TwentyFour Income (TFIF) underlined why it is one of the UK’s biggest listed debt funds today with another strong set of annual results and a further increase in the 9.7%-yielder’s dividends.
The £867m investment company invests in high-yielding, floating rate asset-backed securities (ABS) in the UK and Europe, an increasingly popular area for income investors after the Bank of England cut base rate from 5.25% to 4.5%.
Net asset value of the Guernsey-based but London-listed closed-end fund rose 3.7% from 108.79p to 112.83p per share in the year to 31 March. With 11.07p of quarterly dividends, up from 9.96p, the total underlying investment return for the year was 13.6%, comfortably ahead of the 6%-9% annual target TFIF has met since launch in 2013.
Shareholders’ actual total return was better than this at 17.1% as the shares rose faster than the portfolio, narrowing the discount, or gap, to NAV, from 3.7% to 1%.
Investor demand is growing for the highly diversified portfolio, which holds 206 positions, most of them in non-investment grade or unrated loans, although it has never suffered a default in eight years.
Awareness of the impressive 11% underlying yield these loans are generating, which is more than enough to meet the minimum 8p dividend target, has seen the shares move to a premium above NAV since the financial year-end. The company currently stands 2% above asset value, enabling it to issue shares and grow.
That’s quite a feat given the current depressed state of the investment company market which trails on a 13.5% discount to NAV (excluding the massive 65% premium on the £40bn private equity giant 3i Group).
Currently just 23 investment companies stand at ‘par’, in line with NAV, or at a premium, reflecting either strong capital returns or high dividends. Debt funds account for nearly a third of these. They include TFIF’s sister fund TwentyFour Select Monthly Income (SMIF) and Fair Oak Income (FAIR), CQS New City High Yield (NCYF), Invesco Bond Income Plus (BIPS), M&G Credit Income (MGCI) and CVC Income & Growth (CVCG).
That’s a sign that the sector is in favour, a beacon of light in the investment company gloom, as investors reckon interest rates are staying higher for longer to the benefit of loans whose high coupons will also remain elevated.
Fund manager Aza Teeuwen isn’t complacent, however. With Trump’s tariffs clouding the economic outlook after a period in which consumers have been surprisingly resilient, Teeuwen is shifting the portfolio even more to secured collateral, mortgages, senior-ranking debt and auto loans from Western European countries “where governments have a proven track record in supporting consumers and corporates during recessions.”
He remains cautious about commercial mortgage-backed securities where he said information can be lacking on the quality of collateral.
The manager has cautiously kept gearing, or borrowing, low at 0.5% but will use the ability to lift this up to 25% if a market correction provided an opportunity to snap up high coupons on low prices.
Ahead of the company’s triennial realisation opportunity in October, when investors can sell their shares at asset value or the company can issue new ones, chair Bronwyn Curtis said the board and manager were considering widening TFIF’s investment universe but would say more when it published a prospectus.
Investors await details but will likely look positively on modest changes to a successful strategy that has produced a 153% total return since launch, equivalent to 8% a year.
