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Two alternative income funds
These income funds in the specialist debt sector are stablemates, but offer very different options for investors looking for yield
Browse income funds in the specialist debt sector and you will find two investment trusts run by TwentyFour Asset Management, a fixed income specialist owned by the Swiss asset management group Vontobel that looks after £24 billion in assets under management.
TwentyFour specialises in asset-backed securities (ABS), so it is not surprising that the £1 billion TwentyFour Income Fund (LSE: TFIF)does exactly that. It invests in a diversified portfolio of securities, each of whose income comes from a pool of underlying assets (such as corporate loans and mortgages). The underlying assets are floating-rate – ie, payments vary with changes in interest rates. About 15% are investment grade, 52% sub-investment grade and 33% unrated.
TwentyFour Income Fund targeted a return of 6%-9% per year on the original 100p issue price, including a minimum annual dividend of 8p, paid quarterly. Its net asset value (NAV) total return has averaged just under 8% per year since inception in 2013.
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By contrast, TFIF's smaller stablemate TwentyFour Select Monthly Income Fund (LSE: SMIF) – worth £300 million – invests in a broader range of debt, with the aim of taking advantage of the “premium yields available in less liquid securities across the global credit markets”. That means Additional Tier 1 (AT1) capital securities issued by banks, payment-in-kind notes (often issued as part of private-equity transactions), and leveraged loans, as well as ABS and corporate bonds.
At the end of September, just under 40% of the portfolio was invested in AT1 securities, with about a third in ABS and 15% in securities issued by insurers. Roughly a third of the portfolio is rated BBB (the lowest investment grade rating), while most is sub-investment grade and 7% is unrated.
In some cases, the rating is more of a function of where the securities owned by the trust sit in a bank's capital structure than the borrower's quality. AT1 capital notes are specifically designed to absorb losses in the event of a bank failure and are generally graded three to five notches below each bank's senior capital.
Hence SMIF's second largest holding is Nationwide's 10.25% Core Capital Deferred Shares, which are similar to the AT1 debt issued by banks (building societies have different rules for what they can issue). Fitch Ratings puts Nationwide as a group at A (five notches away from its highest AAA rating), but has a BBB- rating on its AT1 capital (just above sub-investment grade).
Rising rates
SMIF targeted a higher return of 8%-10% per year on the 100p issue price, comprising a 6p per share annual dividend paid in monthly instalments and a capital return of 2p to 4p. While the trust has consistently met its annual dividend target, capital growth has remained elusive. It has delivered a NAV total return of 6.4% per year since 2014, mostly from income. SMIF's performance has been weighed down by exposure to longer-duration securities, which underperform when rates rise. The Nationwide holding illustrates this. These securities, which mature in 2049, are very sensitive to interest rates. They have fallen about 10% in 2026 as interest rate expectations have risen. Since the beginning of 2022, the face value of the securities has fallen 35%.
More than half of SMIF's portfolio matures in five years or more. It has an interest rate duration of 3.5, implying the portfolio would fall by 3.5% if rates rise by 1%. Conversely TFIF holds floating-rate debt, so benefits from higher rates.
SMIF pays out 0.5p per month, plus a top-up at the end of its fiscal year in October. This year, a final payout of 0.912p brings the total to 6.66p per share, or 8.4% on the current share price, which looks tempting . However, with rates set to stay high and TFIF's portfolio generating an underlying yield of over 10%, it may remain the better choice.
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Rupert is the former deputy digital editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert has written for many UK and international publications including the Motley Fool, Gurufocus and ValueWalk, aimed at a range of readers; from the first timers to experienced high-net-worth individuals. Rupert has also founded and managed several businesses, including the New York-based hedge fund newsletter, Hidden Value Stocks. He has written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
