Shires Income 07 September 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 key aim of Shires Income (SHRS) is to deliver a high level of income alongside growth in capital and income over time, primarily through listed UK equities and preference shares. SHRS is managed by Iain Pyle and Charles Luke, who are supported by a strong UK equities team at abrdn. The managers follow a bottom-up stock selection process that aims to identify high-quality companies which have sound balance sheets and can demonstrate stable and consistent earnings growth.
The Portfolio is segmented, and preference shares account for roughly 22% of the portfolio and are chosen with the aim of delivering a stable and high level of income. The preference share investments are largely funded through the use of gearing. The high level of income generated by the preference shares also allows the managers a degree of flexibility to generate further income and capital growth through equities. Historically, SHRS has been able to take a larger exposure to growth stocks compared to most other income strategies, and it has a large holding in abrdn Smaller Companies Income as well as other individual growth-orientated stocks. The core of the portfolio is in traditional high income and defensive sectors such as energy, financials and utilities. The managers are able to generate further income through an option-writing programme.
SHRS has a Dividend yield of 5.3%, which is amongst the highest in its peer group. It has an OCF of 0.98%, and at the time of writing is trading around par.
SHRS’s differentiated proposition has helped it to deliver a high income, one of its key goals. The trust’s historical yield is 5.3% at the time of writing, amongst the highest in its peer group and materially higher than that of the FTSE All-Share. This is achieved through the allocation of roughly 22% of the portfolio to high-yielding preference shares. The trust has also performed well on a total return basis: since taking over Management of the portfolio in May 2018, Iain and Charles have delivered NAV total returns of 17.7% (to 31/08/2022), putting SHRS ahead of its benchmark index the FTSE UK All-Share, which was up by 13.5%. The security of strong income from preference shares gives the managers flexibility to pursue capital growth and diversification.
SHRS is highly geared; however, the debt is used to invest in the preference shares, which behave more like fixed income than equity, reducing the volatility and equity market beta – although bringing in some duration risk, too. In our view the use of preference shares, option writing and investment in smaller companies makes SHRS a truly differentiated proposition which could appeal to investors seeking a high income with the potential for good capital growth. The small size of the trust could be an issue for professional investors, although we note that strong demand has seen the trust trade close to or above par in recent months – and should this continue, the board should be in a position to grow the trust through share issuance.
- One of the highest yields in the sector, supported by ample reserves
- Robust performance profile with resilient underlying portfolio income
- Differentiated portfolio with preference shares plus access to smaller companies
- With net assets of c. £80m, the trust is too small for some professional investors
- Gearing can exacerbate the downside (as well as enhance the upside)
- Materially higher OCF than peer group average