Henderson Far East Income (LSE: HFEL) is an investment trust currently with a massive dividend yield of 11.2%. Could this FTSE trust be what I’m looking for to increase my passive income in 2024 and beyond?
The portfolio
This £350m fund invests across the Asia Pacific region, with significant exposure to China, Australia, South Korea and Taiwan. The investing style is value-focused, with a particular bias towards reasonably-priced shares of companies that produce strong cash flows to support sustainable dividends.
It has around 50 portfolio holdings. Here are the five largest of those, as of 31 August.
| % of portfolio | |
| Taiwan Semiconductor Manufacturing (TSMC) | 3.7% |
| Hon Hai Precision Industry | 3.7% |
| Macquarie Korea Infrastructure Fund | 3.6% |
| Samsung Electronics | 3.5% |
| VinaCapital Vietnam Opportunity Fund | 3.2% |
TSMC is the world’s most dominant chipmaker, with a 60% market share of the global foundry market. Progress in artificial intelligence and robotics should keep demand for semiconductors high over the long term.
Meanwhile, Samsung Electronics remains one of the world’s largest producers of electronic devices. And UK-listed VinaCapital Vietnam Opportunity Fund may prove a compelling investment as companies increasingly move manufacturing to Vietnam from China.
To me, these top holdings appear to have solid long-term prospects.
Attractive region
Another key attraction is that inflation in the Asia Pacific region hasn’t risen as sharply as in the West. Therefore, in many of the region’s largest economies — such as China, South Korea, and Australia — interest rates remain markedly lower than in the US and UK. And they’re not expected to rise.
With lower rates and inflation, there’s greater room for companies to invest and consumers to spend. And that should underpin decent earnings growth.
In May, the International Monetary Fund (IMF) forecast GDP growth in the region to be about 4.6% this year. That’s far above expected growth rates for the West.
A slight discount
One big risk here though is China, where the fund has 21% of assets invested. The nation is facing some well-documented economic challenges. If these turn out to be worse than expected, the share price (and possibly dividend) could come under pressure.
The shares are already trading at a 3% discount to the net asset value (NAV) of the trust. That’s in contrast to the slight premium they’ve historically traded at.
I expect this China-specific risk to keep many investors away from Asian equities for a while yet.
Long-term underperformance
I already hold this stock but will I invest in more shares?
Well, I’m a bit worried about the 39% share price decline over five years here. The trust doesn’t have a formal benchmark, but the NAV performance has been poor over a 10-year period versus the FTSE All-World Asia Pacific ex Japan index. This obviously suggests the stock picks haven’t been great.
Plus, dividend per share growth has averaged only 2.73% a year since 2017. That’s also not great in light of recent high inflation.
There’s a lot of uncertainty here, I feel. For example, could we see the high-yield dividend rebased? How would investors react to that? And I’m worried further valuation declines will eat into dividend returns.
This trust is a small holding in my income portfolio. I think I’ll keep it that way for now while I hunt for better passive income alternatives.
