When Schroders BSC Social Impact Trust (LSE: SBSI) launched in December 2020, the returns it was offering – 2% over the consumer price index (CPI) inflation rate over the long term – looked unattractive. But now, with the latest CPI figure at 9% and set to go higher, interest rates still at derisory levels and bond yields not much better, it looks more attractive.
Furthermore, SBSI’s annualised rate of return has been a better than expected 7%. The trust raised £75m at launch, but performance and further issuance has increased assets to £90m. “Our aim is to get to £300m-£500m, which will bring the expense ratio down from 1.06%,” says manager Jeremy Rogers.
Investing in good causes
The trust is a joint venture between Schroders and Big Society Capital, where Rogers is chief investment officer. Big Society Capital was set up ten years ago by Ronald Cohen, the founder of British private-equity firm Apax, and four high-street banks to connect capital with social enterprises, charities and social-purpose organisations. It now has £2.5bn invested, making it a leading player in the £6.4bn social investment market.
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Rogers accepts that mixing investment returns with social purpose is regarded with suspicion by much of the charitable and public sectors, which means “policy risk” – ie, reliance on government revenues implies a vulnerability to policy change. “This means that we are focused on the value that we deliver to government in areas that it doesn’t do well, such as infrastructure, prevention (such as children at risk of dropping out of education) and very local projects,” he says.
The trust invests in a mixture of social enterprise debt (51% of committed capital), high impact housing (40%) and social outcomes contracts (9%). The debt is usually secured and generally carries an interest rate in the range of 3%-5%, while the borrowers are reputable charities, housing associations and community organisations. Returns are modest and not inflation protected, but the risks are low and the portfolio includes a secondary purchase of a fully deployed secured loan fund at a competitive discount.
The housing portfolio is debt-free and includes affordable housing for those on lower incomes, homes to facilitate the transition from temporary or emergency accommodation and homes for those needing a high level of support. Social outcomes projects includes a project in Manchester to support young people at risk of homelessness. In 2021, SBSI supported more than 100 organisations reaching over 150,000 people, at least 90% of whom were from vulnerable or disadvantaged backgrounds. More than 10,000 affordable homes were provided by investees and £36m of near-term savings were generated.
For investors, SBSI offers “diversification and returns that are not correlated to other asset classes, while the majority of assets benefit from inflation”, says Rogers. “The returns for the risk we are taking stack up so the social impact is a bonus.”
The trust is 82% invested and fully committed. The shares are trading above net asset value so further fundraising cannot be far away. This is likely to be supported by the sustainable investment team at Schroders, which manages £6.8bn for charities and private clients. The team’s ownership of around 20% of SBSI is at arm’s length: “our holding is smaller than we would like”, says Lyn Tomlinson of Cazenove, Schroders’ wealth management and charities arm. The trust fulfils a demand from clients for uncorrelated returns while delivering a social impact.
For her, the dividend yield of 1%-2% is not a problem. But if the trust is to meet the target size it may have to be more generous. Dividends may be at the expense of investment, but increased scale and consequent reduced costs will surely make that worthwhile for everyone.
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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