TwentyFour Select Monthly Income (SMIF) says last month’s commitment by Andy Burnham to follow the Labour government’s fiscal rules if he replaces Kier Starmer as prime minister has contributed to the credit fund’s cautious optimism after a half-year marked by turbulence from the Iran war.
George Curtis, a portfolio manager at TwentyFour Asset Management, said risks of a further sell-off in UK government bonds, or gilts, had “diminished since Burnham signalled his commitment to retaining Labour’s existing borrowing limits, a stance that was well received by the market.”
Burnham, the Greater Manchester mayor hoping to be elected as Labour’s MP in Makerfield next week, last month rowed back from a previous comment that Britain should not be “in hock to the bond markets”. He told ITV News: “Let me say this really clearly. I support the fiscal rules. There needs to be a plan to get debt down, but beyond that, we need to change politics and take the turbulence out of British politics because that is a cause of uncertainty that then has that impact in the markets.”
Curtis said while SMIF did not invest in gilts, its portfolio of loans and high-yielding corporate bonds was indirectly affected by volatility in government bonds. However, in the midst of intense uncertainty over how far interest rates would rise in response to the inflationary impact of higher oil prices resulting from the blockade of the Strait of Hormuz, he said credit prices – as measured by the “spread” between their yields and those of gilts – had been “remarkably contained”.
Nevertheless, the £304m investment company, which has grown rapidly through share issuance, saw net asset value (NAV) fall 4.1% to 82.51p from 86.06p in the six months to 31 March, according to half-year results yesterday.
However, with 3.25p of dividends included the underlying half-year total return from the 8.6%-yielder was 0.24%, with the manager taking steps to improve the portfolio’s defensiveness, although returns fell from the 4.9% made in the previous six months.
NAV per share recovered to 83.46p in April with the shares rallying back to 86.3p today from a 27-month low of 77.4p at the end of March. That leaves shareholders with a 52% total return over three years, the joint best in its Loans and Bonds peer group with rival CVC Income & Growth (CVCG).
Curtis said SMIF’s best performers were asset-backed securities, “AT1” debt from banks and European high yield credits which returned 2.95%, 2.21% and 1.75% respectively over the six months.
Bundles of sub-investment grade corporate debt, known as collateralised loan obligations (CLOs), were the largest detractor with a negative 1% return that reflected the “risk-off” investor sentiment and nervousness around software and private credit, which the fund does not hold.
Curtis said European CLOs had since recovered as confidence had partly improved and investors appreciated the high yields on offer.
“Overall, we remain constructive on credit while maintaining a cautious approach, and note the strong demand for primary bond issuance in weeks following the period end which suggests confidence from markets in the fundamental picture and a willingness to look through the uncertainty,” Curtis concluded.
Our view
Matthew Read, senior analyst at QuotedData, said: “A 0.24% NAV total return over six months may not look exciting, but SMIF delivered this against a volatile credit backdrop while deliberately moving the portfolio up in quality. Shareholders should welcome the additional 0.25p dividend, which puts the fund ahead of target.
“The shift into higher-quality BBB and BB-rated assets looks well timed given the risks around geopolitics, inflation and defaults. Less-liquid credit can be rewarding, but it is not immune from spread widening or changes in risk appetite. However, with no structural gearing, a diversified portfolio and managers willing to adjust exposure as conditions change, SMIF looks well placed to keep delivering the high, regular income that continues to set it apart in a difficult market for investment companies.”
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