Investment Trust Awards 2013: High Income Trust
Winner: Acorn Income Fund
Acorn Income Fund wins this award with by far the best returns of the 19 contenders, thereby adding further support to the argument that smaller companies can be exceptionally rewarding.
With assets at the end of March 2013 of only £29 million, it can be described as a tiddler with a stupendous record, since its net asset value (NAV) total returns are not only better over three years than those of any other UK equity-oriented trust, but over five and 10 years too. Its recent success had pushed its shares to a small premium, so its managers seized the chance to increase liquidity and spread costs more widely by an offer for sale in May, which increased its capital by 25%.
Like most high income trusts, Acorn Income has substantial gearing, which has been achieved since 2011 through a reasonably-priced tranche of zero-dividend preference shares (AIFZ). As the costs of the zeros are all allocated to capital, together with 75% of charges, the structure enhances the yield, and it has been kept intact during the fundraising.
The substantial gearing is also a major boost to NAV returns in a rising market but is liable to cut the other way in falling markets. It is therefore to Acorn's credit that it was not a major casualty of the 2008 crash.
This resilience can be partly attributed to fixed income, which accounts for 20 to 30% of assets. It is actively managed by Paul Smith of Premier Fund Management, who aims to maximise income while protecting capital. The emphasis is currently on investment-grade corporate bonds, plus the higher yielding shares of other closed-end investment companies, such as Invesco Leveraged High Yield and Juridica Investments. The yield on the fixed income portfolio is around 6%.
The equity portfolio is lower yielding but should power the growth in income and NAV. It has been managed since launch by John McClure of Unicorn Asset Management. He focuses on companies capitalised at less than £1 billion with strong management, good cash flow and a progressive dividend policy. McClure is keen on companies with overseas earnings, especially industrial earnings, and is very wary of the UK high street.
The trust's broker, Numis Securities, points out that not only have UK smaller companies outperformed the overall UK stockmarket by 3.4% over the past 56 years, but higher-yielding smaller companies have been exceptionally rewarding. The trick is to avoid the value trap - and Acorn's emphasis on strong cash flow should help it do that.
Highly commended: New City High Yield Fund
New City High Yield Fund invests in high-yield fixed-interest securities and has produced positive NAV total returns in each of the past three years. It has also grown its dividend from 3.57p in 2007/08 to a prospective 4.07p for the year to the end of June 2013, to a give a yield of over 6%, paid quarterly.
The trust has a widely diversified portfolio, including some high-yielding convertibles and equities, with useful exposure to floating-rate notes to guard against inflation. Francis is not a fan of sterling, so only half the portfolio is normally in sterling-denominated securities.
Francis, who succeeded Richard Lockwood as lead manager in 2007, agrees that high-yield bonds will come under pressure, but thinks they will be less vulnerable than investment-grade bonds. "Yields have come down a lot but I keep trying to find niche investments that have not seen their spreads tighten as much as others," he says.
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