TwentyFour Income dividend benefits from higher base rates – TwentyFour Income (TFIF) has posted its annual results for the year to 31 March 2022.
The NAV per share marginally declined from 112.75 at the start of the year to 112.45, for a total return of 5.55% (including dividends paid) during the year, while the income component of the return to investors remained strong.
TFIF declared and paid a dividend of 1.91p to cover the excess income earned during the preceding year, and three dividends of 1.5p per share to cover the pro-rata minimum target return of 6p per share, as well as announcing a final dividend for the year ended 31 March 2022 of 2.27p per share which was subsequently paid after the end of the year.
The increase of the March 2022 dividend can be partly attributed to higher base rates as the Bank of England hiked interest rates three times from December to March and has since then hiked once more in May to bring the current base rate to 1.0%.
As TFIF invests in floating rate bonds the income has improved. Due to the current heightened inflation levels the market widely expects that the Bank of England will hike interest rates five to six times more in the coming 12 months which will benefit coupon income for the company.
Starting the year at a discount, the share price improved after the summer as the economy came out of the COVID pandemic and, until the Russian invasion of Ukraine in February 2022, the shares traded at a premium. In March the fund briefly traded at a 5.3% discount, however, the average discount during the year was 1.2%, and it moved in a range of a 2.8% premium to a 5.8% discount during the year.
Meanwhile, this year saw the company successfully complete the £144m acquisition of assets from UK Mortgages, a transaction funded through the issuance of additional shares by TFIF to shareholders of UKML.
Manager’s outlook:
The Portfolio Manager believes stable primary issuance, solid investor demand and limited secondary volumes have steadied the spread levels of assets. As a result, the market has started to see some spread retracement across all sectors, including CLOs. The Portfolio Manager expects the new issue pipeline in the ABS sector to be reasonably healthy in the near term, with a wide diversity of asset classes across European issuers. Despite the overall outlook remaining rather uncertain due to Russia’s invasion of Ukraine, and weaker sentiment because of tighter fiscal policy, elevated inflation concerns and slower GDP growth, the Portfolio Manager believes that the European ABS market will continue to benefit from the expected increases in interest rates generating progressively higher income streams as the year evolves. The Portfolio Manager expects this search for floating rate income will continue to result in a strong technical backdrop in the ABS market, with the possible result that spreads retrace again from the recent widening. Nevertheless, the Portfolio Manager remains focused on liquidity, given the ongoing uncertainties in Ukraine, high inflation and the increased risk of a future recession in the UK and Europe.
July 2022 update: Due to the ongoing war in Ukraine and increased economic sanctions on Russia, risk sentiment has worsened materially in credit and equity markets. The Fed, BoE and ECB have all announced further rate hikes and the end of quantitative easing in a bid to rein in inflation, with higher interest rates and a growing cost of living the probability of a recession has increased materially. This has resulted in very high volatility in sovereign bonds, sell-offs in global equities and credit markets. With ABS following in sympathy credit spreads have widened significantly. BB rated CLO bonds are now 300-400bp wider than they were in January 2022. There are no credit impaired positions in the portfolio and bonds have been underwritten against adverse scenarios more severe than the global financial crisis. As value has returned very quickly the Portfolio Managers now have the ability to use some of the built-up flexibility and liquidity to add value to the portfolio in their preferred RMBS and CLO platforms, at yields that have not been available for many years.
TFIF : TwentyFour Income dividend benefits from higher base rates