Dividend-hungry investors seeking diversification from the London market’s income-yielding stalwarts might look to the Henderson International Income Trust (HINT), the only international income investment trust that allocates its funds exclusively outside the UK. Collectives can be a cost-effective way to invest overseas and, as the £74.7 million cap is completely ex-UK, it offers a canny way to access dividend payers from around the globe.

The trust, managed by Ben Lofthouse, is trading at a 6.7% discount to net asset value. The management fee has been reduced from 0.8% to 0.75% of net assets and the removal of the performance fee should also reduce charges in future. Additional assets raised over the past year should further reduce ongoing fees, while ‘HINT’ has also passed through the final date for exercising subscription shares, thereby removing the threat of dilution.

Best ideas

Investing in global equity income since 2006, Lofthouse describes the trust as ‘a global equity income best ideas portfolio’ and regards it as ‘an active portfolio managed with a defensive income bias’. Its stated objective is to provide a high and rising level of dividends as well as capital appreciation over the long term from a focused and internationally-diversified portfolio of overseas shares. Typically there’s between 40 and 60 holdings, with 59 as at the latest available factsheet.

Lofthouse, who won’t overpay for dividends, looks for companies that yield over 2% and whose qualities include high barriers to entry and strong cash generation. He makes the point that since companies have to be physically generating cash to pay out dividends, ‘equity income brings a downside protection and a sense check’. He avoids companies that are about to move onto the dividend list but don’t yet have a payout, explaining this would only put pressure on the rest of the portfolio to perform and highlighting the wide universe of global dividend-paying stocks available to the trust.

Unloved and undervalued

A material dividend on offer at an attractive absolute valuation is what he’s after, and he has proven adept at finding shares that are ‘unloved, under-appreciated and undervalued’. Sustainable businesses with a recurring element to earnings grab his attention, especially where there is a catalyst for change to drive a re-rating and enliven the share price. Holdings tend to have ‘a higher yield and a lower beta than the market’, given the focus on unloved shares boasting dependable cash generation. ‘The companies that we are looking for tend to lead us this way,’ concludes the manager.

In terms of selling discipline, Lofthouse explains that ‘it is basically down to valuation and whether you think the investment case has changed’. Stocks which have significantly re-rated or are already paying out a high portion of their earnings could be sale candidates, particularly if the manager sees an opportunity cost in missing out on a new, more compelling story.

Portfolio performers

Lofthouse is keen to highlight some of the names that have proved sterling performers. Buoyed by a rip-roaring US market, one such stock is software giant Microsoft (MSFT:NDQ). Farming cash-aplenty from its large embedded customer base, Microsoft was acquired on an undemanding valuation a few years ago and has since re-rated. Another successful top 10 position is SK Telecom (017670: KS), a South Korean telecommunications services play which successfully bought a semiconductor business at the bottom of the cycle and still has scope to raise a relatively-low dividend payout ratio.

One pick is Deutsche Post (DPW:GR), the mail delivery-to-logistics services group acquired at a time when it was ‘deeply unloved following a disastrous foray into the US’, yet where the valuation overlooked its international strength and strong position in the domestic German market. ‘It had a high dividend that people thought would be cut, but this year the dividend went up by 14%, the first time it had gone up in several years,’ says the manager.

‘HINT is meant to be a relatively sleep-at-night investment,’ says Lofthouse. ‘When you look down the top ten, the core of the portfolio is relatively defensive, good dividend paying companies, while the global element also allows us to invest in interesting opportunities at a more local level.’ One such example is Nexity (NXI:FP), a French housebuilder with cash on the balance sheet. ‘We look to directly get exposure to trends that are quite interesting,’ says Lofthouse, regarding the small cap as a play on the shortage of affordable homes in France.

ASIA CALLING

Though the fund’s biggest country weighting is the US, Lofthouse has been taking the China weighing of the portfolio up since February. New positions have been taken in the likes of PetroChina (601857:CH), the crude oil and natural gas developer and producer, as well as Netease (NTES:NDQ), a dividend paying online gaming company with cash on the balance sheet and an undemanding valuation. He has also added Hong Kong-listed shopping mall operator Wharf (4:HKG), an undervalued real estate play whose attractions include good downside support arising from its predictable, recurring rental earnings.

Ben Lofthouse

Henderson International Income Trust (HINT)

Fund Facts

Launch date: March 2011

Share price: 109.75p

Market cap: £74.7 million

Dividend yield: 3.7%

AIC Sector: Global Equity Income

NAV per share: 117.8p

Discount: 6.7%

Price date (as at 2/09/14)

TOP TEN HOLDINGS

(AS AT 31 JULY)

Company %

Reynolds American (RAI:NYSE) 2.9

SK Telecom (017670: KS) 2.8

Microsoft (MSFT:NDQ) 2.5

Roche (ROG:VX) 2.5

Bank of China (601398:CH) 2.5

Novartis (NOVN:VX) 2.5

PetroChina (601857: CH) 2.5

ENI (ENI:IM) 2.3

Zurich Insurance (ZURN:VX) 2.3

Lockheed Martin (LMT:NYSE) 2 .2

All data as at 31 July 2014 unless stated otherwise

Source: Henderson Global Investors