Henderson Diversified Income (HDIV) invests across the fixed income markets in search of a high and sustainable yield. It is effectively an income-focused strategic bond fund of the sort more commonly found in an open-ended structure, but with the flexibility to take on gearing, hold more illiquid assets and to remain more fully invested without keeping cash on hand to manage redemptions. These advantages mean HDIV yields 4.7%, while the same managers’ three open-ended strategic bond funds yield 4%, 3.7% and 2.4%.
Co-managers Jenna Barnard and John Pattullo take a cautious approach to credit selection, aiming to generate steady income through the cycle. Issuer selection focuses on identifying non-cyclical businesses with sustainable cashflows which they think should make dividends secure. The managers focus on conventional fixed income – high yield and investment grade – and currently limit exposure to less liquid areas which offer higher yields but greater risk in market corrections.
Their bearish outlook on economic growth and inflation means the trust has done well in periods when government bonds have rallied, such as 2019. Despite their cautious outlook the portfolio’s duration, or interest rate risk, has been higher than many peers, against the consensus view (see Performance section). John and Jenna have thus benefited from their continued ‘lower for longer’ view.
Over 2019, the trust swung from a discount to a premium rating of 5.1% as demand for the shares rallied in a period of falling interest rates. The discount volatility remains high, however, thanks to the high valuations in the bond market, the jittery nature of risk appetite and no use of share issuance to limit the premium (as we discuss in the Discount section).