Honeycomb Investment Trust

HONY aims for an 8% yield from asset-backed lending and has so far weathered the pandemic well…

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Honeycomb Investment Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Honeycomb Investment Trust

Honeycomb Investment Trust (HONY) aims to generate a dividend yield of 8%, paid quarterly, by lending money to innovative non-bank lenders, secured against their loan books. The yield target has been met or exceeded every quarter since launch in 2015, and has continued to be paid through the pandemic (see the Dividend section).

HONY is managed by Pollen Street Capital (PSC), an investment manager which specialises in non-traditional finance. PSC uses its extensive experience in the space as well as bespoke IT systems to help identify and monitor the best of the non-bank lenders which have proliferated in recent years.

HONY’s model is very distinct from platform lending (see the Portfolio section), and involves senior lending to non-bank lenders secured on their portfolio of loans rather than directly acquiring loans from lenders. PSC has continuous oversight of each borrower’s entire book and tracks it on a month-by-month basis, altering how much HONY lends and therefore how much its investee can lend. Furthermore the underlying loans are often very short-dated, meaning that as the economic outlook darkens the lenders can run down their books and return cash. Thanks to these features, HONY has yet to register a negative quarterly return, as we discuss in the Performance section.

In order to generate such a high yield, HONY employs gearing, aiming for 50% to 75% on an NAV basis. Facilities are flexible, allowing for rapid expansion or contraction of the balance sheet.

HONY’s discount has narrowed in recent months as risk appetite has returned to the markets, and it is 4.5% at the time of writing.

Kepler View

The performance of HONY’s portfolio since launch has been extremely impressive. The high yield has been consistently generated and NAV maintained, even through the current pandemic. Naturally, investors are likely to be wary of the immediate future. However, we think the indications from the portfolio are good so far. Although some of the underlying loans went into forbearance in Q2, the vast majority are performing once more and importantly the structure of the loans provides significant protection.

We think the counter-intuitively defensive characteristics of the asset class might be missed by some. As much of the underlying portfolio is extremely short-dated, lenders are able to stop new lending and build up cash quickly. This, and the flexible gearing facilities, means the managers have the wherewithal to expand the portfolio once more. They report the pipeline of potential investments already looks promising, as projects mothballed prior to the pandemic get under way.

We recognise a second round of lockdowns creates uncertainty in the immediate future, and this complexity is another reason the discount might persist. However, the overhang of stock held by Woodford and Barnett has long since been cleared, and so should no longer be an issue. HONY offers equity-like returns in income, should it navigate the coming six months as it has the past six.

BULL BEAR
An extremely high yield target which has so far consistently been met
Fees are high, with a management fee charged on GAV and a performance fee
Defensive elements of the strategy have led to strong portfolio performance in the crisis so far
Gearing is high, raising the sensitivity of NAV to valuation movements
Specialist team with extensive experience and deep resources, allowing the trust to operate in a niche area
Opportunity set is complicated, information on the portfolio hard to find and the trust might be considered difficult to understand
Thomas McMahon
Thomas is a senior investment trust analyst and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.

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This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

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