TwentyFour Income 10 March 2020
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
To generate attractive risk-adjusted returns, principally through income distributions
TwentyFour Asset Management
Rob Ford; Ben Hayward; Aza Teeuwen; Douglas Charleston; John Lawler;
Association of Investment Companies (AIC) Sector
12 Mo Yield
Dividend Distribution Frequency
Latest Market Capitalisation
Latest Net Gearing (Cum Fair)
Latest Ongoing Charge Ex Perf Fee
(Discount)/Premium (Cum Fair)
Daily Closing Price
TwentyFour Income Fund (TFIF) aims to generate a high annual income for investors of at least 6p on the issue price of 100p, with a total return of 6% to 9% p.a., by investing in the higher-yielding, less liquid parts of the pan-European asset-backed security (ABS) market.
It pays a quarterly dividend, distributing all income each year, and has met its dividend and total-return targets each year since launch in 2013. In fact, the board is committed to holding a continuation vote if TFIF fails to hit its dividend target in any financial year. The current yield is 5.9%.
The investment universe includes mortgage-backed securities, both residential and commercial, collateralised loan obligations and assets backed by consumer and student debt. All are floating rate, meaning they carry minimal interest-rate risk. Major risks are credit risk, regulatory risk and stock-specific risk. We discuss the securitisation structure in the Portfolio section.
TFIF is run by a specialist team at TwentyFour Asset Management. They use their expertise to invest in this relatively esoteric, illiquid asset class and a number of the team members have experience as originators of ABS as well as buyers. This, as well as the closed-ended structure, allows them to take advantage of the inefficiencies in the market and the smaller unrated deals which can fly under the radar of larger investors.
The trust has a five-year average premium of 2.7%. This has allowed the board to grow the trust by issuing shares although, as we discuss in the Discount section, this only happens when the managers believe this will not dilute the quality of the portfolio.
TFIF is an attractive way to earn a high income. The knowledge and experience of the specialist team at TwentyFour mean they are well placed to generate alpha in an esoteric asset class. The highly regulated nature of the market and its over the counter nature means that there are plenty of inefficiencies to exploit, and TFIF’s ability to invest in smaller non-rated deals is an advantage. The management team are aided in this by the closed-ended structure, which allows them to invest in illiquid assets without being concerned about having to trade when they don’t want to.
The key differentiator from conventional high yield is the lack of duration. This means that while ABS offer higher yields than fixed-rate bonds, they don’t offer the negative correlation to equities which the latter have due to their duration (interest exposure). That said, the high-yield asset class tends to be driven more by credit, as ABS are, and so an investment in high-grade bonds for diversification purposes would be a mistake anyway.
Demand for the shares has been strong over the lifetime of the fund. We think it is encouraging that the board held off issuing shares until it felt there were sufficient opportunities to keep the portfolio quality high, and we note the possibility that demand could outstrip high-quality supply again. We think TFIF deserves its premium rating and would regard any discount as a good entry point.
|A highly experienced specialist management team||Asset class is difficult to understand|
|Attractive yields on offer in the asset class||Exposure to credit risk and lack of duration means that there is minimal diversification to equities|
|Management have limited size of portfolio despite demand for TFIF shares, to keep the portfolio quality high||Limited potential for capital growth|