HFL – Final Results to 31 August 2021

LEGAL ENTITY IDENTIFIER: 2138008DIQRE00380596 HENDERSON FAR EAST INCOME LIMITED Financial results for the year ended 31 August 2021 This announcement contains regulated information Investment Objective The Company seeks to provide shareholders with a growing total annual dividend per share, as well as capital appreciation, from a diversified portfolio of investments from the Asia Pacific region. Highlights o Total dividend of 23.40p (2020: 23.00p) for the year, up 1.7% on the prior year o Dividend yield at 31 August 2021 of 7.8% (2020: 7.4%) CHAIRMAN'S STATEMENT Introduction The success of Covid-19 vaccine roll outs in most advanced economies has heralded a semblance of normality and the prospect of improving commercial activity. The view for emerging and developing economies is not so clear with many regions, even those where infection rates are currently very low, facing resurgent infections and rising Covid-19 death tolls. For the Asia Pacific region, this has produced a marked difference in performance between south and north Asia. The Fund Managers' report provides an interesting insight into their thinking in this respect, as well as their approach to China, and what this means for the positioning of the portfolio in the near term. Dividends The Company has paid a total dividend of 23.40p in the year ended 31 August 2021, continuing our track record of increasing dividends each year for the past 15 years. We declared a 4th interim dividend for the year ended 31 August 2021 on 19 October 2021 of 5.90p per ordinary share. Performance Capital performance over the year was poor with yield, as an investment style, continuing to struggle in the current 'growth at any price' frenzy. NAV total return was 7.2%, lagging the FTSEE All-World Asia Pacific ex Japan and the MSCI AC Asia Pacific ex Japan High Dividend Yield indices at 17.3% and 16.7% respectively. The Fund Managers elaborate more fully on this in their report. However, the yield from the dividend reached 7.8%, notably outstripping the yield of the Company's competitors in the AIC sector as well as the 12-month inflation rate1 of 3.2% at 31 August 2021. Company objectives and performance During the year the Board undertook a review of our investment strategy and process to discover if we were meeting shareholder expectations and living up to our mandate. Our name, Henderson Far East Income Limited, defines who we are and what we want to achieve for our shareholders - an income producing fund. We believe that low interest rates, an ageing population requiring income in retirement and the impact of the recent increase in dividend tax in the UK, together support our strategy of placing income as the top priority. This has been our strategy for the past 14 years. We have increased the dividend progressively from 8.25p in 2007 to 23.40p today. Our investment process has allowed us to grow the dividend and build the revenue reserve enabling us to draw on this to maintain the dividend increase in less favourable market conditions. Following payment of the 4th interim dividend for the year ended 31 August 2021, the revenue reserve will stand at approximately a half years' worth of dividends. Our investment process has been tried and tested in times of acute financial stress - the global financial meltdown in 2009 and more recently in the Covid-19 crisis. Our quarterly dividends continued to increase despite chaos elsewhere. Our final dividend for the year amounting to 23.40p per ordinary share. In recent years, however, while this policy has provided a high dividend yield, currently 7% plus, when combined with the capital performance has resulted in an overall outcome that has lagged our competitors whose yields are substantially lower. Our current process locks us into the value sector of the market that is not popular at present as most investors have preferred growth to income. The debate about value versus growth has been going on for a very long time. Sometimes value is preferred, sometimes growth. Rotation between these two styles will continue. When value returns to favour, our capital performance should improve. Our Fund Managers will do all they can to improve our capital performance, but the Board has directed them not to lose sight of our dividend growth preference. So far, income investors have embraced this policy. Demand for new shares has been elevated. In the last two years we have issued 20.4m new shares and the share price has been consistently above our NAV. This outcome has given the Board confidence that the policy is meeting investor needs, but we will continue to monitor the situation as these do change over time and it is always the Board's intention to respond to our shareholder preferences. Succession planning Last year we paused the implementation of our succession planning as companies and countries navigated their way through the Covid-19 pandemic. I am now pleased to report to you that the Board recommenced the recruitment process for my successor during the course of 2021. The process was led by the Nominations Committee, chaired by David Mashiter, and resulted, subject to no objection from the Jersey Financial Services Commission, in the appointment of Ronald Gould as a non-executive director and Chairman designate on 28 October 2021. Ronald has a long career in investment management and banking, coupled with extensive work in the UK and Asia. I believe that I will be leaving the reins of your Company in very good hands when I retire after a period of handover. Management fees I am pleased to report that we have negotiated a change in the management fee. With effect from 1 September 2021, the start of the current financial year, we have moved to a flat rate of 0.75% of net assets per annum. This replaces the tiered structure formally in place of 0.9% of net assets up to ?400m and 0.75% of net assets thereafter. Annual General Meeting The Company's 15th Annual General Meeting is due to be held on Thursday, 20 January 2022 and, Covid-19 restrictions permitting, we look forward to being able to report to our shareholders in person. The meeting will be held at the offices of our investment manager, Janus Henderson Investors, at 201 Bishopsgate, London, EC2M 3AE with proceedings commencing at 11.00 am. As is our usual practice, voting will take place on a show of hands for those physically present at the meeting. A copy of the Company's Notice of Meeting has been included with this annual report. For any shareholders unable to attend, we will be offering you the opportunity to join using the video conferencing software, Zoom. Due to technological restrictions, we are unable to offer voting to those attending via Zoom and therefore encourage all shareholders, particularly those who will not be present in person, to submit their votes by proxy ahead of the deadline to ensure their vote is taken into account. Outlook The world can be a puzzling place and a challenge for investors at the best of times. Events over the last few years have been particularly trying, with increased volatility, and uncertainty sometimes leading investors to push the panic button. What then is the outlook for the Asia Pacific region? The post-industrial world will be driven by innovation, technology and entrepreneurship. Success in this new paradigm requires three preconditions. Firstly, a successful economy must have entrepreneurial drive and best in class technology. Secondly, it must have a population ready and willing to take up new ideas and products and, finally, it must have a strong domestic consumer base. China is well positioned on all three counts. While some of its technology may have initially been acquired by dubious means, over the past twenty years it has been mostly homegrown. The speed of technology take up is high as visitors to China soon discover. China's consumer base is already enormous and still growing with the urbanisation process continuing. A recent report from Morgan Stanley forecasts that Chinese consumption will double to US$12.7 trillion per annum by 2030 which is the same as the US today. There are risks to this apparent nirvana. The decoupling of the global technology supply chain (in particular with the US centred around Huawei) will negatively impact China's development at least in the short run. Property prices are unaffordable for many and developers are over leveraged; some face the prospect of financial failure. With the fertility rate at 1.3, China is facing an ageing population and a rising dependency ratio. This poses risks to economic growth and the government's often stated objective of achieving European standards of living by 2049. Some fear that wealth disparity might lead to social instability. This is reinforced by the astronomical cost of rearing children when measured against middle class income levels. These problems have been well flagged to investors. The Chinese government has decided now is the time to introduce a more interventionist stance to tackle these problems. This has alarmed investors. However, the private sector will survive and continue to be the main engine of growth, but businesses will have to factor in government policy and work towards its aims rather than against them. This can provide significant opportunities as well as risk because of the clarity of the policy direction and the capacity of the Chinese state to implement its strategies. China will continue to face pushback from the West particularly from the US due to concerns over its increasing assertiveness, rapidly rising military spending, disregard for the special status of Hong Kong and the stated intention of reunification with Taiwan. Thus, the geopolitical environment will remain tense for the foreseeable future. From an investor's perspective, the outlook for China and the Asia Pacific remains attractive. The Henderson Far East Income Limited Asia Pacific Dividend Index 2021, which we published in June this year, highlighted the outlook for the two key investment components - profits and dividends - by noting that: 'Since 2010 pre-tax earnings (in Asia Pacific ex Japan) have risen 80% compared to just 2% for the rest of the world driving a significant increase in the region's share of the global profit pie.' On dividends the report had this to say: 'Looking at income, dividend growth in the region has also been significantly faster than the global average, up 139% over the last 10 years compared to 109% for the rest of the world.' China, South Korea and Taiwan have weathered the Covid-19 crisis well whilst south and south east Asia have suffered. But even there the outlook for growth is encouraging. Vietnam, Indonesia, Thailand and the Philippines are benefiting from supply chain adjustments as companies relocate to avoid western sanctions on China. The strong dividend growth coming from Asia Pacific is well supported by the fundamentals of robust profit growth, cash flow and low net debt. Currently dividend cover is 2.4x compared with 1.6x in the rest of the world. Asia is where the growth is and will continue to be. As an example of the disparity in growth rates, in 2010 the UK produced 5% of global pre-tax profits while China produced 9%. By 2020 the contribution from the UK declined to just 1% while China contributed 20%. It is understandable that anxiety about the impact of climate change is widespread and growing. The results of fossil fuel emissions are clear for all to see. What is not clear is the path to the target of 'net zero by 2050', which we are told is necessary in order to limit temperature gains to 1.5 degrees centigrade or near to it. Hopefully, the next UN Climate Change Conference, COP26, to be held in Glasgow in November 2021 will find practical ways forward. The need for global cooperation on climate change is clear. The US, EU, China and India will have to work together by sharing information and technology and developing solutions that work for all. Different countries are in different stages of development with different energy mixes. China and India combined account for 65% of global thermal coal use while the Asia Pacific region, as a whole, accounts for approximately 80%. The idea that abundant clean energy is available to all at the flick of a switch is unfortunately a fantasy. While a great deal of progress has been made in reducing the cost of alternatives, particularly solar and wind, the roll out takes time. As we can already see from signs in China and India, without sufficient energy the global economy will stall. Economic growth is critical to climate change solutions. It is growth that will supply the trillions of dollars needed to install the necessary infrastructure and undertake experiments with all the other energy alternatives. The right balance needs to be found so it is difficult to understand why some banks, insurance companies and investor groups are using their power to limit coal production. This has just resulted in pushing up the coal price to a new high, increasing costs for all businesses in countries where coal is a large part of the energy mix and lowering economic growth. There is a similar story with oil and gas. We need properly thought-out solutions, when it is clear that the energy created by fossil fuels is vital to short term stability and will play a significant part in creating the wealth to fund the climate change solution. And we need better leadership on this issue from these institutions. I believe we have every reason to expect that Asia Pacific will continue to provide ample opportunities for income generating investment allowing us to fulfil our mandate and justify a place in any diversified portfolio. John Russell Chairman 28 October 2021 1 Consumer Price Index at 31 August 2021 FUND MANAGERS' REPORT Region In last year's report we commented on the incredible period we had just endured. We would have hoped that one year on things would be clearer, but sadly this year the same considerations still apply. The pandemic is now not something that can be defeated, but something that we have to live with while the stop/start nature of a return to normal is causing uncertainty and increased volatility. Despite the uncertainty, asset prices continue to push higher. The S&P 500 was up almost 30% in US dollar terms over the twelve months to the end of August 2021 while property prices in the US, UK, Australia and elsewhere remain very well sustained. Record low interest rates and accommodating government and central bank policies have kept liquidity abundant and while equity and property markets do not have much valuation support at current levels, they have more appeal than cash and bonds. Equities have also been supported by strong earnings growth forecasts from a low base in 2020. With earnings forecast to grow by 30% it becomes much easier to justify high earnings multiples, although clearly this will be a much more difficult task in 2022. By comparison, Asia Pacific markets have struggled to keep pace. The region's success in dealing with the initial phase of the pandemic has been its biggest headwind in the recovery phase. With regional GDP proving much more resilient than elsewhere, the monetary and fiscal response has been more muted than western counterparts, while a disappointing vaccination rollout program and a 'zero tolerance to Covid-19' strategy has ironically put the region behind western economies in the race to normality. This has been particularly true for South Asia where, in some cases, less than 20% of the population has been vaccinated. Thailand, Indonesia, the Philippines and Vietnam fall into the same category and this has been reflected in economic and market performance. On the whole, the best performing markets were in North Asia with Korea and Taiwan both benefiting from the strong work-from-home demand for electronic products. The exception in South Asia was India where, despite some pressure from a Covid-19 escalation earlier in the year, the market rose by over 50% in sterling terms as the pandemic was brought swiftly under control and vaccination levels accelerated. Despite the weakness of the Chinese internet companies, the technology sector still outperformed the regional average driven by hardware and semiconductors while the strength of iron ore and copper helped the materials sector post gains of over 40%. Consumer discretionary was the only sector to post negative returns as ongoing regional lockdowns dampened activity. China The major headwind for the region has been the poor performance of China, which was the only major market to fall in sterling terms over the period. After a solid 2020 when GDP growth and earnings rose while most of the rest of the world fell, the Chinese economy was the first to enter a tightening phase in the first quarter of 2021, which unsettled investors who had been used to a one-way street of supportive monetary and fiscal policy. The market was not helped by the regulatory clampdown on the internet sector which started with the cancellation of the Ant Group initial public offering in November 2020, but subsequently expanded to other areas as regulators challenged monopolistic practices and data protection. From their peak in the middle of February 2021 to the end of August 2021, Alibaba and Tencent, the two largest stocks in the MSCI China index, fell by 38% and 36% respectively, accounting for the majority of the index decline. Alongside the clampdown on the internet sector, there has been a greater focus on the alleviation of wealth inequality. Under the banner of 'common prosperity', measures have been put in place to reduce the cost of living for low and middle-income households while encouraging greater social responsibility from corporates and the more well off. In particular, the focus has been on the key living costs associated with health care, education and property, so it is no surprise that stocks exposed to these areas have performed poorly as profit models are re-assessed. These policies introduced to rein in the power of the internet companies, the protection of data and the attempts to tackle the problems of inequality, are admirable and will serve China well in the future if successful. However, the handling and timing of these announcements leave something to be desired and have caused uncertainty to the point where some investors are classing the country as un-investible. We don't share this view and realise now, more than ever, the importance of investing alongside government objectives rather than against them. Performance Although it is always pleasing to report on a positive NAV total return, we think it is fair to say that the capital performance of your Company has been disappointing compared to regional indices and peers. The NAV total return was 7.2% over the period compared to 17.3% for the FTSE All-World Asia Pacific ex Japan Index and 16.7% for the MSCI AC Asia Pacific ex Japan High Dividend Yield Index. Our process focuses on a portfolio combining high and sustainable yield alongside companies with dividend growth which will be the high yielders of the future. The capital upside for this strategy comes from identifying undervalued yield stocks and companies that will surprise the market with dividends above expectations. Over the last eighteen months, yield as a style has been out of favour while dividend growth in Asia has been ignored with investors choosing to focus on structural themes. The underperformance of the strategy compared to regional indices reflects these style differences. The returns relative to the high yield index are harder to explain, but reflect the portfolio's greater focus on yield. Some of the best performers in the high yield index were the Singaporean and Australian banks which cut their dividends during the pandemic. At current levels, the Company has a dividend yield of 7.8% and could not incorporate these lower yielding companies into the portfolio without impacting the Company's revenue generation. It is fair to say that the focus on yield has held back capital appreciation over the last twelve months, but we continue to believe that this is a process and strategy that can deliver attractive total returns when economic conditions allow. With record low interest rates likely to remain in place for some time and ageing populations requiring a dependable income stream, we believe that the performance of yield stocks will improve in the months and years ahead. This process has proved successful in the past and we believe it will be again in the future. At the stock level there were positive contributions from technology component companies Samsung Electronics, Taiwan Semiconductor and Yageo, which all rose over 40% during the period while software company Chinasoft, rose 62%. There was success with Australian investment bank, Macquarie and Korean telecom company, SK Telecom, which both gained more than 20% while our position in closed end investment company Vietnam Opportunities Fund rose over 40%, reflecting Vietnam's successful navigation through the pandemic. On the negative side, our positions in Chinese materials, consumer staples, property and construction detracted from performance. China Resources Cement fell 35%, China Railway Construction 24%, China Overseas Land 21% and Hengan International 18%. ESG Environmental, social and governance ('ESG') concerns are a core part of our investment approach, but we believe in a pragmatic stance that looks to engage rather than avoid. We believe that the transition from where we are to where we want to be is the most important part of this process and consider it unhelpful to impose developed market ideologies on countries that are at a different stage of development. What this means in practice is that we don't exclude any sector, with the exception of munitions, from our investment universe, but look to invest in the best, cleanest and socially aware companies in their respective sectors and work with them to set and achieve targets for improvement. Our belief is that the best companies will take market share away from the worst over time, improving the environment and working conditions for all. As a responsible investor, it is our duty to help this transition rather than to divest and hand that responsibility to someone else. We regularly engage with the companies we invest in to ensure that the targets set are viable and that there is a clear and coherent strategy on how to achieve them. Revenue Although the Company's capital performance has been disappointing the income generation has been resilient. Dividend income from the invested portfolio increased 5.4% compared to the prior year and total income by 4.1%. The income from option writing declined 9% due to lower volatility compared to 2020. On a per share basis total revenue was down 2.1% as a result of 9.6m new shares being issued over the period - a 6.8% increase on the issued share capital at the start of the financial year. For the first time since the Company launched in 2007 the dividend distributed has not been covered by the revenue generated. The shortfall has resulted in a small drawdown of the reserves which will stand at just under a half years' worth of dividends following payment of the 4th interim dividend for the year. Although we aim to cover the dividend over the longer term there may be periods where reserves are utilised to ensure that revenue generation is smoothed through a cycle. The growth in income in 2021 compared to last year is testament to the strong underlying growth of dividends in Asia Pacific although on a per share basis this was diluted by share issuance. There was also a negative impact on revenue from the 2.5% increase in sterling compared to Asian currencies over the period while some significant dividends were received just after the period end which will bolster next year's figures. Strategy We continue to focus on attractively valued companies with a sustainable yield and those able to grow their dividends over time. Although many markets are close to all time highs, the extreme discrepancy between highly valued thematic plays and cheap real economy sectors leave plenty of opportunities for the value orientated investor. The portfolio characteristics of 12x forward price to earnings with 15% earnings growth forecast and forward dividend yield of 5.5%, make it difficult to be negative on the stocks we own in the portfolio. The perfect stock for our process combines growth, value and income, and we are predominantly finding these characteristics in two sectors. Firstly financials, primarily banks, which are benefiting from rising interest rates, lower provisioning and a more generous dividend policy, especially in Korea, Taiwan and Hong Kong. The second sector is materials and energy. The lack of supply and new demand from electric vehicles, electronics and alternative energy will continue to support the price of industrial metals such as copper well beyond the normal economic cycle. It is a similar story for energy and, in particular, natural gas pricing which is seen by many as the transition fuel from the highly polluting fossil fuels like coal and oil, to the future based on solar, hydro and wind. We own BHP Group Limited, Rio Tinto Limited, OZ Minerals and Woodside Petroleum, which play to these themes. Outside of these core areas, we continue to prefer the enablers of trends rather than the front-line players. In the tech space we like software and semiconductors, while we also like logistics in the property sector as a play on the increase in e-commerce. At the country level, we have become more defensive on China as we see some weakness in economic numbers into 2022 as the Evergrande debt issue is unwound and power cuts impact manufacturing and economic activity. Although we expect a more accommodative policy stance going forward, the pressure on power generation and raw material pricing makes the traditional model of increased investment spending more troublesome than in previous cycles. We are focusing on software, financial services, consumption and building materials. Outlook Although we are positive on the medium to long term outlook for the Asia Pacific region, we are a little nervous on the outlook for equity markets in general for 2022. The earnings momentum, which has been so strong off a low base in 2021, will be difficult to improve upon in 2022 while inflationary pressures, from rising input prices, and the potential for economic support measures to be withdrawn, doesn't bode well for equity markets trading at relatively rich multiples. Although Asian valuations are more attractive, a reduction in global liquidity has not historically been supportive for the region, although regional economies are in far better shape than their western peers with many more levers to pull to offset any potential downturn. The case is the same for dividends where strong balance sheets, high cash flow generation and low payout ratios make the dividend story for the region one of the most compelling. We expect that yield stocks will perform relatively well in this environment of higher volatility and we remain focused on adding the most attractive stocks that fit our process as and when opportunities arise. Mike Kerley and Sat Duhra Fund Managers 28 October 2021 Please refer to the PDF to view the full announcement For further information please contact: Mike Kerley Fund Manager Henderson Far East Income Limited Telephone: 020 7818 5053 Sat Duhra Fund Manager Henderson Far East Income Limited Telephone: +658 388 3175 James de Sausmarez Director and Head of Investment Trusts Janus Henderson Investors Telephone: 020 7818 3349 Laura Thomas Investment Trust PR Manager Janus Henderson Investors Telephone: 020 7818 2636 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 CA:00381899 For:HFL Type:FLLYR Time:2021-11-01 08:30:29