dividends.

Gearing

Our policy on gearing is provided in our Investment Policy (please refer to the Annual Report). At the end of 2019 we had drawn down approximately £38 million of our £45 million floating rate revolving credit facility with Scotiabank, leaving some £7 million available for future investment opportunities. Investment of this floating rate facility, combined with the long-term fixed rate senior unsecured note of £20 million, helps to generate additional income and increase the Company's total return to shareholders. Our level of gearing had fallen from 27.1% at the end of 2018 to 21.5% at 2019 year-end, partly as an intentional strategy to reduce risk and partly as a result of the increasing capital value of the underlying assets. Nearly 80% of the Company's borrowings have been used to fund bonds within the portfolio, with the average yield providing a profitable margin over the Company's average cost of borrowing. The level of gearing allocated to equities (4.6% as at the end of 2019) was therefore considerably lower than the reported headline gearing figure.

In light of the recent market events, we have recently reduced borrowings further under this flexible facility and will continue to review our level of gearing going forward.

Liquidity Considerations

The issue of portfolio liquidity has been extensively covered by the press during last year and I would like to address this now in the context of this Company. The closed-ended structure of investment trusts, such as the Company's, naturally avoids the need to sell portfolio holdings to meet investor redemptions. Nonetheless, I would like to reassure our investors that the Company's investment portfolio comprises listed securities which are readily realisable and the Fund Manager is not permitted to invest in unquoted securities. Thus, liquidity risk is not considered to be material for the portfolio.

Responsible Investing

Responsible investing is a term that is growing in prominence and relates to how environmental, social and corporate governance (ESG) factors impact a company's long-term sustainability. Analysis of the sustainability of a business' profits has always been at the core of the Company's investment strategy, for which ESG considerations are incorporated. Please refer to the Fund Manager's Report for more detail on how ESG considerations are integrated into the investment process.

The Board believes that voting the Company's shareholdings at general meetings is essential to corporate stewardship and is an effective means of expressing its views on the policies and practices of its investee companies. These voting decisions reflect the provisions of Janus Henderson's Responsible Investment Policy which is publicly available at www.janushenderson.com and records the high standards of corporate behaviour that are expected. Ultimately, however, our Fund Manager makes the final decision on any controversial votes, after any necessary consultation with the Board. Janus Henderson will actively engage with those companies that fall below such expectations to encourage improvement over time, but the final sanction is the divestment of those holdings that fail to make an acceptable transition and adapt sufficiently. The Board monitors the process by reviewing on an annual basis a report on the Company's voting pattern. Details of specific votes cast against resolutions in the year under review can be found in the Environmental, Social and Governance Matters section in the Annual Report.

Growth

We continue to believe that it is in the best interests of all our shareholders for the Company to diversify and increase its capital base as this should with time increase the liquidity of the Company's shares and spread the Company's fixed costs over a larger number of shares. As the Company's shares traded at a small discount for most of 2019 until the General Election in December, we did not exercise the authority to allot shares at a premium to NAV, as granted by shareholders at the last AGM. This authority is due to expire at the forthcoming AGM and we are therefore asking shareholders to renew this authority so that the Company can expand further if and when appropriate.

Continuation Vote

The Company's Articles of Association provide that shareholders should have the opportunity every fifth year to vote on whether they wish to continue the life of the Company or to wind it up. Shareholders will, therefore, be asked to vote on this at the forthcoming AGM, as an ordinary resolution, which requires a majority vote in favour to pass.

The Board strongly recommends that you vote in favour so the Company can continue its objective of providing a regular high level of income while maintaining the prospect of capital growth over time. If the resolution fails to pass, the Board would be required to wind up the Company. If you are in any doubt as to what action you should take, please consult your financial advisor. The directors will be voting their own holdings in favour and encourage all other shareholders to do the same.

Succession Planning

The Board is now nearing the end of its five-year succession process to refresh itself so that a younger Board (both in age and tenure) will be in place when I retire at the 2021 AGM. As part of this process, Richard Cranfield was appointed to the Board on 1 March 2020. Richard is a partner of the law firm Allen & Overy where he is global chairman of the corporate practice and co-head of its financial institutions group. In 2019 he was appointed Chairman of IntegraFin Holdings plc, a FTSE 250 Company that owns Transact, an investment platform provider. More details of his experience and expertise can be found in the Board of Directors section in the Annual Report. Four new directors have now joined the Board since 2016 and their appointments have been phased annually to ensure that the required mix of skills, experience and corporate knowledge is retained during this process of refreshment. This succession plan complies with the new AIC Code of Corporate Governance issued in February 2019 and a formal policy on directors' tenure, including the Chairman's tenure, has recently been established by the Nominations & Remuneration Committee, details of which can be found in the Corporate Governance Report in the Annual Report.

Our plan includes five years of service by me as Chairman (after my eight years as a non-executive director on the Board), with my retirement scheduled for the conclusion of the AGM in 2021, following the Company's continuation vote this year. We will begin our search for a further director in the second half of this year and my successor as Chairman will be determined by the Nominations & Remuneration Committee ahead of my retirement and announced at the release of our 2020 financial results. It is our intention to maintain the number of board members at five but this will temporarily increase to six during this succession period. The Board believes this plan continues to achieve a sensible balance between continuity and reinvigoration and is in the best interests of the Company.

Anthony Newhouse who has served on the Board since July 2008, and more recently as Senior Independent Director, will be retiring from the Board at the forthcoming AGM. Anthony's legal expertise and commercial experience have been of enormous benefit to the Company. On behalf of the Company I would like to thank Anthony for his valuable contribution to the Board's discussions and his wise counsel during his twelve years of service. More personally I would also like to thank him for his unfailing support and advice to me during our many years of working together on the Board. Zoe King will become Senior Independent Director on Anthony's retirement.

AGM

We usually hold our AGM in early May however, in light of the current situation the Board has decided this year to hold the AGM on Tuesday 23 June 2020 at 12 noon. By this date 13 weeks will have passed since the beginning of the UK's "lockdown" and we hope that some of the restrictions will be lifted by then. The AGM is currently scheduled to be held at the offices of Janus Henderson at 201 Bishopsgate, London, EC2M 3AE however it may be necessary to change the venue and/or the date of the AGM, subject to the advice of the public health authorities and the UK government closer to the time. Any changes as to the venue and/or date and time of this year's AGM will be made available on a dedicated section of the Company's website at www.hendersonhighincome.com   and additionally an announcement will be released to the Stock Exchange.

It is our current intention to live stream the formal business and the usual presentation from the Fund Manager, David Smith, which will be available to view by logging on to https://www.janushenderson.com/en-gb/investor/investment-trusts-live/   at 12 noon on Tuesday 23 June 2020.

In light of the current situation and respecting that shareholders may not wish to travel to the AGM, this year's voting will be conducted on a poll rather than a show of hands and we therefore encourage all shareholders to submit their votes as early as possible by proxy. Proxy votes can be lodged in advance either through postal voting or the CREST system.

Prospects and Outlook

Fears over the widespread transmission of COVID-19 and the effectiveness of government actions to contain the virus have weighed heavily on sentiment and market levels, while the decision by Saudi Arabia and Russia to instigate an oil price war in the middle of the crisis sent a fresh deflationary shock through the financial system. Although there will be a significant short-term impact on both global economic growth and company profitability from the disruption caused, governments and central banks are beginning to initiate a coordinated response, both in terms of further monetary and fiscal stimulus, to provide support. Caution is certainly warranted in these uncertain times, not least because of the unknown severity and duration of the impact of the virus over the medium-term but also because of the additional challenges of implementing the UK's withdrawal from the European Union and negotiating related trade agreements during such a period. In addition, markets may be further unsettled in the run up to the US elections in November. However, with interest rates and bond yields at extremely low levels, income generated from other sources will remain a focus for investors and is likely to be sought from equities which have the potential to pay dividends in all but extreme economic conditions.

We are confident that the well-diversified portfolio carefully constructed by David Smith is in a good position to continue to generate a relatively high income stream over the long run. This will continue to be highly valued by our shareholders, many of whom have been long-term holders. We would like to take this opportunity following our thirtieth anniversary to express our appreciation of our shareholders' loyalty and support over many years. We hope that you keep well and that our relationship will strengthen and continue for many more years to come.