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Investment trust insider on structured finance funds

Investment Trust Insider on Perpetual Income and Growth

Investment trust insider on structured finance funds – James Carthew: Debt funds wobble as recession risk rises

With inflation and interest rates still climbing, and the threat of recession looming closer on the horizon, it’s time to consider the impact on the £1.7bn structured finance sector. These are high-yielding funds that invest in asset-backed securities, collateralised loan obligations (CLOs), collateralised debt obligations and other forms of securitised debt.

Typically, loans are packaged into portfolios and then exposure to those portfolios is sold off in tranches. The highest-ranking tranche – the one that is first in the queue when money is being allocated to pay interest or repay capital – is the least risky. The returns it earns reflect that and may be close to the yields for government debt with the same time to maturity. At the other end, the lowest-ranking equity tranche is the riskiest, being very highly geared by the higher-ranking tranches, but pays out the highest returns.

There are seven investment companies in the AIC’s Debt – Structured Finance sector. TwentyFour Income (TFIF), the largest and best-known, is a bit different to the others. It targets net total returns of 6-9% a year, which is less aggressive than most of its rivals. At the end of May, almost 60% of its European-focused portfolio was invested in residential mortgage-backed securities – securitised debt where the underlying investments are portfolios of mortgages, some of which may be buy-to-let. Another third was invested in CLOs.

The Vontobel-backed TwentyFour team is good at keeping investors up to date with developments. In a recent blog post, fund manager Elena Rinaldi highlighted…   read more here

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