Suits investors, particularly those in retirement, who need a regular income. It might also be appropriate for more cautious investors looking for an alternative to cash deposits.

Henderson Diversified Income Limited uniquely combines expertise in investment grade bonds, high yield bonds and specialist secured loans. It aims for consistently high income, capital preservation over all periods and the prospect of capital growth over the long term. The managers have the flexibility to invest across the whole of this asset class, the freedom to invest in secured loans without limit, and directly in equities when appropriate.

• Henderson Diversified Income offers investors diversification of their income portfolios both through exposure away from equity income and also by offering a wide range of lower risk, fixed interest and floating rate instruments.
• The Fund Manager actively asset allocates between fixed and floating rate instruments to take advantage of changing market conditions.
• The ability to invest in Secured Loans when desired means that an increase in the bank interest rate would result in an increase in distributable income and dividends.

• Higher yielding bonds are issued by companies that may have greater difficulty in repaying their financial obligations. High yield bonds are not traded as frequently as government bonds and therefore may be more difficult to trade in distressed markets.
• Investors need to be aware of exchange rates. Not all the investments in this portfolio are made in Sterling, so exchange rates could affect the value of and income from your investment. Full details of risks.

The company’s net asset value (NAV) fell marginally during April, but the shares continue to trade at a good premium. Economic data from the US started to disappoint, which coincided with the effects of the liquidity-fuelled Long-Term Refinancing Operation (LTRO) rally fading. Markets turned their attention yet again to the solvency of the Spanish government and the banking sector, the latter having been cajoled into supporting the former. Huge scepticism remains over whether Spanish banks will confess the extent of their property writedowns whilst unemployment continues to rise. Also during the month, the first round of the French presidential elections saw a swing to the left – Francois Hollande is projected to win the second-round election on 6 May. His policies – pro growth, less austerity (re-negotiation of the fiscal compact), and increased bank regulation could grate somewhat against the current Germanic orthodoxy for fiscal retrenchment.

European banking stocks were particularly weak during the month as expectations of a Spanish bank re-capitalisation and/or a sovereign-sponsored ‘bad bank’ were touted. Various European economies, including the UK and Spain, slipped into recession. On a more positive note, there are signs of a loosening in bank lending standards in both the US and Europe, albeit there only seems to be evidence of extra demand for credit in the US. The jury is out whether the credit supplied to Europe under the LTRO scheme will be demanded and subsequently spent.

The loan market in April was characterised by an element of stability versus recent intra-month ‘risk-on’ and ‘risk-off’ episodes. The European loan market returned 59 basis points (bp) during April. The discount margin (three-year life) was 722bp with an average secondary price of 86.21 at the end of March. New primary issuance in April remained low, with €1.38bn of volume, taking this year’s total to €8.26bn. Ineos (global chemical company) dominated issuance, coming with a refinancing transaction dealing with near-term maturities, along with Infor Global (global enterprise software supplier), which came with a request to support the acquisition of a competitor (Lawson). Both deals had attractive risk/reward metrics, and we decided to add these loans to the trust.

There were also a number of amend-and-extend requests during the month including Formula One, which came with one alongside a new money request. Formula One (F1), the rights holder to F1 races, has had a good history of deleveraging and the new money request came with an attractive increase in spread, so it made sense for the company to add exposure in the name. Avio (global aero component manufacturer), which is held by the company, launched an extension request ahead of a potential initial public offering, where it is seeking to extend maturities and raise additional senior debt to repay the second lien; HDIV holds exposure to the second lien so could potentially benefit from a par repayment. Also worth noting, is that we finally received the repayment on the Deutsch Connector position, which was the result of the purchaser of the company (TE Connectivity) clearing all competition hurdles.

On the bond side we trimmed a few financial bonds (Co-operative Bank, RSA and Swiss Re). We added some lower beta, industrial yield in names including BAA, RWE, and HeidelbergCement, but otherwise activity was limited. We continue to analyse a significant number of high yield deals, but are rejecting the majority of them. We expect further Spanish ‘flare-ups’, but the timing is hard to determine. However, the high yield market remains open whilst default expectations remain low. We are running reasonable levels of gearing given this environment. 
   
John Pattullo/Jenna Barnard
April 2012