Shires Income 04 October 2023

Shires Income (SHRS) owns a portfolio of predominantly UK equities with the aim of providing a high and growing income, alongside the potential for capital growth. The trust is managed by Iain Pyle, supported by Charles Luke, who have the flexibility to hold the likes of preference shares, as well as having a tilt towards small and medium-sized companies to build a portfolio that has a diversified set of income streams to improve the resilience of the dividend. They can also hold up to 10% of the portfolio in overseas companies to help with further diversification. The tilt to smaller companies also offers greater capital growth potential, as well as diversifying the portfolio from the traditional high-income stocks, which helps differentiate the trust from the AIC UK Equity Income peer group (see Portfolio).

The portfolio currently has exposure to smaller companies through an 8.1% holding in abrdn Smaller Companies Income (ASCI), which is SHRS’ largest portfolio holding and represents a 13% ownership stake in ASCI. The board has recently recommended a combination with ASCI, which would see gross assets grow by up to 70% and which should help to lower Charges, as well as improve liquidity in the new vehicle.

Performance in the past year has benefitted from good stock selection in the large-cap equity portfolio, but has suffered from the impact that higher interest rates have had on the preference shares’ portfolio. The smaller companies element of the portfolio has also been a drag on performance and, while the managers believe it may be of benefit when an economic turnaround starts to take effect, they point to the mid-cap area trading on a record dividend yield versus the large-cap index as evidence of investors being paid to wait for this.

SHRS is a highly flexible equity income proposition which offers a lot to investors and really stands out in a broad peer group. The investments in preference shares and the use of gearing help boost the yield and, at the time of writing, this is amongst the highest in the sector at 6.1%. This offers a considerable pick-up over the equity market, as well as bonds or cash. Unlike bonds or cash, however, SHRS also offers exciting dividend and capital growth potential. Thanks to how SHRS funds its high dividend, Iain and Charles can invest in intriguing growth companies across the market-cap spectrum, without compromising the yield on offer. In fact, when we met recently, Iain highlighted that UK small and mid-caps are particularly cheap at the moment, which means they often offer a decent yield too, and he was able to add some good growth companies on cheap valuations in that space after the sell-off in 2022 (see Portfolio). As such, we think the small and mid-cap tilt is particularly attractive at this point in time, from a total return perspective.

The proposal to combine the assets of SHRS with ASCI is positive, in our view. We would expect the larger asset base of the combined entity to offer better liquidity for investors and lead to lower charges. It also provides the managers the opportunity to generate further alpha through smaller company stock selection. Furthermore, the Discount on the trust’s shares is currently wide relative to its historical levels, which we believe adds to the picture of an attractive entry point for long-term investors.