TwentyFour Income Fund - Portfolio and market update
London, April 24
TwentyFour Income Fund Limited ("TFIF" or the "Company")
(aclosed-ended investment company incorporated in Guernsey with registration number 56128)
Portfolio and market update
On 13 April 2023 the Board of TwentyFour Income Fund Limited ("TFIF" or the "Company") announced its highest ever quarterly dividend of 4.46p which resulted in a record full year (to 31 March 2023) dividend total of 9.46p. This is an increase of 2.69p from the 6.77p dividend total paid out in the previous year. The Company's long-term floating rate investment strategy has reaped the benefit of a year of consistent interest rate increases by the Bank of England, which contributed to the significant jump in income and was further supplemented by the investment decisions made by the Portfolio Manager.
In the Company's financial year to 31 March 2022 the average SONIA rate was just 0.14% The average for the 2022/23 financial year jumped to 2.26%; an increase of 2.12%. As the Company's portfolio consists of floating rate securities, all hedged to sterling, this additional 2.12% of income formed the basis of the increased dividend.
The additional income during the financial year has primarily been the result of the Portfolio Manager's reinvestments of bond repayments as well as the investment of share issuance proceeds at higher yields. While the UK may be approaching a peak in rates for this cycle, the 10.1% inflation print for the 12 months to March 2023 was higher than expected and may put pressure on the Bank of England to further increase interest rates, from the current 4.25%. Market expectations are for a further two or three more 0.25% hikes and no cuts in 2023 implying that interest rates will stay elevated for longer.
The 2022/23 financial year was very eventful for the Company, due to a number of factors, starting with the Russian war in Ukraine which led to high commodity prices and double-digit inflation across the UK, Europe and the US. Central banks responded by rapidly increasing key short-term rates and reversing quantitative easing. The next major market event was the UK 'Mini-budget' in September, which resulted in unprecedented selling of various asset classes by UK pension funds, including highly liquid floating rate bonds, to fund margin calls on their gilt and fixed rate books. European Asset Backed Securities ("ABS") and Collateralised Loan Obligations ("CLOs"), as the largest floating rate markets in Europe, provided much of that liquidity for UK pension funds. Selling was concentrated in Investment Grade assets, but High Yield RMBS and CLO spreads also widened significantly. This provided some excellent investment opportunities for TFIF.
Whilst spreads have subsequently retraced around half of their mark-to-market losses, this did mean that 2022 was a disappointing year from a performance point of view and the Company recorded its first negative year since 2015 with the NAV down 8.84%.
January 2023 had a very strong start, following two months of relative stability, as investors looked for high quality floating rate assets. Primary supply in these assets has been underwhelming though with just €23bn so far in 2023, but it has been met with strong demand and most deals were heavily oversubscribed.
Although risk sentiment was, understandably, very weak during the recent banking turmoil, especially after the bankruptcy of two US regional banks and the unprecedented write off of Credit Suisse AT1 bonds, TFIF had no direct bond exposure to any of these banks. If anything, these bank problems emphasised the importance of the bankruptcy remote nature of ABS and CLOs, as these are standalone vehicles that only have exposure to the mortgages and loans that they fund, not to the bank.
In the aftermath of the banking turmoil, European ABS and CLO spreads widened briefly in sympathy with bank debt, but there was very little actual selling and spreads have now retraced around half of that spread widening. High Yield RMBS and CLO spreads are still 50-75bps wider than the tight levels seen in February and around 250-300bps wider than they were before the Russian invasion. The Portfolio Manager believes that the market is now pricing in a moderate recession in the UK and Europe which justifies these wider spreads.
The Portfolio Manager expects to see some level of fundamental performance deterioration in the next 12 months. That said, mortgage arrears and leverage loan defaults are currently still at historically low levels and borrowers have been able to refinance for longer terms in recent years. Drivers of performance such as unemployment and house price declines are expected to remain significantly lower than during previous recessions, and well within levels for which the bonds in the portfolio have been stress tested. The Portfolio Manager's analysis suggests that the types of ABS structures held by the Company have sufficient structural protection to deal with much greater economic stress than is expected.
The Portfolio Management team see the best value in BBB, BB and B secured assets (primarily mortgages and senior secured corporate loans) from Western European countries and have less conviction on unsecured consumer assets and Commercial Real Estate mortgage risk. Their expectation is that volatility will persist in the medium term, so they have built more flexibility into the asset portfolio and reduced gearing from the Q4 high of 10.6% to 5.4% on 31 March 2023.
Absent further negative surprises, the Portfolio Manager anticipates that credit spreads could tighten further if the current positive supply-demand situation persists. Since the beginning of 2023 the NAV of the Company has increased by 6.78%, and as of 31 March 2023 the Purchase/Book Income is 11.27%, the highest income since inception of the Company. On a mark-to-market basis the current yield is 14.96%.
For further information, please contact:
Numis Securities Limited:
Hugh Jonathan +44 (0)20 7260 1000
TwentyFour Income Fund Limited:
John Magrath +44 (0)20 7015 8900