TwentyFour Income Fund (TFIF) has published its final results for the year ended 31 March 2024, during which it provided an NAV total return of 18.10%, which is a marked turnaround from the 3.74% loss reported for the prior year. TFIF says that European ABS has performed strongly across the board, supported by stronger than expected macroeconomic conditions, higher for longer interest rates and improving risk sentiment as investors assumed a soft-landing for Europe and the UK. Mezzanine Residential Mortgage-backed Securities (RMBS) and Collateralised Loan Obligations (CLOs) were the strongest performers whilst Commercial Mortgage-backed Securities (CMBS) lagged spread performance. TFIF comments that activity in the primary markets has created opportunities to further diversify and rotate its portfolio (for example UK and European banks have been tapping the ABS sector for both funding and capital transactions following the end of cheap funding). It adds that its manager continues to favour higher-yielding, floating rate ABS, particularly secured assets (RMBS and CLOs) and has increased allocations to the Significant Risk Transfer (SRT) market as a source of both yield and diversification.
Reflecting these shifts, the portfolio had a book yield of 11.7% and a mark-to-market yield of 12.8% at the end of the period. TFIF’s manager continues to prefer bonds with short spread durations, liquidity and low levels of gearing, reflecting concerns over market volatility and geopolitical risk. Reflecting these concerns, the level of leverage has dropped over the period to -1.6% from -5.4%. TYFIF’s portfolio has not had any defaults in its investments since it was launched in 2013 and the manager says that the portfolio did not see any material interest deferrals or defaults during this reporting period.
Dividends
In April 2024, TFIF announced the fourth quarter dividend at 3.96p per share, bringing the overall dividend declared for the year to 9.96 pence per share. This is above its policy level of 8p per annum and is the highest annual dividend that TFIF has paid since its inception in 2013. Its chairman says that the strategy of investing in higher yielding floating rate asset-backed securities in a higher interest rate environment has enabled TFIF to deliver these dividends, as substantially all excess investment income is paid out each year.
Discount and share issuance
TFIF traded at a narrow discount to NAV for most of the year, with a discount of 0.47% at the beginning of the reporting period and a discount of 3.67% at the end of March 2024. The company issued 29.8m new shares between April 2023 and the end of June 2023. No shares were bought back during the reporting period.
Market outlook
TFIF says that market expectations for rates to remain higher for longer should continue to support strong demand for ABS and performance over the medium term. While acknowledging the benefits of higher rates on the portfolio, TFIF comments that it has delivered dividends within or above the target range of 6p to 9p per share since launch and is confident that it should be able to maintain that record even if, as anticipated, rates start to fall over the next 12 months. The manager says that it continues to see strong demand and supply of ABS, particularly in European CLOs. Over the longer term, geopolitical risk remains a driver of market volatility and the manager sees value in retaining flexibility within the portfolio and maintaining elevated levels of liquidity.
Portfolio events
TFIF’s manager says that it both added and reduced risk to the portfolio on many occasions over the year, mostly by buying and selling longer dated BB-rated CLOs. Due to strong demand, when spreads tightened quickly in BB CLOs, it booked profits for the company’s portfolio and replaced these with primary CLOs at wider spreads and mezzanine ABS in primary. It adds that the portfolio allocation approach has remained broadly unchanged over the course of the year as it favoured secured assets (RMBS and CLOs) over unsecured assets from Western European lenders. The portfolio saw increased allocations to SRT trades over the year, a sector that it believes provides both diversification and an attractive yield to the company.
Although collateral performance has weathered base rate rises well, there have been pockets of deterioration in pre global financial crisis RMBS and office CMBS in the manager’s view. CMBS exposure has been reduced to 3.3% from 4.8% in the previous year, also reducing non-conforming RMBS exposure to 14.5% from 21.7%. The yield ended the year at 12.78%, and the weighted average rating of the company’s portfolio has remained stable at B.
Portfolio strategy
The manager says that its focus during the year was, and will continue to be, on investing in higher-yielding floating-rate ABS, which, in an environment of higher-for-longer rates, should continue to deliver ongoing, attractive levels of income, enabling the company to continue to deliver on its annual target dividend. At the end of the reporting period, the portfolio had a healthy book yield of 11.7% and a mark-to-market yield of 12.8%. Spreads have generally tightened through this year and the manager has crystallised profits on various older investments in favour of primary supply.
The manager says that it believes that fundamental performance will likely deteriorate (not least due to increasing consumer arrears and corporate defaults), and with the elevated geopolitical risk (further escalations of the conflicts in Ukraine and the Middle East, along with the UK, French and US elections impacting market volatility), it favours secured collateral (mortgages, senior secured corporate loans, auto loans, etc) from Western European countries, where governments have a proven track record in supporting consumers and corporates during recessions. As mitigation from the effects of market volatility, it prefers bonds with relatively short spread durations and values the flexibility of having more liquidity and low levels of gearing. It adds that liquidity which TFIF has available could be deployed in the event of elevated market stress to take advantage of any investment opportunities. It remains cautious about CMBS and unsecured consumer risk. With the increasing number of banks issuing highly regarded SRT transactions, thereby releasing regulatory capital, it expects that TFIF’s allocation in SRT will grow in preference to making further investments in junior or equity RMBS.