The board of the Henderson Diversified Income Trust has raised concerns about the way it is being managed by Janus Henderson after it declined in size to just £116mn.
In its annual report, published today (July 25), the board of HDIV said it would be assessing the long-term viability of the trust.
Angus Macpherson, the trust's chairman, said: "We are very aware that shareholders are principally interested in the yield offered by the [trust's] shares. The sustainability of this yield, and the risks necessary to achieve it, are an area of increasing focus for the board, especially as revenue reserves have diminished.
"The board are therefore concerned that the structure of the [trust] as originally envisaged does not allow the fund managers to preserve the real value of the capital of its shareholders, and feel that perhaps an alternative investment process could offer greater scope to provide a more consistent return to our shareholders.
"The board have not reached any conclusions on these matters but will be considering options for the [trust] in the near term."
But the trust's managers have said the depletion in capital is only temporary and can be made back though gearing during the coming downturn.
When the trust was launched in 2007 it's objective was to invest in a wide range of fixed income instruments including secured loans. This would allow the fund managers to take advantage of the credit cycle to increase the allocation to loans when interest rates rose, protecting investors against capital losses.
It was also envisaged there would be opportunities for capital growth in periods of falling interest rates which would enhance total returns.
But quantitative easing and the persistence of negative real interest rates during the last decade were not envisaged at that time and so returns from loans have looked relatively unattractive and the managers chose not to invest in them because they felt a reasonable reward was not available for the risks taken.
In October 2022 the trust announced it could buy back more than 27mn of its shares. Macpherson said buybacks have been increasing, with 4.5mn bought back over the year, but has caused the trust's diminishing size.
The board said a reduction in the size of the trust means costs are shared over a “diminishing asset base” compared to other investment trusts.
Macpherson said: “These costs eat into the returns available for distribution. This small size also impacts liquidity in the [trust's] shares.”
The trust has lost more than 9 per cent over the past three years while its sector gained more than 10 per cent.
Fund managers John Pattullo, Jenna Barnard and Nicholas Ware outlined that to mitigate risk they reduced the trust's high yield holdings by 12 per cent to about 40 per cent and increased investment grade holdings by around 13 per cent to 50 per cent.
They said: "This cycle seems like a classic boom/bust one, with potential for significant depth and duration. It is of course an inflationary cycle, and nominal growth has muddied and delayed many historical economic relationships.
