Stifel warns income-focused trusts not offering enough yield

Trusts are struggling to keep up with interest rates


Stifel has warned that many income-focused investment trusts are not offering enough yield to be attractive investments.

Markets have been radically changed by the sharp rise in interest rates, and analysts at the wealth manager and investment bank have said trusts are struggling to adapt.

The Stifel analysts said that 24 months ago, with interest rates at under 1% and most income-focused investment funds yielding 5% plus, investors were’ quite comfortable’ as the income alone was attractive enough to justify investment. Capital growth on top could be viewed as ‘icing on the cake.’

With money market funds or government bonds now offering similar yield, many investors are shunning income trusts and discounts have widened significantly, Stifel noted.

“There are funds whose attractiveness was a high dividend yield, but this is no longer the case. In our view, this is a significant reason why the sector as a whole is continuing to struggle, with high discounts,” Stifel’s analysts said in the research note.

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“The rapid rise of interest rates has meant that many investment funds that were previously seeing much higher demand due to their attractive dividend yields have fallen out of favour and are languishing on sizeable discounts.

“This is especially the case for funds investing in alternative assets. Given current high risk-free rates, we wonder if funds where income is a core focus of their return profile are offering dividend yields that are high enough relative to other asset classes.”

While this is a bleak picture, there is light at the end of the tunnel. Stifel’s analysts noted that UK interest rates are unlikely to remain at these ‘lofty levels,’ and some lowering will have to occur in 2024 as consumers feel the pressure and inflation falls.

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There are some bright spots within the investment trust universe where high yields that outpace the base rate are on offer.

Stifel pointed to CLO funds and direct lending funds, such as Fair Oaks which offers circa 15%, and CQS New City High Yield offering a circa 10% yield.

There are also fund or sector-specific issues that have led to some funds trading at significant discounts, which has bolstered their dividend yield. D9 Infra is an example of this picked out by Stifel. It is at a -54% discount with an 11.7% yield. 

Taylor Maritime is on a -42% discount, partly due to concerns about weaker growth in China, and is yielding 8.9%. Henderson Far East Income with an 11.4% yield is another.

This comes with risk though, Stifel noted, as capital losses within a trust’s portfolio can wipe out the returns from the yield over time.   

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