Henderson's Far East yield not matched by returns

IC TIP RATING

Tip style: INCOME

Risk rating: HIGH

Timescale: LONG TERM

This trust is still no basket case: it offers a yield of more than 5 per cent, higher than either of the other two Asian equity income investment trusts, Aberdeen Asian Income and Schroder Oriental Income. It also beats the MSCI Asia Pacific ex Japan index over one and five years.

But in terms of share price and net asset value (NAV), it has lagged both these trusts over one, three and five years, over the longer periods by some considerable margins. It also lags the index over three years. So, by being invested in this trust rather than the other two, you have missed out on performance and may miss more in the future. Therefore you might want to consider a switch.

"There are risks in focusing entirely on the yield and we would note that investors have suffered some poor NAV total returns relative to immediate peers," says Alan Brierley, director of investment companies at Canaccord Genuity. "Over the past five years, the NAV total return is just 35 per cent, a long way behind the 92 per cent achieved by Aberdeen Asian Income Fund and 51 per cent recorded by Schroder Oriental Income."

Mike Kerley, manager of Henderson Far East Income, defends his record by explaining that the trust invests in highly cash-flow generative businesses that produce high and sustainable dividends, and ones that will be the high-yielding stocks of the future. "This second part can generate superior capital returns over the long term as markets attribute a premium valuation to high-yielding stocks and we want to capture this capital re-rating as companies go through this transition," he explains. "In this low-interest rate and low-growth environment, the desire for defensive yield has been the driving force of market returns rather than the potential for dividend growth in the future, and this is the reason we have underperformed our immediate peers in the recent past."

However, Mr Brierley is also concerned that the trust's high Chinese weighting of 22 per cent is a drag on medium returns. Mr Kerley argues: "We think that this is the country that stands the best chance of riding out any global economic volatility in the months and quarters to come. Unlike some markets where dividend yield has become quite expensive, China still offers plenty of opportunities to acquire cash-flow generative non-cyclical businesses at valuations, that look very attractive relative to their history and the rest of the region."

Mr Brierley suggests a switch into Aberdeen Asian Income to offset possible volatile markets ahead. "Within this sector, the three companies offer materially different risk profiles. Our preference would be for the more value-orientated Aberdeen Asian Income Fund, which has delivered far superior long-term risk-adjusted returns. Its correlation with underlying equity markets is 0.58, compared with 0.74 for the more growth-orientated Henderson Far East Income and Schroder Oriental."

Aberdeen Asian Income's superior performance comes at a price, though, as it trades at a premium to NAV of 4.03 per cent. But all three Asian equity income trusts are on premiums, and Aberdeen's strong outperformance and solid positive returns compensate for this. The yield of 3.61 per cent is still attractive, and Aberdeen Asian Income is run by Hugh Young and his team, widely regarded as one of the best Asian teams and who have a strong performance track record with many funds. Ultimately, a high yield is no good if you are losing out on performance. If you have a large portfolio, you could hold all three trusts, but for smaller investors, Aberdeen Asian Income looks the better place to be.

Source: Morningstar & *Henderson

Performance data as at 2 July 2012

Top 10 holdings as at 31 May 2012

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