TwentyFour Income Fund (TFIF) has announced its annual results for the year ended 31 March 2021, during which income to investors remained strong. Its NAV per share rose from 94.19p at the start of the year to 112.75p, for an NAV total return of 27.40%, while it paid a dividend of 1.9p to cover the excess income earned during the preceding year, and three dividends of 1.5p per share to cover its pro-rata minimum target return of 6p per share. This was followed by a final dividend for the year of 1.91p per share which has since been paid.
TFIF’s shares have typically traded at a premium since launch, however last year’s COVID-related market turmoil saw them move out to a discount that has largely persisted, though at a significantly lower level than in March 2020. While the shares have, at times, traded at a premium, the average discount during the year was 3.00%, and it moved in a range of a 2.62% premium to a 7.76% discount during the year. From July 2020, the NAV performance has been steadily positive, but this has not been matched by the share price meaning that the share price total return has been lower.
Manager’s market commentary
“The global spread of COVID-19, the response from governments and central banks, and the subsequent market recovery largely dominated the year in question. In addition, the US election and the agreement governing the relationship between the UK and the EU have further occupied headlines.
As the year started, most financial markets had seen the lowest prices experienced since the spread of COVID-19. They were largely on a recovery trend, buoyed by the coordinated liquidity and bond-buying stimulus from multiple central banks. The stimulus continued to directly impact many parts of the fixed income markets, including, among others, investment grade and high yield bonds, covered bonds, US ABS and ETFs. In contrast, direct intervention in the European ABS markets was muted, leading to a lag in the relative speed of recovery.
The year started with European ABS primary markets effectively closed, leading to increased uncertainty of direction while other markets rallied, driven by oversubscribed new issues. In May, however, the first ABS deals were brought to market, by well-known issuers, but these were largely pre-placed or club transactions to provide certainty of execution. Gradually the primary market opened up, with a broader range of collateral types and issuers and more complete capital structures brought to market, and participants saw a return to a more traditional book-building process. UK banks were expected to supply more new issuance in 2020. However, with the high levels of liquidity extended by the Bank of England, this has not come to pass, and volumes are expected to remain low, contributing to a sharper price recovery during the year.
Secondary markets have taken the lead from primary markets, with increased liquidity and investor engagement. However, as the year draws to a close, lower volumes of consumer ABS in the primary market and the effective maturity of some large existing deals has increased competition for similar product in the secondary market, and subsequently reduced the number of willing sellers.
With the recovery in market liquidity, bond prices have risen, and spreads have tightened, with most parts of the consumer market approaching the levels seen before COVID-19 impacted markets at the start of 2020. Conversely, CMBS and CLOs remain wider due to the more esoteric nature and underlying structural risks for the former and a steady supply of the latter. In general, however, spreads remain wider than similarly rated corporate bonds, which trade through their pre-COVID-19 levels.
In mainstream fixed income markets, the first quarter of 2021 has seen material volatility, driven by inflation concerns principally in the US, sparked by the Democrat Party clean sweep in the elections and President Biden’s stimulus package. These concerns have led to a material repricing of the US Treasury curve, with correlation infiltrating Gilts and Bunds and driving negative performance in corporate credit. In comparison, the floating rate nature of European ABS means that this market has outperformed, with the more attractive spreads and lack of rate volatility attracting investors to the asset class.
During the first quarter of the year, market participants used a wide range of assumptions around the underlying credit performance of the loan pools backing ABS bonds, reflecting the significant uncertainty present in the global economy. Ultimately, while performance deteriorated, it saw a significant positive rebound through the second half of the year. Both consumer and corporate-backed transactions are performing largely in line with pre-COVID-19 levels at the year end. The performance was driven by wage support and direction for borrower-friendly behaviour from lenders, the significant liquidity provided by central banks, and the swift adjustment to working from home for many parts of the economy.
Notwithstanding the impact of lockdowns on several sectors, the evolution of the European economy to the last 12 months has further supported housing markets. Accordingly, UK and Dutch house prices increased significantly and consumer savings rates rose substantially, further bolstering household balance sheets. The portfolio managers recognise the support in place for consumers and corporates will ultimately end and that there will likely be a subsequent impact on loan performance. However, they do not envisage any material credit concerns for the ABS market as a result.”
Manager’s market outlook
“While the last quarter of the year initially saw a healthy amount of new issuance, supply tailed off in all sectors other than CLOs as the year drew to a close. Those deals that did come to market during this year saw a very high degree of oversubscription compared to historical levels, reflecting a strong appetite for risk from investors and trading desks. The market appetite has not diminished with the subsequent reduction in supply, setting the stage for positive price performance going forward. Issuance is not expected to outweigh demand based on current indicators, despite expectations of an increase. As mentioned, CLO issuance will remain strong, and existing transactions continue to be refinanced, a trend we expect to continue for the remainder of this year, as various sub-Investment Grade bonds are still trading at a discount, allowing for extra performance for investors.
While risks persist, and, as noted above, a move to a more normal level of support for consumers and corporates as economies reopen will likely see deterioration in loan performance, the Portfolio Manager does not expect this to create issues for the portfolio. The Portfolio Manager has tempered the significantly negative cash flow models used in the second quarter of 2020 to reflect actual experience. However, they continue to run stress models to examine how much each deal can withstand and remain comfortable with portfolio positioning even in hypothetical environments similar to, or worse than, 2020.
Historically the main risk has been market price volatility, and typically this has been relatively short-lived. At the time of writing, the main focus of fixed income market participants would appear to be the path and persistence of future inflation and the Fed’s response to this. Indeed a policy error or ongoing battle between the Fed and the markets would appear to be the most apparent source of volatility. While the floating rate nature of European ABS might mitigate this, a material drop in risk tolerance in such a circumstance could, if sustained, have the potential to push spreads wider.”