Page 31 - DIY Investor Magazine | Issue 38

‘AN ENVIRONMENT OF HIGHER INTEREST RATES MAY BE WITH US FOR SOME TIME’
SCREENING FOR YIELD AND POSITIVE TOTAL RETURNS
I have selected some higher yielding bond funds and UK equity income funds that have provided superior long-term total returns. I considered funds that provide a yield in excess of 6% - currently achievable on bank deposits – and a total return in excess of 4.5% per annum, taken over 10 years to smooth out the effects of the pandemic and, the Brexit referendum, which still distort the five-year numbers.
NOT MANY MAKE THE CUT FROM UK EQUITY INCOME
Unsurprisingly, relatively few meet these stringent criteria – a higher bar for income limits capital growth prospects. From the sector, only one trust makes the list – Chelverton UK Dividend Trust. With a market cap of just £34m and a spread of 5.1%, it is not going to be suitable for many, although its yield of 8.0% allows it to trade at a 3.9% premium to NAV.
DEBT – LOANS AND BONDS – THE CHOSEN FEW
From Debt – loans and bonds, three funds make the cut: CQS New City High Yield (NCYF), CVC Income and Growth’s sterling shares (CVCG) and Invesco Bond Income Plus (BIPS).
NCYF invests in predominantly higher-yielding fixed income securities targeting a high level of quarterly income, with some prospect for capital growth. Its veteran manager, Ian “Franco” Francis, aims to build a “sleep at night” portfolio for investors looking for a high level of income that don’t wish to take too much risk.
This has played out in its recent NAV performance (NAV total return is -0.80% over six months), although not reflected in NCYF’s share price (share price total return is -13.97% over the same), hence the move to a discount.
In May last year, Ian said he felt interest rate rises maybe too little, too late, so he positioned the fund’s portfolio accordingly, edging up exposure to equities, which has been to NCYF’s advantage.
‘CVCG HAS EXPERIENCED A PURPLE PATCH’
CVC INCOME AND GROWTH – ALSO CHEAP DESPITE YIELD AND OUTLOOK
CVCG has experienced a purple patch; in its annual report to 31 December 2022, its chairman said current market conditions are inherently attractive for the company. Increased credit spreads, together with increasing risk-free rates on offer by central banks, have driven the yield on the underlying portfolio to levels not seen for many years.
31
Aug 2023
DIY Investor Magazine ·
NCYF has the highest yield at 10.0%, the highest on offer in the
At the end of Feb 2023, the yield to maturity on the underlying sector. Next highest is 8.9% from the soon to be defunct NB
portfolio was 17.3% (€ hedged) / 19.0% (£ hedged), with Global Monthly Income Fund (NBMI), although it’s yield is high
running cash yields of 11.5%/13.1%.
for a reason – its returns are way behind the peer group (2.78%
p.a. vs a median of 4.01%).
NCYF – CHEAP VERSUS HISTORY, DESPITE YIELD AND LONG-TERM PERFORMANCE
NCYF delivered a NAV total return of 4.56% p.a.; a combination of high yield and outperformance means this fund tends to trade at a premium to NAV.
Currently trading at a discount of 1.4% it looks cheap relative to history where it has had a five-year average premium of around 5%; I would not expect this to persist.
Floating rate instruments comprised 83.2% of the portfolio
and with prevailing economic conditions and inflation data suggesting a “higher for longer” expectation for risk free rates, this indicated continual favourable conditions for the fund, as its manager deploys capital to fresh positions at higher all-in rates.
Currently, CVCG offers a yield of 7.7% (quarterly payments) and is available at a discount of 7.6%; like NCYF, cheap relative to its history.