Debt-focused investment trusts are ramping up fundraising plans as investors continue to turn to the sector amid falling yields in traditional markets.
Three trusts specialising in this area have used eight separate occasions in the last 6 months to raise a combined £110m, while another six are awaiting board approval to do so later this year, data from the Association of Investment Companies (AIC) shows.
An intensifying hunt for yield – driven by soaring bond and equity prices pushing down yields in mainstream asset classes – has seen more investors turn to the 23-strong AIC Debt sector.
Funds investing in the likes of asset-backed securities (ABS) - bond-like instruments made up of bundles of loans - have become more sought-after as a result.
One of the more popular specialist vehicles, the £354m TwentyFour Income trust – which operates in the ABS space and currently yields 7.5 per cent – recently announced plans to issue shares at a 2 per cent premium to net asset value (NAV).
Manager Ben Hayward said he thought there was a “significant opportunity to deploy additional funds with favourable returns given prevailing market conditions”.
Ewan Lovett-Turner, director of investment companies research at Numis Securities, noted the TwentyFour fund tended to only issue shares when it believed there was demand in the market, rather than simply capitalising on its share price.
“I think it is key to recognise that TwentyFour have been disciplined in raising capital for TwentyFour Income in the past, as opposed to asset gathering.
“It typically hasn’t regularly issued shares with a view to control the premium, rather it has undertaken a few larger fundraisings when it believes the opportunity is attractive,” Mr Lovett Turner said.
The trust previously issued £31m worth of shares in March, when it also offered investors a chance to exit the fund at close to NAV. The value of the trust has risen 6.9 per cent since.
But with TwentyFour not the only specialist debt trust issuing shares while trading at a premium, some analysts have questioned why investors would consider such products at a time when they are particularly expensive.
Sarah Godfrey, investment companies analyst at Edison, said funds issuing new shares at a time when they are particularly popular should also be ready to buy back stock in less favourable conditions.
“The important thing for investors is that funds that issue new shares at a premium should also be prepared to buy them back at a discount, [albeit] not at any cost.”
But she added: “It is also worth considering that as long as any price falls are only caused by changing investor sentiment, rather than increased default rates or falling rental income from the underlying assets, the high yields on these funds would become even higher if their share prices were to go down.”
For now, the trusts have bucked the wider trend seen in the investment trust space. The average portfolio’s discount to NAV widened to 8.6 per cent at the end of June following the UK’s EU referendum, and though share prices have since rebounded, the typical discount remains wide at 6.9 per cent.
Innes Urquhart, investment trust researcher at Winterflood, said: “It is certainly fair to say that issuance across the investment trust sector has slowed as a result of more difficult market conditions.
“However, a number of funds that are trading at a premium are still issuing shares in response to ongoing demand, including fixed income-focused funds.”
