There are many reasons that lead me to be sceptical.
1. At 7.5% yield with its sister OEIC it is an outlier among purely or mostly equity based funds.
2. A quick scan of the top ten holdings only has 1 at more than 8% yield most are less than 5% and TSMC a large holding yields less than 3%.
3. Most stock markets do not have low risk stocks yielding more than 7%.
4. There was a report by HFEL themselves that shows the fund's holdings yield which is close to 5%. Close to the average yield on Asian high yielding stocks.
5. In their interim report they show that interest from options are approximately 10% of the earnings from stock holdings.
6. There seems to have been a step change in the last 2 or 3 years when the yield moved way above yield on competing funds. At the nadir of the GFC HFEL yielded a bit more than 8% Schroders oriental Income also yielded 8% at the same time. Now Schroders Oriental yields 3.7%, Aberdeen Asian Income 4%.
7. Yahoo finance shows the payout ratio to be 150% of earnings, Simply Wall Street shows a payout ratio of 116% of earnings.
8. The fund trades at a premium which reduces the yield.
Maybe the managers are highly skilled and have chosen distributions over capital growth and perhaps they can maintain the distribution level. As an outlier 7.5% yield is a lot when inflation is about 2% and most government bonds yield 1% or less.
There are many reasons that lead me to be sceptical.
1. At 7.5% yield with its sister OEIC it is an outlier among purely or mostly equity based funds.
2. A quick scan of the top ten holdings only has 1 at more than 8% yield most are less than 5% and TSMC a large holding yields less than 3%.
3. Most stock markets do not have low risk stocks yielding more than 7%.
4. There was a report by HFEL themselves that shows the fund's holdings yield which is close to 5%. Close to the average yield on Asian high yielding stocks.
5. In their interim report they show that interest from options are approximately 10% of the earnings from stock holdings.
6. There seems to have been a step change in the last 2 or 3 years when the yield moved way above yield on competing funds. At the nadir of the GFC HFEL yielded a bit more than 8% Schroders oriental Income also yielded 8% at the same time. Now Schroders Oriental yields 3.7%, Aberdeen Asian Income 4%.
7. Yahoo finance shows the payout ratio to be 150% of earnings, Simply Wall Street shows a payout ratio of 116% of earnings.
8. The fund trades at a premium which reduces the yield.
Maybe the managers are highly skilled and have chosen distributions over capital growth and perhaps they can maintain the distribution level. As an outlier 7.5% yield is a lot when inflation is about 2% and most government bonds yield 1% or less.
The other method of increasing distributions is to have a relatively high gearing and repay the borrowing from capital. HFEL has not done this as their gearing remains very low at 5% of assets.
I feel some scepticism is warranted here given all the points mentioned above.
Can anyone explain how the HFEL pays a 7.5% yield when underlying assets yield around 5% on Henderson's own figures.
In addition the shares trade at a premium and the is a 1% annual charge.
I do like the fund and I am a long term holder but I would like to test these fundamentals.
Concerned about the estimated dividend on the underlying portfolio which is around 5%. Plus a little bit from selling options around a yield of 5.5%.
How does the fund pay a dividend of 7.5% and then there are charges of roughly 1%.
When i first started investing in the fund the yield was 3.8% with healthy dividend and capital growth.
There has been a major shift over the last 2 or 3 years.