Final Results

RNS Number : 4855Q

Henderson Diversified Income Ltd

29 February 2016

 

29 February 2016

This announcement contains regulated information.

HENDERSON DIVERSIFIED INCOME LIMITED

Annual Financial Report for the Year Ended 31 October 2015

STRATEGIC REPORT

Performance Highlights

	2015	2014
NAV per share at year end1	88.36p	88.82p
Share price at year end2	90.50p	91.25p
Dividend for the year3	5.10p	5.10p
Dividend yield	5.64%	5.59%
Ongoing charge for the year4	1.10%	1.08%
Total gearing at year end	16.90%	12.98%
Number of portfolio investments held at year end	122	129
Performance fee paid5	£410,000	£845,000

1 Calculated using published daily net asset values including current year revenue

2 Mid-market closing price

3 Ordinary dividends paid per share for each financial year ended 31 October (includes dividends declared but not yet paid)

4 The ongoing charge excludes the performance fee. The ongoing charge including the performance fee was 1.39% (2014: 1.87%)

5 The 2014 performance fee was paid in the financial year ended 31 October 2015. The 2015 performance fee will be paid in the financial year ending 31 October 2016

Investment Objective

The Company's investment objective is to provide shareholders with a high level of income and capital growth over the longer term. The Company aims to deliver these outcomes by investing selectively across the full spectrum of fixed income asset classes including secured loans, high yield corporate bonds and investment grade corporate bonds.

Portfolio

The portfolio is managed by reference to a benchmark of three month sterling Libor plus 2.00%. The portfolio is therefore not constrained by concepts such as the size, sector or domicile of the issuer.

Derivatives and gearing

The Company and its wholly-owned subsidiary, Henderson Diversified Income Luxembourg S.a.rl. (the 'Group') uses synthetic gearing in the form of credit default swaps which are a credit derivative, to enable it to earn additional income by taking the default risk on certain bonds.

The Group may use credit derivatives (including credit default swaps) in addition to interest rate futures and interest rate swaps. Both the credit derivatives and the interest rate futures and swaps are used in order to take a synthetic exposure to, or to hedge, an investment position where the derivative contract is more efficient or cost effective than a position in the underlying physical asset.

The Group's exposure to credit derivatives is capped at a maximum net long or short position of 30% of their net assets. It may employ financial gearing to enhance investment returns but total gearing (both financial gearing and synthetic gearing combined) may not exceed 30% of net assets. The current borrowing facility is for a maximum of £45.5 million.

The interest rate exposure of the Company is currently managed in a range of between 0 and 8 years.

The Board has noted that the bear market in credit markets has resulted in valuations being considerably cheaper than they have for a number of years. However, the end of the bear market may well provide a compelling opportunity to lock in highly attractive long term income streams in good quality companies with the consequent benefits for shareholders in both capital and income terms. Should such a scenario arise, the Board would like the flexibility to be able to increase the total gearing above the existing 30% to a new maximum level of 40% and is therefore seeking shareholder approval to permit this additional flexibility.

A separate circular will be sent to shareholders with the Annual Report in mid-March, putting forward proposals to amend the Group's existing gearing limit as follows:

• the exposure to credit derivatives which will be capped at a maximum net long or short position of 40% of its net assets; and

• that total gearing will not exceed 40% of net assets.

A resolution to approve the amended gearing limit will be put to shareholders at the 2016 annual general meeting.

Subsidiary

The subsidiary was previously consolidated into the Company's financial statements but following changes to accounting standards in the year under review, it is now held at fair value and disclosed as 'interests in subsidiary' on the Company Balance Sheet.

Chairman's Statement

Introduction and changes to financial reporting

I am pleased to report that your Company continued to grow over the year under review with net assets of £145.4m at the year end compared to £124.6m at the beginning of the year. This is a rise of 16.7%, reflecting the success we have had in issuing new shares at a premium to net asset value. The aggregated revenue return was 5.16p per ordinary share and dividends were maintained with a total for the year of 5.10p per ordinary share.

As I reported to you in the half year update International Financial Reporting Standard 10 ('IFRS 10') now states that Investment Entities should measure all of their subsidiaries that are themselves Investment Entities, at fair value. Your Board asked the Audit Committee to evaluate the application of the new accounting standard IFRS10 as it applies to Investment Entities. As a result of its recommendation, your Board has prepared audited accounts for the year ended 31 October 2015 where the Company is presented as a separate entity and has accounted for the Company's interest in the subsidiary at fair value on the Company's Balance Sheet. This follows the methodology used in the half year update.

To help enable shareholders to understand the full results and position of the total portfolio, your Board has presented a supplementary Aggregated Statement of Comprehensive Income and Aggregated Balance Sheet, prepared on a basis consistent with prior years.

Performance

Your Company's net asset value per ordinary share decreased slightly from 88.82p to 88.36p over the year as did the share price from 91.25p to 90.50p.

Dividends and dividend policy

On 31 December 2015 a fourth interim dividend of 1.35p per share for the year ended 31 October 2015 was paid. In this financial year, your Board also paid three interim dividends of 1.25p per share making 5.10p for the financial year under review, which is the same as the prior year. This reflects the Board's view of the outlook for credit markets in the year ahead.

Gearing

Your Board maintains an active gearing policy given the attractive arbitrage between the cost of debt and the yields that can be achieved in the portfolio and the desire to at least maintain the dividend at the current level. This is delivered through a combination of traditional financial gearing, which is funded using a loan facility provided by Scotiabank, and synthetic gearing, being the gearing effect of investing in credit derivatives. Over the year under review total gearing rose from 12.98% to 16.90% with the emphasis shifting from synthetic gearing to financial gearing, reflecting the lower risk-reward profile of credit derivatives at this point in the cycle.

Amendments to the investment policy

Your Board has recently undertaken a review of its investment policy and in particular the gearing limit within the policy, in the light of recent market movements. Your Board and Henderson believe that the end of the bear market may well provide a compelling opportunity to lock in attractive income streams from high quality companies. In order to take advantage of these opportunities should they arise, your Board would like the flexibility to increase total permitted gearing above the current limit of 30% of net assets to a new limit of 40% of net assets.

A resolution will be put to shareholders to approve the amended investment policy at the 2016 annual general meeting. Further details of this amendment to the investment policy can be found in the separate explanatory circular which will be sent to shareholders with the Annual Report in mid-March.

Prospectus and share issues

On 26 March 2015 your Company issued a Prospectus to issue up to 70 million new shares to meet market demand. Your Board believes that the Company's continuing ability to issue shares at a premium to the net asset value enhances net asset value for existing shareholders, increases the liquidity of the shares, spreads the fixed costs of the Company over a larger asset base and reduces volatility by preventing the build-up of excessive demand for shares. In addition, a general meeting was held on 14 December 2015 where shareholders agreed to renew the authority to issue shares on a non-pre-emptive basis.

In the year under review your Company issued 24,236,514 shares and a further 1,950,000 shares have been issued between 1 November 2015 and 29 February 2016.

Management and performance fee arrangements

Following a review of the management fee arrangements with Henderson, with effect from 1 November 2015, the base management fee has been reduced to 0.60% of net assets and the overall cap on total fees in a financial year (base fee and performance fee) has been reduced from 1.50% to 1.20% of net assets. The next fee review will be in 2017.

Board

Your Board has agreed a succession plan for Directors and the first stage of this will be the retirement of David Smith following the 2016 annual general meeting. David has been a Director since the launch of the Company and has made a significant contribution, particularly in the area of sales and marketing. We thank him for his diligent service and shall miss his wise counsel and advice. The second stage will be the retirement of Helen Green and myself following the annual general meeting in 2017 and the final stage will be the retirement of Nigel Parker following the annual general meeting in 2018.

In regard to new Directors, I am pleased to report that Ian Wright and Angus Macpherson were appointed to the Board as independent non-executive Director's on 23 November 2015 and 18 January 2016 respectively. Ian is a Jersey based Chartered Accountant with a wealth of experience in both financial services and regulation whilst Angus is a UK based investment banker with considerable experience of the financial markets. Your Board welcomes the experience and expertise they will bring.

Annual general meeting

Our ninth annual general meeting will be held on Tuesday 12 April 2016 at 11.00 a.m. at our registered office in Jersey. Your Board recommends unanimously to shareholders that they vote in favour of each of the resolutions, as the Directors intend to do in respect of their own beneficial holdings. As in previous years a shareholder event, which includes the opportunity to meet the Fund Managers, will be held on Thursday 14 April 2016 at 10.30 a.m. at Henderson's offices in London and will be followed by light refreshments. For those that cannot attend in person the shareholder event will be available to watch online at www.henderson.com/trustslive.

Outlook

The outlook for the credit markets is uncertain and our Fund Managers are keeping the gearing on the Company at a level that will enable them to maintain the flexibility to add at higher yields should the opportunity present itself. It is worth noting that the investments in UK companies (particularly insurers and banks) face an additional level of volatility in the form of the referendum on continued membership of the European Union. In an environment of already heightened risk aversion this could result in material price movements for the bonds issued by these companies.

Fund Managers' Report

Portfolio performance

The Company provided a net asset value total return of 5.0% over the course of the year and maintained dividend payments of 5.10p for shareholders. It is clear from this profile of return that there was a modest amount of capital loss and, the overall return was driven by income. As Fund Managers we view this profile of return as reasonable in the context of a much more difficult environment for credit investing than we have experienced in the last few years. Key to the Company's performance was the avoidance of any of the number of negative corporate surprises that characterised the year. Many of these originated from the commodities sector (which the Fund Managers maintain no exposure to) but also genuine surprises such as the VW emissions scandal. Although default rates in Europe remained at exceptionally low levels throughout the financial year, the same cannot be said of the ever-dominant US credit markets where modestly rising default rates were a hallmark of the year. Much of this was due to the higher commodity (particularly energy) weighting in the US market but it was also a function of a more general rising risk aversion which caused investors globally to display a much more cautious approach to refinancing of marginal credits.

Indeed it now seems clear that the environment for US corporate bond investing has entered a late cycle phase. A more cautious approach to stock selection is likely to prevail. One obvious sign of this is an increased trend to more shareholder friendly activity at the expense of bondholders i.e. debt-financed M&A and share buybacks. This is particularly notable for better-rated investment grade companies (the healthcare industry being a posterchild in this respect). However on the positive side this has already caused a repricing of spreads to wider levels (higher yields all else being equal) which has, on occasion, presented some selective opportunities. One such opportunity was the US telecom company Verizon which used a large amount of debt to buy out Vodafone's stake in the company in 2013. Following a general market sell-off we initiated a position in the company's longer dated bonds with a yield of 5.3%. At the same time we also built a position in AT&T at similar yields. Although the corporate sector is in this late cycle phase there remains one sector which has been in a more positive phase of the cycle for bondholders - the European banking sector. It is remarkable to us that seven years after the financial crisis, European banks continue to announce rights issues and dividend cuts (painful for equity investors) in order to meet ever-harsher regulatory requirements. As a result the Fund Managers have found opportunities for income investment in this sector. One area is legacy subordinated Tier 1 bonds which are being gradually phased out as Tier 1 capital under new, tougher regulation. In addition, the Company held a smaller tactical position, in the new loss-absorbing hybrid bonds issued by banks with the Swiss banks (Credit Suisse & UBS) a particular focus given their emphasis on wealth management and reduction of their investment banking operations.

Finally, turning to high yield corporate bonds, we have been managing the Company's exposure to this sector in a much more defensive manner reflecting the more inhospitable market environment described above. This has manifested itself through aggressive sell discipline where a company begins to show any signs of stress or where the market may no longer be willing to support a company at its current leverage due to heightened investor risk aversion. As a result we were quick to rid the portfolio of a number of positions which subsequently sold off aggressively: Intelsat (the satellite company), Altice (telecommunications/cable acquisition vehicle), Sprint (US telecommunications) and Valeant (debt financed pharmaceutical acquisitor). Even though many or all of these companies may not ultimately default, we felt that the Company would be able to buy the bonds back at lower prices in the future should it wish to and could not justify the risk of capital loss in the short term. Turning to bonds that we purchased for the Company, these also reflect this more cautious tone. Examples include bonds issued by the funeral care and convenience food retailing divisions of Co-operative Group, CentreParcs and the French blood testing business, LabCo. At the higher risk end of the spectrum positions were also added to bonds issued by Tesco reflecting our view that the debt reduction strategy was achievable through asset sales and focus on cash flow (and much easier than the underlying operational turnaround).

Secured loans

The secured loans portfolio experienced a significant amount of churn through the period as a number of borrowers repaid their loans as a result of a successful IPO process or having been acquired. Loans that were repaid in full included Alliance Boots, Intertrust, TDF and Worldpay.

Although the financial performance of the companies in which the portfolio has been invested was generally quite stable through the period, the Company did exit a number of holdings due to concerns about the performance of the business. These included small positions in Deoleo (Spanish food producer) and Burtons Biscuits (UK food producer), which were both adversely impacted by the significant competition being seen in the food retail sector.

New loan issuance in Europe has been fairly steady through the year to 31 October 2015 with €55bn of issuance, down 22% versus the prior year (source S&P LCD). Our strategy through the period has been to continue to focus investment on sourcing new primary loans rather than purchasing secondary issues as we felt primary loans offer a more attractive risk-reward.

We have been particularly selective with new additions to this portfolio, given the view that there were better opportunities in other parts of the fixed income market. As a consequence of this and the exits from the portfolio mentioned above, the number of loan holdings has reduced from 44 to 35 as at 31 October 2015. New additions included Douglas (Germany, retail) and Evry (Norway, technology). The secured loan portfolio did not report any defaults over the year. The market default rate has continued to fall with the trailing 12 month default rate as at the end of October 2015 standing at 1.4% (source S&P Capital IQ). The main detractor to performance was a small position in BMC Software (US, technology). We have maintained our strategy of primarily holding the most senior loans (rather than second lien or mezzanine tranches) with good liquidity, and focused purchases on the best risk-adjusted return prospects supported by detailed fundamental research.

Performance

The European secured loan market, delivered a healthy return despite significant periods of volatility in fixed income markets. The market return based on the CS Western European Leveraged Loan Index (hedged to GBP) stood at 4.0%, which was slightly below our expectations for the period. Returns were compressed largely by the recent risk asset market volatility in the first and last quarters of the year. Looking forward we expect loans to deliver a return of around 5.0% over the next 12 months, broadly in line with the average coupon. This is underpinned by the following key points:

1.   The running yield on the loan portfolio is 5.2%, with broader European loan market yielding 4.8% (source Henderson, Credit Suisse 30 November 2015);

2.   We see the potential for modest capital gains as the majority of European loan prices are again below par (source Credit Suisse 30 November 2015); and

3.   We expect the low default environment to continue.

Equities

The equity portion represented 7.2% of the total portfolio at the period end.   During a year in which equity markets moved sideways, we have sought to position the portfolio to attract both dividend yield and capital growth. Our holding in Royal Dutch Shell was switched into BP and a new position in Taylor Wimpey, which was bought to benefit from the strong demand for new homes, performed well. HSBC continued to pay an attractive dividend although share price performance was restrained by concerns about regulation and also the bank's exposure to Asia Pacific, whilst life assurer Phoenix has benefited from a significant improvement in its balance sheet. Elsewhere, the blue chip holdings of British American Tobacco and National Grid continued to deliver decent dividend growth whilst defence contractor BAE Systems and real estate investment trust Segro both remain well positioned for future growth.

Outlook

With credit markets having been in a well-entrenched bear market since June 2014, valuations are considerably cheaper than they have been for a number of years. Risks however, have also risen appreciably as the default cycle builds and as a result, we feel patience is still required. Credit markets have a tendency to overshoot fair value by a considerable margin, not least when liquidity conditions deteriorate. Should this final leg of the bear market occur we will be able to lock in highly attractive long term income streams in good quality companies so long as we have retained adequate flexibility to do so in advance.

Portfolio Information

Ten largest investments at 31 October

Ranking 2015	Ranking 2014	Investment	Principal activities	Type of investment	Country	Market Value 2015 £'000	Percentage  of portfolio
1	1	Lloyds Group	Diversified banking	High yield bond	UK	4,088	2.43
2	26	Axa	Insurance	Investment grade bond	France	4,024	2.40
3	2	Nationwide	Banks	High yield bond/equity	UK	3,982	2.37
4	16	Virgin Media	Cable TV	High yield bond	UK	3,603	2.15
5	36	RAC	Commercial services High Yield Bond	Secured loan High Yield Bond	UK	3,505	2.09
6	96	Orange	Telecommunications	Investment grade bond	France	3,356	2.00
7	18	Royal Bank of Scotland	Diversified banking	High yield bond	UK	3,145	1.87
8	37	Barclays	Diversified banking	High yield bond	UK	3,039	1.81
9	78	AA	Commercial services	High yield bond	UK	3,032	1.81
10	28	Brake Brothers	Food	High yield bond	UK	2,910	1.73

Principal risks and uncertainties

The Directors have carried out a robust assessment of the principal risks facing the Company. They have subsequently drawn up a matrix of risks facing the Company and put in place a schedule of investment limits and restrictions appropriate to the Company's investment objective and policy, in order to mitigate risks as far as practicable. The principal risks which have been identified and the steps taken by the Board to mitigate these are as follows:

Risks	Controls and mitigation	Board action/consideration
Investment strategy An inappropriate investment strategy, for example, in terms of asset allocation or level of gearing, may result in under performance against the companies in the peer group, and also in the Company's shares trading on a wider discount. Poor investment performance, for example, failure to achieve expected returns or returns achieved only with excessive risk.	Henderson operates in accordance with an investment limits and restrictions schedule determined by the Board, which includes limits on the extent to which gearing may be employed. Henderson provides the Board with management information, including performance data, reports and shareholder analyses.	The Board manages these risks by ensuring a diversification of investments and a regular review of the extent of gearing. The Board reviews the limits and restrictions at each meeting and Henderson confirms adherence to them each month by way of completion of a schedule that is based on a traffic light system to easily identify areas for concern. The Directors monitor the implementation and results of the investment process with Henderson at each Board meeting and monitor risk factors in respect of the portfolio. Investment strategy is reviewed regularly at Board meetings. The Board considers this risk to have remained unchanged throughout the year under review.
Market and financial Market risk arises from uncertainty about the future prices of the Company's investments. The fair value or future cash flows of a financial instrument held by the Company may fluctuate due to changes in market prices. The financial risks faced by the Company include currency risk, market price risk, interest rate risk, liquidity risk and credit risk.	Henderson assesses the exposure to market risk when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. Henderson and BNP Paribas Securities Services provide an annual AAF 01/06 Report to the Board. The Board also receives quarterly internal controls reports from these service providers as well as the monthly limits and restrictions schedule, details in investment strategy above.	The Board reviews and agrees policies for managing these risks. The Board considers these risks to have remained unchanged throughout the year under review.
Accounting, legal and regulatory The Company is regulated by the Jersey Financial Services Commission and must comply with the regulatory requirements in Jersey. The Company must comply with the provisions of the Companies (Jersey) Law 1991 and since its shares are listed on the London Stock Exchange, the UK Listing Authority ('UKLA') Rules. A breach of company law could result in the Company and/or the Directors being fined or the subject of criminal proceedings, all with the potential for financial and reputational damage. A breach of the UKLA Rules could result in the suspension of the Company's shares.	The Board relies on its Corporate Secretary and advisers to ensure adherence to Jersey and UK company law and the UKLA Rules however the responsibility to comply remains with the Board.	The key requirements are captured within a fund policy manual and are subject to periodic testing by Henderson. The Board considers this risk to have remained unchanged throughout the year under review.
Operational Disruption to, or the failure of Henderson or BNP Paribas Securities Services accounting, dealing, or payment systems, or the custodian's, depositary's or other counterparty records could prevent the accurate reporting or monitoring of the Company's financial position. BNP Paribas Securities Services S.C.A (Jersey) sub-contracts some of the operational functions (principally relating to trade processing, investment administration and accounting) to BNP Paribas Securities Services.	The Board has established an ongoing process for identifying, evaluating and managing any major risks faced by the Company. The process accords with advice issued by the Financial Reporting Council and is subject to regular review by the Board. The Board has overall responsibility for the Company's system of internal controls and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate risks of failure to achieve the Company's business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Board has delegated responsibility to the depositary to appoint a custodian under the terms of the depositary agreement.	The Board has reviewed the effectiveness of the Company's system of internal controls for the year ended 31 October 2015. During the course of its review the Board has not identified or been advised of any failings or weaknesses that have been determined as significant. All business risks faced by the Company are recorded in a risk map which is reviewed periodically by the Audit Committee which also annually reviews the Company's third party service provider's assurance reports to provide comfort that these companies have appropriate controls in place to manage risk. The Board receives periodic reports from, and has meetings with, the depositary as appropriate. The Board considers this risk to have remained unchanged throughout the year under review.
Borrowing As an investment company, the Company uses borrowing to enhance returns to shareholders. Failure to maintain the loan facility because of a breach of agreed covenants, or inability to renew the loan facility because of the bank's unwillingness to lend could cause possible loss of shareholders' assets because of forced sales at short notice at a disadvantageous price.	The Board relies on its Corporate Secretary to adhere to the terms of the loan facility.	The Corporate Secretary has responsibility for the ongoing monitoring of the bank covenants and reports to the Board at each meeting adherence to these as part of the monthly limits and restrictions schedule. The Board considers this risk to have remained unchanged throughout the year under review.
Currency hedging/foreign exchange The Company accounts for its activities and reports its results in sterling while investments may be made and realised in other currencies. In any instances where the Company does not hedge its currency exposure, the movement of exchange rates between sterling and the other currencies in which the Company's investments are denominated or its borrowings are drawn down, may have a material effect, unfavourable as well as favourable, on the returns otherwise experienced on the investments made by the Company. Although the Fund Managers seek to manage any foreign exchange exposure in relation to the Company, there is no assurance that this can be performed effectively. Any currency hedging may force the Fund Managers to realise underlying investments, as well as adversely affecting the overall value of the portfolio and the net asset value per share. Movements in the foreign exchange rate between sterling and the currency applicable to a particular shareholder may have an impact upon such shareholder returns in their own currency of account.	The Company engages in currency hedging of capital risk but not income risk. It does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.	The Board has assessed the Company's income and equity and concluded that neither is materially sensitive to changes in exchange rates. The Board reviews the currency exposure of the portfolio at each meeting. The Board considers this risk to have remained unchanged throughout the year under review.
Interest rates In the event of a significant rising interest rate environment and/or economic downturn, loan defaults may increase and such an increase could result in losses that may adversely affect the Company's operating results. In the event of a general rise in interest rates, the value of certain investments that may be contained in the Company's investment portfolio, particularly those which are not at floating rates may fall, reducing the net asset value per share of the Company.	As the Company's dividend yield target is three month Libor plus 2.00%, shareholders' income should not be diminished should interest rates rise. Likewise, if interest rates fall, the Company's income will fall.	The Company remains committed to the three-month Libor plus 2.00% target yield on net assets. This is reviewed at each Board meeting. The Board considers this risk to have remained unchanged throughout the year under review.
Credit risk including credit default risk The Company will be exposed to credit risk with counterparties with which it trades and issuers of financial instruments if the issuer fails to fulfil its obligations or commitments that it has entered into. The Company's investments expose it to the risk of default on the Company's investments by counterparties and the risk of loss of principal and accrued interest. For example, a bond issuer may fail to meet its operating projections and this could lead to the issuer defaulting interest and/or capital payments. There is also a default risk for any derivative contracts that the Company enters into should the counterparty to the derivative default on its obligations under the contract.	The Fund Managers consider credit risk and credit default risk as part of their assessment of an investment before the time of transaction and also as part of their monitoring of the portfolio. They may also invest in credit default swaps and certain other derivative instruments in order to enhance and protect the Company's income and total returns. Credit derivatives are used as a way of managing the aggregate credit exposure of the Company without buying or selling a physical bond/loan. To the extent that the credit derivative exposure is not covered by cash held by the Company then any net long exposure would act as synthetic gearing. By selling protection (going long risk) the Fund Managers can increase the Company's exposure to a particular reference entity. In return for taking this credit risk the Company will receive a specified income over the life of the contract but will be exposed to capital losses should the reference entity breach the terms of the contract in the intervening period. Transactions involving derivatives are only entered into with investment banks, the credit ratings of which are taken into account so as to minimise the risk to the Company of default.	The Board has set a maximum aggregate exposure of 5% of the Company's net assets to any counterparty that has a rating below a single A equivalent from a number of ratings agencies. Where the counterparty's credit rating is downgraded, this would lead to this exposure limit being breached, the position will be corrected within a timeframe that is in the best interest of shareholders. The Board has set a maximum net exposure to credit derivatives which may not at any time exceed 30% of the Company's net assets. Adherence to these limits is reviewed at each Board meeting. The Board has noted that the bear market in credit markets has resulted in valuations being considerably cheaper than they have for a number of years. However, the end of the bear market may well provide an exceptional opportunity to lock in highly attractive long term income streams in good quality companies with the consequent benefits for shareholders in both capital and income terms. Should such a scenario arise, the Board would like the flexibility to be able to increase the total gearing above the existing 30% to a new maximum level of 40% and is therefore seeking shareholder approval to permit this additional flexibility.

Viability statement

The Directors have assessed the viability of the Company over a three year period, taking account of the Company's current position and the potential impact of the principal risks and uncertainties documented in this Strategic Report. The Directors consider this to be an appropriate period over which they do not expect there to be any significant changes in the current principal risks and adequacy of the mitigating actions in place. Also the Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period.

The assessment has considered the impact of the likelihood of the principal risks and uncertainties facing the Company in severe but reasonable scenarios, and the effectiveness of any mitigating actions in place.

The Directors also took into account the liquidity and maturity of the portfolio and the income stream from the portfolio in considering the viability of the Company and its ability to meet liabilities as they fall due. This included consideration of how the forecast income stream, expenditure and levels of reserves could impact on the Company's ability to pay dividends to shareholders over that period in line with its current dividend policy. Whilst detailed forecasts are only made over a shorter timeframe, the nature of the Company's business as an investment company means that such forecasts are equally valid to be considered over the longer three year period as a means of assessing whether the Company can continue in operation. However, the Directors may follow the provisions in the Articles of Association relating to the wind up of the Company and realisation of its assets.

Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three years.

Borrowing

The Board has in place facilities which allow it to borrow up to £45.5 million (£30.5 million with an additional £15.0 million commitment being available) for periods of one, two, three or six months. The facilities are subject to regular review. At 31 October 2015 the Company had drawn down £19.2 million (2014: £10.0 million). The maximum drawn down in the period was £30.0 million, with borrowing costs including interest for the year totalling £0.3 million. At 31 October 2015, the ratio of borrowings under the facilities to net assets was 13.2% (2014: 8.0%).

Future developments

While the future performance of the Company will depend, to some degree, on macro-economic factors and on the performance of international financial markets, which, in turn, are subject to many external factors, the Board's intention is that the Company will continue to pursue its stated investment objective. Further comments on the outlook for the Company for the next 12 months are set out in both the Chairman's Statement and the Fund Managers' Report.

REPORT OF THE DIRECTORS

Related party transactions

The Company's transactions with related parties in the year were with its Directors, Henderson and the subsidiary. The material transactions between the Company and its subsidiary during the year and the amount due from the subsidiary are given in note 11 of the Annual Report. There have been no material transactions between the Company and its Directors during the year other than the amounts paid to them in respect of fees for which there were no outstanding amounts payable at the year end. In relation to the provision of services by Henderson, other than fees payable by the Company in the ordinary course of business and the provision of sales and marketing services there have been no transactions with Henderson affecting the financial position of the Company during the year under review. More details on transactions with Henderson, including amounts outstanding at the year end, are given in note 22 of the Annual Report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

Statement under DTR 4.1.12

Each of the Directors confirms that, to the best of his or her knowledge:

• the Company financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union on a going concern basis, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

• the Strategic Report, Report of the Directors, Directors' Remuneration Report, Corporate Governance Statement, Report of the Audit Committee and financial statements include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

The full Strategic Report can be found on pages 1 to 23 of the Annual Report

For and on behalf of the Board

Helen Green

Director

29 February 2016

Aggregated Income Statement

	Year ended 31 October 2015						Year ended 31 October 2014
	Revenue return £'000		Capital return £'000		Total return £'000		Revenue return £'000		Capital return £'000		Total return £'000
(Losses) on investments designated at fair value through profit or loss	-		(3,498)		(3,498)		-		(1,399)		(1,399)
Gains on foreign exchange transactions at fair value through profit or loss	-		3,117		3,117		-		2,590		2,590
Investment income	9,320		-		9,320		7,727		-		7,727
Other operating income	2		-		2		1		-		1
Total income	9,322		(381)		8,941		7,728		1,191		8,919
Expenses Management and performance fees	(514)		(924)		(1,438)		(393)		(1,238)		(1,631)
Other expenses	(562)		-		(562)		(514)		-		(514)
Profit/(loss) before finance costs and taxation	8,246		(1,305)		6,941		6,821		(47)		6,774
Finance costs	(139)		(139)		(278)		(78)		(78)		(156)
Profit/(loss) before taxation	8,107		(1,444)		6,663		6,743		(125)		6,618
Taxation	(77)		-		(77)		(39)		-		(39)
Profit/(loss) for the year	8,030		(1,444)		6,586		6,704		(125)		6,579
Earnings/(loss) per ordinary share	5.16p		(0.93)p		4.23p		5.57p		(0.10)p		5.47p

The aggregated information is derived from the separate accounts of the Company and its subsidiary, individually prepared in accordance with the IFRS accounting policies and after eliminating intra group transactions and balances. This statement is supplemental to the financial statements and unaudited

Aggregated Balance Sheet

	At 31 October 2015 £'000		At 31 October 2014 £'000
Non current assets Investments designated at fair value through profit or loss	167,963		130,434
Current assets Other receivables	4,756		5,872
Cash and cash equivalents	1,131		803
	5,887		6,675
Total assets	173,850		137,109
Current liabilities Other payables	(9,304)		(2,548)
Bank loan (net of issue costs)	(19,177)		-
Total assets less current liabilities	145,369		134,561
Non current liabilities
Bank loan (net of issue costs)	-		(9,957)
Net assets	145,369		124,604
Equity attributable to equity shareholders Stated capital	109,891		87,847
Distributable reserve	39,862		39,862
Retained earnings:
Other capital reserves	(7,683)		(6,239)
Revenue reserve	3,299		3,134
Total equity	145,369		124,604
Net asset value per ordinary share	88.36p		88.82p

The aggregated information is derived from the separate accounts of the Company and its subsidiary, individually prepared in accordance with the IFRS accounting policies and after eliminating intra group transactions and balances. This statement is supplemental to the financial statements and unaudited.

Company Income Statement

Notes		Year ended 31 October 2015						Year ended 31 October 2014
		Revenue return £'000		Capital return £'000		Total return £'000		Revenue return £'000		Capital return £'000		Total return £'000
	(Losses)/gains on investments designated at fair value through profit or loss and interests in subsidiary	-		(452)		(452)		-		1,562		1,562
	Gains on foreign exchange transactions at fair value through profit or loss	-		1,338		1,338		-		978		978
3	Investment income	6,865		-		6,865		5,113		-		5,113
3	Investment income from subsidiary	1,088		-		1,088		1,222		-		1,222
4	Other operating income	1		-		1		1		-		1
	Total income	7,954		886		8,840		6,336		2,540		8,876
5	Expenses Management and performance fees	(514)		(924)		(1,438)		(393)		(1,238)		(1,631)
	Other expenses	(488)		-		(488)		(443)		-		(443)
	Profit/(loss) before finance costs and taxation	6,952		(38)		6,914		5,500		1,302		6,802
	Finance costs	(139)		(139)		(278)		(78)		(78)		(156)
	Profit/(loss) before taxation	6,813		(177)		6,636		5,422		1,224		6,646
	Taxation	(50)		-		(50)		(67)		-		(67)
	Profit/(loss) for the year	6,763		(177)		6,586		5,355		1,224		6,579
6	Earnings/(loss) per ordinary share	4.34p		(0.11)p		4.23p		4.45p		1.02p		5.47p

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The revenue return and capital return columns are supplementary to this. All items in the above statement derive from continuing operations. All income is attributable to the equity shareholders of Henderson Diversified Income Limited.

The Company does not have any income or expenses that is not included in the profit for the year and therefore the 'profit for the year' is also 'total comprehensive income for the year'.

Company Statement of Changes in Equity

Notes	Year ended 31 October 2015		Stated capital £'000		Distributable reserve £'000			Other capital reserves £'000			Revenue reserve £'000		Total £'000
	Total equity at 31 October 2014		87,847			39,862			705		(3,810)		124,604
	Total comprehensive income:
	(Loss)/profit for the year		-			-			(177)		6,763		6,586
7	Transactions with owners, recorded directly to equity:   Dividends paid		-			-			-		(7,865)		(7,865)
8	Issue of shares		22,044			-			-		-		22,044
	Total equity at 31 October 2015		109,891			39,862			528		(4,912)		145,369
Notes	Year ended 31 October 2014		Stated capital £'000	Distributable reserve £'000			Other capital reserves £'000				Revenue reserve £'000		Total £'000
	Total equity at 31 October 2013		45,008			39,862			(519)		(3,462)		80,889
	Total comprehensive income:
	Profit for the year		-			-			1,224		5,355		6,579
7	Transactions with owners, recorded directly to equity:   Dividends paid		-			-			-		(5,703)		(5,703)
8	Share issues		42,839			-			-		-		42,839
	Total equity at 31 October 2014		87,847			39,862			705		(3,810)		124,604

Company Balance Sheet

Notes		At 31 October 2015 £'000		At 31 October 2014 £'000
	Non current assets Investments designated at fair value through profit or loss	117,940		82,048
	Interests in subsidiary	44,598		50,369
		162,538		132,417
	Current assets Other receivables	4,095		2,911
	Cash and cash equivalents	350		482
		4,445		3,393
	Total assets	166,983		135,810
	Current liabilities Other payables	(2,437)		(1,249)
	Bank loan (net of issue costs)	(19,177)		-
	Total assets less current liabilities	145,369		134,561
	Non current liabilities
	Bank Loan (net of issue costs)	-		(9,957)
	Net assets	145,369		124,604
8	Equity attributable to equity shareholders Stated capital	109,891		87,847
	Distributable reserve	39,862		39,862
	Retained earnings:
	Other capital reserves	528		705
	Revenue reserve	(4,912)		(3,810)
	Total equity	145,369		124,604
9	Net asset value per ordinary share	88.36p		88.82p

The financial statements were approved by the Board of Directors and authorised for issue on 29 February 2016 and were signed on its behalf by:

Helen Foster Green                             Nigel Robert Parker

Director                                              Director

Company Cash Flow Statement

	At 31 October 2015 £'000		At 31 October 2014 £'000
Operating activities
Net profit before tax	6,636		6,646
Interest payable	278		156
Losses/(gains) on investments held at fair value through profit or loss	452		(1,562)
(Gains) on foreign exchange transactions at fair value through profit or loss	(1,338)		(978)
Amortisation of loan expenses	10		15
Increase in prepayments and accrued income	(1,338)		(641)
(Decrease)/increase in other creditors	(355)		230
Purchases of investments	(97,956)		(84,695)
Sales of investments	60,999		47,895
Drawdown of loan to subsidiary	(12,850)		(17,950)
Repayments of loan to subsidiary	21,151		11,344
Interest from subsidiary	(1,088)		(1,222)
(Increase)/decrease in sales for settlement debtor	(414)		79
Increase/(decrease) in purchase settlement creditor	1,543		(1,377)
Net cash outflow from operating activities before finance costs	(24,270)		(42,060)
Interest paid	(278)		(156)
Taxation on investment income	(65)		(72)
Net cash outflow from operating activities	(24,613)		(42,288)
Financing activities
Equity dividends paid	(7,865)		(5,703)
Issue of ordinary shares	22,044		42,839
Net drawdown of loans	9,220		4,242
Net cash inflow from financing	23,399		41,378
Decrease in cash and cash equivalents	(1,214)		(910)
Cash and cash equivalents at start of the year	482		466
Exchange movements	1,082		926
Cash and cash equivalents at the year end	350		482

Notes to the Financial Statements

1 General information

The entity is a closed-ended company, registered as a no par value company under the Companies (Jersey) Law 1991, with its shares listed on the London Stock Exchange.

The Company was incorporated on 5 June 2007.

These Company only financial statements have been presented for the first time in a number of years. This is because the Company is at present, assessed to meet the definition of an Investment Entity and accordingly it is prohibited from producing International Financial Reporting Standard ('IFRS') compliant consolidated accounts.

The comparative amounts were not disclosed in the prior year as Company only accounts were not required to be presented to shareholders. They do not represent a restatement of the consolidated data presented last year as they are Company only comparatives.

2 Accounting policies

a) Basis of preparation

This financial information for the year ended 31 October 2015 has been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union. These comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting Standards Committee ('IASC') that remain in effect, to the extent that IFRSs have been adopted by the European Union ('EU').

The financial statements have been prepared on a going concern basis under the historical cost basis of accounting, except for the revaluation of financial assets designated at fair value through profit or loss, loans that are held at amortised cost using the effective interest method and derivative financial instruments that are measured at fair value. Having assessed the principal risks and the other matters discussed in connection with the viability statement, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements.

The principal accounting policies adopted are set out below. Where consistent with IFRSs the financial statements have also been prepared in accordance with the guidance set out in the Statement of Recommended Practice ('SORP') for the Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued in January 2009.

Standards, amendments and interpretations to existing standards that become effective in future accounting periods and have not been adopted by the Company are:

IFRS 9: Financial Instruments - Classification and Measurement (effective for annual financial periods beginning on or after 1 January 2018)

IFRS 15: Revenue from Contracts with Customers (effective for annual financial periods beginning on or after 1 January 2018)

The Directors do not expect that the adoption of these standards will have a material impact on the financial statements of the Company in future periods.

b) First time application of IFRS 10 Consolidated Financial Statements ('IFRS 10')

From 1 January 2014 entities that meet the definition of an Investment Entity within IFRS 10 are required to account for most investments in controlled entities, as well as investments in associates and joint ventures, at fair value through profit or loss. Subsidiaries that provide investment related services or engage in permitted investment related activities continue to be consolidated. The criteria which define an Investment Entity are as follows:

• an entity that obtains funds from one or more investors for the purpose of providing those investors with investment management services;

• an entity that commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both; and

• an entity that measures and evaluates the performance of substantially all of its investments on a fair value basis.

Further narrow scope amendments were issued in December 2014, Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 Disclosures of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures), to clarify the application of the standard in respect of Investment Entities. The amendments which clarify the initial standard are effective for annual periods beginning on or after 1 January 2016, with early application being permitted.

The Board has concluded that the Company meets the definition of an Investment Entity and that the subsidiary should be excluded from consolidation to comply with IFRS 10. The Company has no other subsidiaries so it no longer prepares consolidated accounts. These accounts now represent Company only financial statements.

c) Significant accounting judgements and estimates

The preparation of the Company's financial statements requires management to make judgements, estimates and assumptions that affect the amounts recognised in the financial statements; however, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in the future. As the majority of the Company's financial assets are quoted securities, in the opinion of the Directors, the amounts included as assets and liabilities in the financial statements are not subject to significant judgements, estimates or assumptions.

The other significant accounting judgement considered by the Directors in the preparation of the financial statements is the first time application of IFRS 10 which is explained in detail above.

d) Investments designated as fair value through profit or loss

All investments are designated upon initial recognition as held at fair value through profit or loss. This is consistent with the Company's investment strategy and fair value information about these investments is provided to the Board. Assets are recognised at the trade date of aquisition and are de-recognised at the trade date of the disposal. Proceeds will be measured at fair value, which will be regarded as the proceeds of sale less any transaction costs. The fair value of the financial instruments is based on their quoted bid price at the Company Balance Sheet date, without deduction of the estimated future selling costs.

Fair value for quoted investments represents the bid-market value as at the close of business on the Company Balance Sheet date. Fair value for unquoted investments or where a market value is not readily available is based on Henderson's assessment of the value of the investment. Overseas investments are translated into sterling at the exchange rate ruling at the year end.

Changes in the fair value of investments designated at fair value through profit or loss and gains and losses on disposal are recognised in the profit or loss as 'Gains/(losses) on investments designated at fair value through profit or loss'. Also included within this caption are transaction costs in relation to the purchase or sale of investments, including the difference between the purchase price of an investment and its bid price at the date of purchase.

e) Interests in subsidiary

Interests in subsidiaries are accounted for at fair value through profit or loss. Fair value is estimated based on the fair value of the net assets held by the subsidiary adjusted where market evidence exists that a different value should be used such as a substantial discount or premium between the Company's share price and the aggregate net asset value of the Group.

3 Investment income

	2015 £'000		2014 £'000
Income from investments:
Dividend income	521		223
Bond and loan interest	5,991		4,210
Premiums on credit default swaps	353		680
Interest income from subsidiary	1,088		1,222
	7,953		6,335

4 Other operating income

	2015 £'000		2014 £'000
Bank and other interest	1		1
	1		1

5 Management and performance fees

	2015						2014
	Revenue return £'000		Capital return £'000		Total return £'000		Revenue return £'000		Capital return £'000		Total return £'000
Investment management fee	514		514		1,028		393		393		786
Performance fee	-		410		410		-		845		845
	514		924		1,438		393		1,238		1,631

A summary of the terms of the management agreement is given on page 4 of the Annual Report.

6 Earnings per ordinary share

The earnings per ordinary share figure is based on the net profit for the year after taxation of £6.586 million (2014: £6.579 million) and on 155,631,014 (2014: 120,316,298) being the weighted average number of ordinary shares in issue during the year.

The earnings per ordinary share figure detailed above can be further analysed between revenue and capital, as below.

The Company has no securities in issue that could dilute the return per ordinary share. Therefore the basic and diluted earnings per ordinary share are the same.

	2015 £'000		2014 £'000
Net revenue profit	6,763		5,355
Net capital (loss)/profit	(177)		1,224
Net total profit	6,586		6,579
Weighted average number of ordinary shares in issue during the year	155,631,014		120,316,298
Revenue earnings per ordinary share	4.34p		4.45p
Capital (loss) earnings per ordinary share	(0.11)p		1.02p
Total earnings per ordinary share	4.23p		5.47p

7 Dividends

Dividends on ordinary shares	Record date	Payment date	2015 £'000		2014 £'000
Fourth interim dividend - 1.30p	6 December 2013	31 December 2013	-		1,196
First interim dividend - 1.25p	7 February 2014	31 March 2014	-		1,150
Second interim dividend - 1.25p	6 June 2014	30 June 2014	-		1,643
Third interim dividend - 1.25p	5 September 2014	30 September 2014	-		1,714
Fourth interim dividend - 1.35p	5 December 2014	31 December 2014	1,940		-
First interim dividend - 1.25p	6 March 2015	31 March 2015	1,909		-
Second interim dividend - 1.25p	5 June 2015	30 June 2015	2,002		-
Third interim dividend - 1.25p	4 September 2015	30 September 2015	2,014		-
			7,865		5,703

The fourth interim dividend for the year ended 31 October 2015 has not been included as a dividend payable in these financial statements as it was announced and paid after 31 October 2015 (2014: same).

The table below sets out the total dividends paid and to be paid in respect of the current financial year and previous year. The revenue available for distribution by way of dividend for the year is £6.763 million (2014: £5.355 million).

	2015 £'000		2014 £'000
First interim dividend for 2015 - 1.25p (2014: 1.25p)	1,909		1,150
Second interim dividend for 2015 - 1.25p (2014: 1.25p)	2,002		1,643
Third interim dividend for 2015 - 1.25p (2014: 1.25p)	2,014		1,714
Fourth interim dividend for 2015 - 1.35p (paid 31 December 2015 with a record date of 4 December 2015) (2014: 1.35p)	2,247		1,940
	8,172		6,447

8 Stated capital

	Authorised	2015					2014
		Issued and fully paid		£'000		Issued and fully paid		£'000
Ordinary shares of no par value Opening balance at 1 November	Unlimited	140,281,726		87,847		92,004,964		45,008
Issued during the year		24,236,514		22,044		48,276,762		42,839
Closing balance at 31 October		164,518,240		109,891		140,281,726		87,847

The holders of ordinary shares are entitled to all the capital growth in the Company and all the income from the Company that is resolved by the Directors to be distributed. Each shareholder present at a general meeting has one vote on a show of hands and on a poll every member present, in person or by proxy, has one vote for each share held.

During the year, the Company issued 24,236,514 (2014: 48,276,762) ordinary shares for proceeds of £22,044,000 (2014:£42,839,000) net of costs.

9 Net asset value per ordinary share

The net asset value per ordinary share is based on the net asset value attributable to ordinary shareholders at the 2015 year end of £145.369 million (2014: £124.604 million) and on 164,518,240 (2014:140,281,726) ordinary shares, being the number of ordinary shares in issue at the year end.

10 Transactions with the Manager

Under the terms of an agreement effective from 22 July 2014 (which replaced the agreement dated 15 June 2007 in order to reflect the appointment of an Alternative Investment Fund Manager in accordance with the requirements of the Alternative Investment Fund Managers Directive), the Company has appointed wholly-owned subsidiaries of Henderson to provide investment management.

Details of the arrangements for these services are given on page 4 of the Annual Report. The total of the fees paid or payable to Henderson under this agreement in respect of the year ended 31 October 2015 was £1,028,000 (2014: £786,000), of which £350,000 was outstanding at 31 October 2015 (2014: £286,000).

A performance fee is also payable to Henderson. The performance fee payable for the year ended 31 October 2015 amounted to £410,000 (2014: £845,000). This amount was outstanding at 31 October 2015 (2014: £845,000).

Henderson also provides the Company with sales and marketing services. The total fee payable for these services for the year ended 31 October 2015 amounted to £66,500 (2014: £48,000). As at 31 October 2015, £23,000 was outstanding (2014: £16,000).

11 Financial information 2015

The figures and financial information for the year ended 31 October 2015 are compiled from an extract of the latest financial statements and do not constitute statutory accounts. These accounts included the report of the auditors which was unqualified.

12 Financial information 2014

The figures and financial information for the year ended 31 October 2014 are compiled from an extract of the latest published accounts and do not constitute the statutory accounts for that year. The accounts included the report of the auditors which was unqualified.

13 Annual Report

The Annual Report will be posted to shareholders in March 2016 and copies will be available on the Company's website (www.hendersondiversifiedincome.com) or in hard copy format from the Company's registered office, Liberté House, 19-23 La Motte Street, St Helier, Jersey, JE2 4SY.

For further information please contact:

John Pattullo and Jenna Barnard

Fund Managers, Henderson Diversified Income Limited

Telephone: [phone]

James de Sausmarez

Director and Head of Investment Trusts, Henderson Global Investors

Telephone: [phone]

Sarah Gibbons-Cook

Investor Relations and PR Manager, Henderson Global Investors

Telephone: [phone]

Jeremy Hamon

BNP Paribas Securities Services S.C.A., Jersey Branch, Company Secretary

Telephone: [phone]

Henderson Diversified Income Limited has its registered office at Liberté House, 19-23 La Motte Street, St Helier, Jersey JE2 4SY and it is regulated by the Jersey Financial Services Commission.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

FR EAAANAANKEFF