Financials fire Henderson Diversified Income trust

Bonds from Lloyds, Nationwide and AA powered the £83 million Henderson Diversified Income investment trust to a benchmark-beating performance in the final quarter of 2013, yielding 5.5% at year end. It's current yield is a shade above that, at 5.6%.

Co-managed by the firm's head of retail fixed income John Pattullo and director of retail fixed income Jenna Barnard, the trust launched in 2007 and has achieved a share price total return of 214% in that time.

Pattullo and Barnard are currently finding attractive income opportuinities in the high yield area of the market.

The managers said the current growth stage of the economic cycle is supportive for floating rate bonds, where the income rises when market interest rates also rise.

Barnard said the portfolio has around half of its assets in floating-rate senior secured loans, offering investors some downside protection to potential interest rate hikes.

Fixed income assets

The managers can invest across the full range of fixed income assets - including secured loans, high yield corporate bonds and investment grade corporate bonds.

Barnard said: "Whenever you hold assets that yield more than the risk-free rate, you add risk. We manage that risk through the normal strategic routes of allocating to high yield or investment grade bonds depending on the economic environment, but where we differ, and an advantage offered only to retail investors through investment trusts, is to be able to significantly allocate to senior secured loans; vital debt capital issued to corporations and a growing part of the debt markets."

On Lloyds and Nationwide, which boosted the trust's yield at the end of 2013 and ensured a healthy margin over the 3-month Libor plus 1.25% benchmark, Barnard said: "Lloyds sold debt for re-call in 2037 at 6.657% and is currently yielding 6.8%.

"The AA, the organisation for autos, issued at 9.5% and is now yielding 6.2%. Nationwide, the UK building society, issued preference shares at a very attractive 10.25% yield and is currently yielding 8.6%."

Aside from the 50% invested in floating rate loans, 33.7% is held in high yield corporate bonds and 7.9% in investment grade financial corporate bonds.

There is a tiny allocation to investment grade non-financial bonds and 5.9% in equities. The remainder is held in derivatives and preference shares.

Analyst view

Ewan Lovett-Turner, associate director, investment companies research at Numis Securities, said: "John Pattullo and Jenna Barnard allocate capital opportunistically depending on relative value, and Henderson Diversified Income has generated a net asset value (NAV) total return of 9.3% over the past 12 months. The fund currently trades on a 2.9% premium to NAV," he added.

For 2014 Pattullo and Barnard have an additional aim: to push the market cap of the trust to £100 million.

Barnard explained: "If we can push the market capitalisation above the key £100 million threshold we expect to be able to attract a wider scope of investors, bring down their costs and improve the liquidity of their shares."