Q:  How would you describe your investment philosophy?

A: The greatest differentiator of the Henderson Global Equity Income Fund is that we are both value and income investors and we consider dividend income as an important part of our strategy, which is ignored by many fund managers.

Our investment style is valuation driven and we spend a lot of time studying the companies, including their income statements, balance sheets, and cash flows. The most important part of the selection process is the share valuation and how it relates to the company’s prospects. That means that we would not hold a great company if its price is overvalued, but we would be interested in buying companies with long-term value and short-term problems.

The other core element of our philosophy is income investing. We like income-producing equities and companies that pay dividends because the dividend is not only income for the investors, but also a great discipline for the management. When we buy companies that are out of fashion, their regular and attractive dividend yield is important to ensure stability until the true value of the stock emerges. We are trying to identify solid businesses that have the potential to grow, but are mis-priced by the market.

Q:  What regions and countries does your investment universe include?

A: We research stocks in every continent in the world. This is a global equity income fund, which invests predominately overseas, outside the U.S. Typically, the U.S. market generates lower yields, so our domestic exposure is limited to the range between 5% and 20%. We are happy to own stocks in any market and we have no particular constraints related to our geographic exposure, but the high-yield markets, such as Australia, South Asia, and Europe, are our core investment areas. We are however restricted from investing more than 25% of the fund in emerging markets.

Currency hedging is an important part of our strategy. We are dollar investors and currency hedging is important because in the markets with relatively high interest rates, such as South Africa or the UK, the currency can depreciate quite sharply.

Q:  How does that philosophy translate into an investment strategy and process?

A: Since this is an income fund, every stock that we own has to pay a dividend, and we prefer growing dividends. This strategy results in a portfolio of companies with management that is disciplined and committed to growing the cash earnings. Therefore, dividend growth is a crucial part of our selection process.

We have a core list of long-term holdings, but we also employ a dividend capture strategy for the majority of the portfolio, which results in short-term holdings. We select stocks with attractive dividends from across the world, where the dividends are likely to be paid over the next two months. The idea is to buy these stocks at attractive levels and by holding them for a minimum of 61 days, all the income is qualified income for US investors, attracting a lower tax rate. Once they move to the exdividend stage, we are likely to move on to other stocks.

The dividend capture strategy is important for identifying the flow of money around the world. Certain markets have distinct periods in which they go ex-dividend, so this strategy allows the assets to rotate. Our core holdings in Europe and the UK have strong dividend season in March and August, while for Hong Kong this period is June, for Korea it is December, etc. These distinct periods allow us to hunt in different markets for income opportunities.

Q:  Would you explain your research process from the idea generation step to the final stock purchase?

A: We have a very analytical bottom-up process. We start with an external database, which provides information on the dividends of companies across the world. It includes thousands of stocks. Within the portfolio, we hold only 50 to 75 stocks, so we make a very narrow selection from a wide universe.

The attractive yield is not the only requirement. We would also expect positive news flow over the next two months and to seek limited downside. Then we calculate the absolute value of the stock based on various valuation criteria.

Although we have a bottom-up approach, we are mindful of certain segments and macro factors. For instance, we have been very light on banks for most of 2007, because of concerns about the earnings. Financials are a high-yielding area of the market, and you would expect an income fund to own many banking stocks. That means that we have a strict discipline built in our global stock picking process and we have the flexibility to avoid entire sectors or countries.

Q:  Does your definition of dividends include the special dividends as well?

A: Typically, we prefer cash dividends, or the case where the company is saying that it has excess profits and is returning cash. If we can base our whole process around the standard regular annual or quarterly dividends of a company, then we can repeat the same process in the next period and achieve stability. If you rely entirely on special dividends, then the performance of the fund will vary strongly from year to year, as will asset allocation because certain sectors are prone to special dividends at different points in the economic cycle.

Overall, we do not rule out special dividends, but we are not targeting them specifically because we don’t depend on them for income.

Q:  Several years ago, Microsoft had to pay dividends because it had accumulated too much cash. On the other hand, General Motors and Citigroup had to cut dividends due to deficits. How do you treat those situations?

A: A key part of our research process is identifying whether or not a company is likely to cut its dividends, and Citigroup is a great example. That was the reason for having low exposure to banks over the last year. At the same time, we have been heavy on utilities and telecoms, where we view the dividends as being safe and will grow further.