Shires Income 23 February 2022
This is a non-independent marketing communication commissioned by abrdn. 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.
The objective of Shires Income (SHRS) is to provide a high level of income and the potential for capital and dividend growth, primarily via investment in UK stocks and preference shares. Iain Pyle and Charles Luke have managed SHRS since May 2018, following the quality focussed process and philosophy of the 15 strong UK equities team at abrdn (one of the best-resourced UK equity teams in the industry).
There are several moving parts to the portfolio. About a third of the Portfolio is held in preference shares, bond-like securities with a high yield that is enhanced by the use of Gearing to fund the positions. The income generated by the preference shares provides Iain and Charles with leeway to buy lower yielding, growth-orientated stocks, alongside core dividend paying stocks. This includes a holding in abrdn Smaller Companies Income (ASCIT), which makes up around one tenth of the portfolio (abrdn do not double charge on this holding). The direct equities sleeve is concentrated, highly active, and balanced between growth and value stocks, which has resulted in a stable pattern of relative returns in the severe style rotations experienced since the pandemic outbreak (see the Performance section for further details).
As we discuss in the Dividend section, the current historic yield of c. 5.2% (as at 14/02/2022) is at present one of the highest within the AIC UK Equity Income sector. The diversified income streams resulted in the earnings per share being resilient in the pandemic period, dropping only 5% over the last financial year versus the 40% drop in dividends paid in the wider UK market.
Currently the UK market yields 3.2%, so with a yield of 4.9% SHRS offers income investors a chunky premium. This attractive yield is achieved without sacrificing growth potential, the holding in ASCIT and growth stocks providing opportunities for capital gains. Additionally, the Dividend has proven robust during the pandemic, the resilience of underlying portfolio income and ample revenue reserves providing assurance that SHRS will be able to continue delivering market beating dividends.
The high yielding preference shares mean there is no need to reach for yield within the equity portfolio, by balancing lower yielding growth stocks with higher dividend paying value stocks. Iain and Charles have managed to provide a smoother ride for their investors versus the booms and busts of some dedicated value or growth strategies (see the Performance section). Given the uncertainty in inflation and interest rate outlooks there is, in our view, a strong argument for this balanced, prudent approach, especially when reliable income is the priority. The overweight to banks and exposure to energy & mining could provide protection if inflation persists or interest rates rise.
One downside of SHRS is that with net assets of only c. £88m fixed costs are impactful, hence SHRS is a relatively expensive trust to own. On the other hand, the preference shares allocation would be difficult to substantially scale up, so the small size provides a competitive advantage in this regard (if SHRS grew it is likely other hybrid instruments would be used). The small market cap also leads to some discount volatility, as noted in the Discount section.
|One of the highest yields in the sector, supported by ample reserves
|With net assets of c. £88m, the trust is potentially below minimum investable size for some professional wealth management firms
|Robust performance profile with resilient underlying portfolio income
|Gearing can exacerbate the downside (as well as enhance the upside)
|Differentiated portfolio with preference shares plus access to smaller companies
|Materially higher OCF than peer group average