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Investment Trust Insider on TwentyFour Income Fund

Investment Trust Insider on Capital Gearing Trust

Investment Trust Insider on TwentyFour Income Fund – James Carthew: what TwentyFour’s yield appeal says about credit markets

I was looking at results for TwentyFour Income (TFIF) for the year ended 31 March 2019 and thinking, how does an investment company that only managed to generate a total return (including income) on net assets of 1.6% over a year manage to rake in £145.5 million of extra capital since 31 March 2018?

In part, it must be the yield – the fund declared dividends totalling 6.45p for its accounting year, which on today’s share price of 113p puts it on a yield of 5.7%. It might also reflect a hope that the share price will rebound to the 124p level it traded at last September or even the 130p level it reached briefly in 2014.

To be fair, while returns over the six years since launch have not been smooth, they have averaged out at an attractive, annual rate of about 8.25%. Bumper years early on, and in 2017, have been offset by lower returns in 2015/16 and since 2017.

We have known for a long time that investors are desperate for income. The yield on ‘safe’ bonds isn’t going to get them excited – after adjusting for inflation, real yields on government bonds are negative in many places. Worse, there are said to be $12.5 trillion of bonds offering negative nominal yields, which means investors will lose money holding them to maturity. This is bonkers and ought to be setting alarm bells ringing.

TFIF can achieve its yield by buying debt that, while not excessively risky, is not considered to be safe. It also buys that debt through a structure that gears up returns, magnifying potential losses as well as profits.

TFIF’s portfolio consists mainly of residential mortgage-backed securities (RMBS) and collateralised loan obligations (CLOs). These are forms of securitised debt where a pool of assets is packaged up and exposure to them is sold off in tranches of decreasing seniority. Senior loans stand in the front of a queue of creditors in the event of a compay going bust.

At the top is a layer, usually rated AAA, where it would take a real disaster within the portfolio for you to lose money. Any losses in the portfolio hit the bottom-ranked layer first…

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