Henderson Diversified Income

In 2013, the trust regularly traded at a premium to its underling net asset value (NAV). The premium reached 5 per cent on 8 November 2013 but has since reduced to 0.62 per cent on 15 January 2014.

The trust aims to provide shareholders with a high level of income and capital growth over the long term by investing selectively across fixed-income asset classes, including secured loans, high-yield and investment-grade corporate bonds. Investors have been attracted to its yield, currently 5.62 per cent, and more than half its assets pay floating rate interest.

The trust also wants to increase its market capitalisation of £81.65m as some brokers and wealth advisers won't put money into an investment trust unless its market capitalisation is over £100m. Doing this should also make the shares easier to buy and sell, and as the costs are spread over a larger capital base, reduce the ongoing charge of 2.44 per cent.

Investors can apply for the issue up until 5 February 2014.

Henderson Diversified Income's base management fee is also to fall from 0.75 per cent to 0.65 per cent from 1 February 2014. However, it still takes a performance fee if its NAV total return in that year exceeds the benchmark target of Libor plus 1.25 per cent, at a rate of 15 per cent of such excess. A performance fee of £703,000 was paid in the trust's last financial year.

"I disagree with a performance fee on a vehicle like this," says Mick Gilligan, head of research at broker Killik. "The primary focus should be on income generation and preservation of capital."

And some feel it's unfair to base a performance fee benchmark on Libor because interest rates are so low at the moment and easy to beat (Libor plus 1.25 per cent currently equates to about 1.75 per cent).

However, the cap on total fees has been reduced from 1.75 per cent to 1.5 per cent, and any prior year underperformance must be made up before a fee can become payable. And the expected increase in the trust's size is likely to push down the ongoing charge further.

"HDIV was launched in 2007, and in 2008 we had the global financial crisis with the consequent negative impact on the various fixed-interest securities as well as the floating rate secured loans," says James de Sausmarez, director and head of investment trusts at Henderson. "All the underperformance as a consequence of the global financial crisis therefore had to be made up, so consequently no performance fees were paid until the financial year ending 31 October 2012."

He also points out that while Libor is exceptionally low right now, when it returns to normal levels it won't be such an easy benchmark to beat. Libor was also higher when Henderson Diversified Income launched in 2007.

The trust has around half of its assets in senior secured loans that pay floating-rate coupons, and its managers can increase this exposure if interest rates begin to rise, offering the potential for greater income and some protection against interest rate rises, although it may take a few months for an interest rate hike in any one region to feed through.

"Gently rising interest rates with a low level of defaults are good for this trust," explains John Patullo, head of retail fixed income at Henderson, who also runs IC Top 100 Fund Henderson Strategic Bond (GB0007495293).

Read Mr Patullo's outlook for 2014

"The trust has done a reasonably good job and, in theory, its flexible mandate should allow it to manage the rate cycle much better than a pure bond fund," adds Mr Gilligan.

The trust also has a specialist mandate and is unlike any other retail bond fund, in particular because it offers access to loans which private investors cannot buy directly, and into which open-ended corporate bond funds can only put 10 per cent of their assets. It is not unusual for trusts that invest in specialist or esoteric assets to charge more.

"Henderson Diversified Income is differentiated from [debt-focused investment trusts] via a greater level of diversification between loans and bonds," say analysts at broker Numis Securities. "Other listed debt funds typically focus on either loans, bonds or asset-backed securities."

Read more on debt focused investment trusts

Numis also points out that the trust has produced some strong annual returns and has provided a yield in excess of its target. Its NAV has recovered from its low of 49p in February 2009 to around 88p today.

The trust also opportunistically invests in equities and has an allocation of just under 6 per cent to these. This section of the portfolio is run by Job Curtis, who also runs IC Top 100 Fund City of London Investment Trust (CTY). "The allocation to equities is not permanent but they currently provide good total return opportunities," explains Jenna Barnard, co-manager of Henderson Diversified Income. "We increased exposure to these at the beginning of January 2013 because they were providing attractive yields relative to the corporate bonds issued by the same companies. This is our highest ever allocation to equities but we may move away from these if the current cycle continues."

The trust has paid out quarterly dividends of 1.25p over eight successive quarters, but raised this to 1.3p in the fourth quarter of its last financial year. However, the dividend will revert to 1.25p a quarter while rates are low. "1.25p is more sustainable and we have built up a revenue reserve of 0.9p a share, which provides a nice cushion," says Ms Barnard. "We are confident in its sustainability but do not expect a big rise next year."

The trust's managers intend to invest the proceeds swiftly, and Ms Barnard says that with the new money they will broadly try to replicate the current asset allocation (see chart). So that there is no delay in receipt of income if there is any delay in investment, they will use credit derivatives to replace any income shortfall.

The managers are finding attractive opportunities in high-yield debt, which accounts for more than a third of assets and in debt issued by household names. "Lloyds Banking (LLOY) sold debt for re-call in 2037 at 6.657 per cent and is currently yielding 6.8 per cent," says Mr Patullo. "The AA, the organisation for autos, issued at 9.5 per cent and is now yielding 6.2 per cent per cent. Nationwide, the UK building society, issued preference shares at a very attractive 10.25 per cent yield and is currently yielding 8.6 per cent."

The issue price of the new shares is expected to be above the prevailing NAV per share at a premium of 2 per cent, so it does not dilute the NAV per share which would be detrimental to existing shareholders. Investors in the new shares will also not be eligible for the first half-year dividend.

Source: Morningstar & *Henderson. Price as at 15 January 2014.

Source: Morningstar as at 15 January 2014

Top 10 holdings as at 10 January 2014

Asset allocation