Twentyfour Income Fund (TFIF) announced its annual report for the year end 31 March 2023. NAV for the year fell 10% while shares fell 6%. Discussing the performance for the period, the investment manager noted the following;
“The company started the reporting period just after the invasion of Ukraine by Russia, meaning the risk sentiment in the credit and equity markets changed significantly as investors sought liquidity. Additionally, general risk sentiment had evolved due to expectations of high inflation, increasing interest rates and the general higher risk of a slowdown of the UK and European economies. Following a brief relief during the summer, floating rate fixed income markets were again faced with a large liquidity event, which was the result of the UK mini-budget as GILT yields increased significantly and UK pension funds had to sell assets to settle margin calls on their books. During this period there were no defaults in the portfolio, however, spreads had widened for most of the first six months of the financial year. As risk appetite returned in October, spreads retraced roughly half of this spread widening in the second half of the company’s financial year. For the company, this resulted in increased NAV volatility, particularly due to the negative performance of CLOs through the period as they correlated with high yield corporate bonds, demonstrating significant volatility showing negative performance.
“In October 2022 CLO spreads briefly reached 1100 and 1650bps for BB and B rated bonds, but spreads rapidly contracted in the first quarter of 2023. CMBS showed similar negative performance over this 12 month period, but credit spreads in the sector didn’t significantly tighten as concerns over (global) commercial real estate valuations increased and this was reflected in bond valuations. The portfolio manager viewed the illiquidity following the UK mini-budget, and the following spread widening, as an opportunity to buy assets (predominantly BBB to B rated UK and Dutch RMBS and BB rated CLOs) and increased fund leverage in the fourth quarter of 2022 to fund these purchases. This leverage was reduced in the first quarter of 2023 when credit spreads tightened and the portfolio manager sought to lock in this performance. As the portfolio manager views a future recession in the UK and Europe as very likely, overall positioning has changed to a focus on secured collateral (RMBS and CLOs) over unsecured consumer loans and SMEs, from western European countries and they have further improved the average rating of the underlying portfolio.”
Regarding the outlook, the manager continued;
“Floating rate ABS began 2023 well placed with a strong income component through high spreads and increased base rates with more rises expected. Performance caught up in the first two months of the year, spreads remain wider. Highlights for the sector are expected to include robust deal performance across mortgages although some weakness is expected in consumer pools. CMBS is expected to be the weakest performer, with Credit Real Estate (“CRE”) valuations decreasing, and we anticipate selective loans with short maturities will face refinancing challenges. Other sectors are expected to perform well.
“Liquidity conditions have been restored after Q3 volatility and 2023 so far has seen strong and active investor participation, which we expect to continue. Default rates and ratings are expected to outperform in ABS relative to credit markets.
“We anticipate volatility to remain a theme through this late cycle phase and assets with stronger liquidity characteristics are preferred. EU ABS issuance has surprised to the upside so far in 2023, despite demand driven reductions in lending in Europe, as early year tightening of spreads has accelerated issuer plans. Bank issuance has begun to represent a larger share. This is expected to continue but predicated by the potential for disruption by wider market events.”
TFIF : Volatility leads to challenging year for Twentyfour Income Fund