Active Income Portfolio reaps dividend rewards

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The purchase of Henderson Far East Income (HFEL), brought into the active income portfolio last month, might on the face of it seem an odd decision given the stellar performance of some other Asia-Pacific income funds.

The investment trust has managed a 47% return over five years and a 19.7% rise in 2012 to date, but that performance still lags the returns of the sector leaders. Aberdeen Asian Income (AAIF), the sector leader, has returned 132% over five years, while Schroders Oriental Income has achieved 89%.

Both outperform Henderson in terms of the value of their underlying assets. Aberdeen's 70% rise in net asset value (NAV) far exceeds Henderson's 10% NAV rise, as does Schroders' 32%. However, buying top performers trading at a premium to NAV carries its own risks: investors will pay a 4.35% premium for Aberdeen and a 2% premium for Schroders. And while these sector leaders yield under 4%, Henderson brings in more than five.

That income deficit may seem irrelevant in the context of the far superior total return, but it isn't. The danger for market leaders in any fund or trust sector is of a reversion to the mean, something that is particularly likely in fast-changing Asian markets.

Reversion to the mean can work both ways. It can bring down current sector leaders, but it can also boost laggards. Henderson, though no laggard overall, has a high exposure of 22% to the Chinese stockmarket, which has limited recent returns. The Shanghai stockmarket is down 16% this year, having fallen by two-thirds since its 2007 peak.

However, it is prices rather than prospects that have taken the hit. Indeed, the forward price/earnings ratio in Shanghai is now within a whisker of the 10.9% all-time low, compared with 25 at its peak in 2007. That is bargain level for a country with such enduring growth prospects, and a return to more average ratings would mean a considerable rise, which Henderson, with its overweight position, would benefit from.

Sustainable growth

Of course, as an income portfolio, we are looking for sustainable growth in income as well as high income. Mike Kerley, manager of Henderson Far East Income, reckons his holdings are built for long-term dividend growth. In recent interviews, he has suggested that the chasing of high-yield defensive shares by other investors has been one reason why immediate peers may have done better.

For all that, the acquisition of 3,000 shares in the trust last month was neatly timed to catch the half-year dividend. The 4.1p payment may only add £123 to the portfolio's cash total, but it is the first trickle of a stream of dividends coming in the next six weeks that will include payments from Raven Russia (RUS), Nottingham Building Society (NOTP) and National Grid (NG.).

The prices of all but one portfolio constituent have risen by an average of 3.5% since inception at a time when the FTSE All-Share index has fallen by 0.63%. I'm particularly pleased by the sterling performance of preference shares in Raven Russia, up 6%, and Nottingham Building Society permanent interest-bearing shares, up 8%.

These sectors have been Cinderellas for a long time, but it seems the hunt for yield means neglected areas are being reappraised. Nottingham Building Society, which Moody's rates BAA2, is two notches above junk but, even after recent price strengthening, still yields more than 7%. Likewise, Raven Russia has built a sustainable business model in the development and sale of warehouses for the supply of goods to Russian consumers. The preference shares have more than doubled in price since issue in 2008.


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