Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Schroder BSC Social Impact. 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.
- Schroder BSC Social Impact (SBSI) has released its financial results for the year ending 30/06/2023. Over the year, the trust saw its NAV increase by 0.8% on a total return basis, which compares to an average NAV total return of -5.8% for the AIC Flexible sector. The FTSE All Share Index, which is a comparator but not a formal benchmark, rose 7.9% in the period.
- The portfolio consists of investments in projects that are designed to provide a meaningful impact on those otherwise underserved. These are private, illiquid assets whose valuations are affected by factors such as development milestones or revenue changes and valued regularly. During the year, the board decided to value the whole portfolio quarterly in future to provide more clarity to investors, rather than semi-annually as before.
- In the period, the key drivers of the NAV performance were valuation gains in the high impact housing portfolio, and capital and income gains in social outcomes contracts, though this was somewhat offset from a write down in one holding.
- The period also saw an increase in net revenue from £1.12m to £1.97m mostly because of higher interest generation from floating rate loans and mature investments. This improved revenue has led to a final dividend of 2.3p per share for the year versus 1.3p in 2022. The managers have increased their future guidance for the dividend, stating the expected yield on the trust should climb from the 1-2% of NAV forecast at inception, to 2-3% going forward.
- The trust’s shares moved from a 1.1% premium to a 10.9% discount in the period. The board has begun a share buyback programme to manage this with c. 711k shares bought back in the period, equivalent to 0.83% of the opening share count.
- Chair Susannah Nicklin commented on the managers achieving the dual goal of delivering both NAV returns and a social impact, saying: “the social impact created by the company’s investments is needed more than ever” and that “the company remains well positioned to lead and benefit from further market growth, as the portfolio manager continues to see an expanding and maturing pipeline of investment”. She also highlighted that the “portfolio has shown resilience within a turbulent market”.
The most recent financial year has been punctuated with a series of tumultuous events, however Schroder BSC Social Impact (SBSI) has shown good resilience with a stable NAV performance which we believe demonstrates the benefits of social investment as an asset class. The managers have also highlighted that the asset class continues to expand, with numerous opportunities in the pipeline for them to consider.
The managers invest in projects that deliver a meaningful impact to the most disadvantaged members of society. This includes co-investments, secondary investments in existing projects and other closed funds in private markets across different asset classes. They categorise the portfolio into committed capital, called the high impact portfolio, and undrawn commitments. Within the high impact portfolio, assets are divided into different maturities. The investment phase holdings which make up nearly a third of the high impact portfolio, contributed the most to returns in the period, of 1.58%. The more mature holdings, which make up 65% of the high impact portfolio, contributed 0.17% to the overall NAV return. The liquidity assets, which is capital invested in best-in-class, liquid ESG funds in order to fund capital commitments in future, contributed 0.16%.
On a project level, the key drivers behind the performance in the period came from the high impact housing portfolio. Two projects completed development, the CBRE Affordable Housing Fund and the Man Community Housing Fund. These completions meant they began producing income which has led to valuation uplifts, contributing 0.58p and 0.48p to NAV. A number of holdings in the social outcomes contracts delivered a combination of both capital gains and income for the trust. With the exception of a write-off in Skills Training UK, the trust’s holdings in the high impact portfolio all contributed positive returns in the period. This shows the performance has come from across the portfolio, rather than any one holding driving performance which we believe is evidence of diversification.
An increase in revenue, in part due to the inflation linkage of the more mature investments, has supported an increase in the dividend for this year. The managers believe this improvement is sustainable and have therefore upgraded the long-term guidance on the dividend. Previously, the trust was expected to deliver a dividend worth 1-2% of NAV, but going forward this figure is expected to be between 2-3%. We have previously described the dividend as a positive, supplementary feature of the investment case, though this change in policy could, in our opinion, increase the attraction for potential investors.
Despite the resilience shown in the portfolio, the trust has fallen to a wide discount in the period, arguably as a result of contagion from higher interest rates. The board has begun to try and narrow this with share buybacks which we believe could be a catalyst for a turnaround. For investors, this could prove a compelling entry point with the discount at or around its widest level since the trust’s inception.
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