Shires Income (SHRS), a £112m, high-yielding UK equity and bond income fund, saw all the sectors in its portfolio rise in the six months to 30 September as it handsomely beat the FTSE All-Share.
The investment trust achieved an underlying net asset value total return of 15% that outperformed the UK benchmark’s 11.6% by 3.4%, although shareholders had to make do with a 12.7% total return on their stakes.
The shareholder return included a first quarter dividend of 3.4p per share as part of an annual target of at least repeating the 15.5p total paid in the last financial year to 31 March.
The payout, which represents a yield of 5.4% on the current 289p share price, looks well covered with first half earnings per share growing over 17% to 9.56p.
Aberdeen fund manager Ian Pyle said the increase in earnings was helped by a special dividend after a General Accident preference share was bought back in a tender offer at a 5.6% yield. He reinvested the proceeds in a Nationwide 10.25% perpetual bond, yielding 7.8% at the time, to provide a “nice uplift to income”.
Shires is unusual among UK equity income trusts in holding 17% of its assets in fixed interest stocks such as preference shares and bonds. It notionally uses gearing, or borrowing, to fund this part of the portfolio whose stream of coupons does much to support overall income for shareholders.
Pyle also saw good uplifts in construction stocks with Morgan Sindall (MGNS), Balfour Beatty (BBY) and Kier (KIE) returning 38%, 52% and 79% during the period.
His financial stock picks benefited from growing business volumes and falling interest rates. Challenger bank OSB Group (OSB) rose 35% and Close Brothers (CBG) jumped 78% after the lender benefited from a better-than-expected outcome from the City regulator’s inquiry into car finance sales.
Insurers Chesnara (CSN) and Aviva (AV) generated 28% and 32% returns, while asset manager M&G (MNG) provided 31%.
Pyle also took profits on doctors’ surgery investor Assura after its bid from Primary Health Properties (PHP), reinvesting in Safestore (SAFE), Sirius Real Estate (SRE) and LondonMetric (LMP).
However, the manager bought too early into the potential recoveries of high street baker Greggs (GRG), chemicals specialist Victrex (VCT), technology solutions provider Midwich (MIDW) and Pets at Home (PET) after their shares did badly. Despite falls of 10% to 21% during the half-year, he remains confident they will do well over the next three to five years.
The big disappointment was Wood Group (WG), the debt-laden oil services company, where a previous 1% holding slumped and was written off after the shares were suspended and an inquiry launched into historic accounting practices. Pyle said a bid from a private rival could still deliver a positive outcome.
Like many UK-focused funds, Shires can invest as much as 20% in overseas companies, although in practice it tends to hold less than this, at just over 9% in March for example.
In August 2024 the manager added ASML, the Dutch leader in semi-conductor lithography machines, and by last March it accounted for 1% of assets. He sold out in June explaining that although a high-quality company with “seemingly insurmountable barriers to competition in a structurally growing end market”, there was some risk to earnings estimates next year and with a low dividend yield, Victrex looked better value and a better fit for its growth and income objectives.
Launched in 1929, Shires has generated a 67% total return to shareholders over five years, above the sector average of 58%, while its shares trade on a narrow 4% discount in line with the peer group average.
Despite bulking up with the merger with stable mate Abrdn Smaller Companies Income two years ago, Shires looks small in a sector dominated by £1bn+ trusts, such as City of London (CTY), Edinburgh (EDIN), Finsbury Growth & Income (FGT), Law Debenture (LWDB) and Temple Bar (TMPL), and could be vulnerable to further consolidation in the sector.
Our view
James Carthew, head of investment company research at QuotedData, said: “It is good to see some decent numbers from Shires Income, which managed to capture the bounce in UK markets over the six months to end September. Investors are now looking nervously towards this week’s budget, however, and UK equites remain cheap. Fund manager Iain Pyle paints a picture of falling inflation and interest rates in 2026. It is possible to imagine that, from an investor’s point of view, the UK might be the place to be next year but Wednesday could be make or break for that.”
