by Sam Benstead from interactive investor, 8th May 2024:
Rising interest rates have knock-on effects for all investments – but one of the most important impacts is on bond markets.
When rates rise, so do the returns that investors demand from fixed income. This leads to higher yields as a result of falling prices for existing bonds, as well as higher yields from newly issued debt.
One way of accessing lending markets is with specialist investment trusts – those which buy debt that is not easily sold in secondary markets and requires a lot of expertise and resource to issue. For the greater risk and complexity, investors are normally rewarded with higher yields.
The Association of Investment Companies’ (AIC) Debt – Direct Lending and Debt – Loans & Bonds sectors give DIY investors access to these markets..
This investment area is undergoing a difficult period, with many trusts being wound down or facing continuation votes.
James Carthew, head of investment trusts at QuotedData, says the Debt – Direct Lending sector is shrinking fast.
“VPC Specialty Lending Investments, RM Infrastructure Income, and Riverstone Credit Opportunities are all in a managed wind-down phase, and subject to a vote at the AGM on 20 May 2024, GCP Asset Backed Income GABI could join them.”
That leaves just BioPharma Credit, which is providing funding to biotech and pharmaceutical companies, usually securing debt against revenues from existing products to help fund new ones.
Carthew says: “BioPharma Credit has been very successful in this, returning 9.3% a year on average in net asset value (NAV) terms. However, it can be bought on an 11% discount to NAV. The portfolio is quite concentrated and the yield is an attractive 8%.”
In the Loans & Bonds sector, CQS New City High Yield is a popular fund with a diversified portfolio of mainly smaller debt issues with a bias to sterling debt.
Carthew says the manager has a strong focus on capital preservation and the trust currently yields “an attractive” 8.5%.
Read more here