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Narrower discount and good equity returns for Shires

Shires Income - Sustainable high yield 1

Over the 12 months ended 31 March 2022, Shires Income underperformed its All-Share benchmark by 1.6%, returning 11.4% in NAV terms to the index’s 13.0%. A narrowing discount helped shareholders do better, however, giving them a return of 18.4%. It was the portfolio’s structure that held things back. A 2.8% return on the portfolio’s preference share holdings acted as a drag, the equity portfolio actually outperformed, returning 13.8%.

Dividends totalling 13.8p for the year were covered by earnings of 14.21p, allowing the fund to rebuild its revenue reserves. These now equate to about 1.04x the annual dividend. The first three quarterly dividends for the new financial year will be 3.2p. The size of the final dividend will be decided closer to the time as usual.

The portfolio is invested in equities and preference shares. At the year end 75.9% of the portfolio was invested in equities and 24.1% was invested in preference shares.

Extract from the manager’s report

Over the period the equity portfolio produced a total return of 13.8%, 0.8% ahead of the benchmark. The preference shares, as we would expect in a rising bond yield environment, were more stable but still delivered a positive total return of 2.8%. The positions that delivered the most positive relative returns for the portfolio were weighted towards more commodity sectors. The largest single contributor to outperformance was the holding in BHP, which benefited from rising metals prices. The shares increased in value by 46%. Energy exposure was also a distinct positive for the portfolio, with Energean (+40%), Diversified Energy (+20%) and Total (+22%) performing well as oil and gas prices rallied.

Along with energy, utilities exposure was also beneficial, with UK utilities seeing rising income as gas prices rose. SSE increased in value by 27% as it continued to make progress with its renewables pipeline and benefited from weaker businesses exiting the higher gas prices in the UK. Telecom Plus also benefited from rising energy costs. Its offering, prioritising stable, competitive pricing, is now more attractive to consumers, allowing for better growth in customer numbers and leading to a share price rise of 26% in the year.

The best performance terms of share price appreciation in the portfolio was Novo-Nordisk, which rose by 75%. The company has delivered consistent growth and demonstrated the strength of its market position and pricing power – valuable attributes in today’s market.

The greatest detractors from relative performance for the Company were not holding a number of large company commodity exposed stocks that performed strongly: Glencore, Anglo American and Shell all delivered positive returns. Of the companies held, the greatest detractor was Ashmore. The company is an emerging markets debt fund manager and the asset class has been out of favour this year, leading to under performance, with its shares down 37%. Countryside Properties was also weak, with the company downgrading guidance after missing build targets in early 2022 – its shares fell 47%.

SHRS : Narrower discount and good equity returns for Shires

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