Hot Topic: The closed-ended alternatives maintaining yield reserves in tough times

Octo Members
28 October 2020
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A panel of trust managers and fund buyers discuss current income opportunities

A short read and longer watch.

Global recession has thrown a spanner in the works for income seekers with stocks either cutting or halting dividend payments entirely, and ultra-low or negative interest rates restricting bond payments.

It makes sense then why many investors are turning their attentions to alternatives, particularly closed-ended vehicles, which have been able to maintain dividends despite the gloom.

In our latest Hot Topic virtual lunch we put some of these trusts to the test, with managers in disparate asset classes given the opportunity to update us on their specialist markets and the income opportunities they present.

Unlike open-ended funds, an advantage of investment companies is the ability to maintain dividend payments in the tougher times though reserves. 

This was a topic that host Tim Cockerill, investment director at Rowan Dartington, was keen to explore, asking each guest how they could maintain payments in the context of the current recession.

Ready with reserves

First up was Thomas McMahon, senior analyst at Kepler Partners, who stressed how the current crisis has highlighted one of the main advantages of investment companies.

He explained: “Within the equity space it’s becoming less relevant the actual reserves the trusts have, given the ability to pay out of capital.

“It means the board has total control over the income pay-outs. Of course, there are potential drawbacks of paying out of capital, but overall it’s a very positive thing. For investors looking for income, the investment trust space is clearly the place to be”.

Carl Harald Janson, lead investment manager on International Biotechnology Trust, highlighted the advantage of paying out of capital reserves in creating dividend from a sector that is not necessarily known for its income payments.

“Most biotech companies are focused on growth and would pay back to investors by buying back their shares with only the largest companies paying a dividend,” he explained.

“Some investors that like to have a dividend can then participate in this sector if we can create a dividend out of capital. A disadvantage with our dividend policy of paying 4% of NAV is that it can go up, but it can also go down as the NAV decreases”.

Bumps in the road

Moving beyond equities, David Conlon, director of Gravis and the lead fund manager for GCP Asset Backed, spoke about a different dividend resource – paying out of the income generated from underlying loans within his portfolio rather than reserves.

“While we do have a reserve created over time, as a debt fund we wouldn’t expect to be creating big capital reserves to pay out,” he explained.

“We’re very much targeting to pay out of the income and the reserves are really there are any bumps in that income along the way. Equally for a debt fund to start paying out of your capital means you lose that ability to reinvest and generate income from that capital”.

An asset class that has understandably endured some tough times during lockdown has been property, with those invested in office and retail spaces having to make allowances for tenants who have faced a big, unexpected drop off in revenues.

Jason Baggaley, manager of Standard Life Investments Property Income Trust Limited, shared his insights into these difficult times and how this is impacting dividend payments in the sector with rental values in retail in particular under continued pressure.

“Each quarter we are collecting around 80% of our rent, which is likely to go up to 85-90% with some deferred into next year and some of our smallest tenants being given a rent-free period,” he said.

“We also have a few that could pay but quite frankly are choosing not to, and I’m hopeful that we will recover that a bit later on”.

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