You need to be a specialist to cope with a lack of liquidity
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A key advantage of investment trusts over open-ended investment companies is that they don't have to sell assets in order to meet redemptions. When people want to sell the share price falls and the discount to net asset value (NAV the value of the underlying portfolio), if any, at which the shares trade, widens, but the portfolio stays intact. This makes investment trusts a very attractive way to invest in illiquid assets: because so many investors can't or won't hold them, they are generally cheap.
TwentyFour Asset Management (TFAM) seeks to capture this "illiquidity premium" for investors in the bond market with its TwentyFour Income Fund (LSE: TFIF) and the Select Monthly Income Fund (LSE: SMIF). The former, a £460m fund launched in 2013, targets "less liquid, higher-yielding, asset-backed securities", notably pools of variable-rate mortgage-backed securities and corporate loans. The latter, a £160m fund launched in 2014, invests primarily in fixed-interest bonds and bank finance.
TFIF targets net returns of 6%-9% a year, after costs of 1%, from which it pays a quarterly dividend per share of 1.5p, plus an extra 1p in late April.SMIF targets a return of 8%-10%, also after costs of 1%, and also yields 6%, but pays 0.5p monthly. The key point of both is that the yields of 6% are not achieved by investing in high-risk securities, but in illiquid and complex ones that private investors and wealth managers would generally avoid. Pooling these investments in a fund reduces the risk and adds the expertise of a specialist fund manager.
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As Mark Holman, chief executive of TFAM, points out, there are 23,700 bond issues in the world of publicly traded government and corporate bonds, valued at $50trn, but the average yield is just 1.84%. Bonds no longer give investors an attractive income together with a cushion against swings in the equity market.
Nevertheless, Holman still sees opportunities in bank debt, European loans and emerging-market debt. This means that SMIF's portfolio has a weighted-average purchase yield (in other words, the yield across the portfolio) of a little over 7%, with TFIF a little under 7%. With a benign global outlook and debt defaults likely to stay low, broader market risks are low, though rising interest rates could have some impact on SMIF.
So far, so dull but dull is good in the world of fixed-interest investment. SMIF shares trade very close to their issue price, at a premium of 3%, while TFIF shares, at 116p, trade at a tiny discount. With annual dividends of 6p and 7p respectively, both yield 6%. For long-term investors seeking income, these are solid options.
If there is one niggle, it is that SMIF hasn't made any capital gains since launch, and TFIF not since spring 2014. The return target should allow for some income retention, leading to modest capital gains and gently rising dividends, but this hasn't been possible in the last three years. The result, even without any problematic investments, could be share prices moving to trade at a discount.
In time, that and a broader set of investment opportunities perhaps following some turbulence in fixed-interest markets could create an opportunity for higher long-term returns. The trouble with waiting, though, is that your cash would be earning next to nothing in the bank in the meantime.
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Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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