However, one high yielding trust which doesn’t fit into that category, according to Cantor Fitzgerald’s Monica Tepes, is the ICG Longbow Senior Secured UK Property Debt Investment Trust.Tepes, who is an investment company research analyst at the broker, says the closed-ended fund is a good option for investors who are looking for a safe income stream as, though it won’t deliver the strongest capital growth, it offers a decent dividend through exposure to senior secured debt.
“ICG Longbow Senior Secured UK Property Debt, in our view, is a transparent and simple proposition that can deliver a predictable and secure high yield,” Tepes (pictured) said.
“A dividend of 6p is targeted from 10 fixed-interest loans, first charge secured on UK commercial property, with no gearing.”
“I only started looking at it recently, but I found it to be a really interesting trust. For a low risk investor who wants a predictable yield, I think it is very attractive because you are taking income from property, but with a much lower level of risk.”
Tepes describes the trust as a simple and transparent portfolio. It is made up of 10 loans which all carry fixed rates of interest and prepayment protections. Its borrowers all tend to be institutional or high net-worth real estate investors.
Tepes says ICG Longbow, which is co-managed by Martin Wheeler, Kevin Cooper and Trever Homes, is a diversified portfolio, lending to corporates around the country and into different areas of the property market, such as student accommodation, hotels, retail space and industrial sites.
She added: “Furthermore, the trust does not utilise gearing, making for a transparent and relatively simple investment proposition.”
The trust currently yields 5.8 per cent – which is due to its current 4.3 per cent premium to NAV – and while Tepes concedes that level of yield may seem risky, she points out that the quality of the trust’s loans are high.
That is because, according to the analyst, buyers within the UK commercial property market are growing increasingly impatient of having to wait for loans from traditional lenders and are therefore willing to pay a higher rate of interest to the likes of ICG Longbow for the speed of transaction they offer.
“The trust targets quarterly dividends of 1.5p – 6p per annum – and a portfolio IRR [internal rate of return] of 8 per cent.”
“The trust’s returns comprise primarily the income earned from the loans: the interest payments (currently 7.4 per cent) and the loan arrangement and exit fees paid by the borrowers, which typically amount to around 2 per cent of the value of the loan.”
“Taking these into account, the projected total return of the portfolio is 8.4 per cent.”
“The high interest carried by the loans does not come at the expense of quality, we believe: they all have first ranking fixed charges, including in respect of any receivable income, no subordinated debt, strong covenants and an average LTV [loan to value] of 60.4 per cent.”
“The managers explain this by highlighting that their typical borrower is looking for a speedy transaction, which is not generally a feature of traditional lenders.”
ICG Longbow UK Commercial Property Senior Secured Debt came to market in February 2013, raising £100m at its initial public offering.
According to FE Analytics, the closed-ended fund has returned 2.71 per cent in share price terms over that time, which has been largely driven by discount volatility as NAV returns have been minimal.
Performance of trust since Feb 2013
Source: FE Analytics
Unlike traditional equity investment trusts, which are valued using the share prices of the underlying stocks they hold, ICG Longbow’s NAV is calculated in a different way.
When asked how the trust is valued, Tepes said: “Essentially, a loan would need to go into default and for them to believe they won't be able to recover the outstanding amount for it to be written down.”
“So there is no ‘mark to market’ which would make the NAV go up if interest rates went down or conversely NAV decline if interest rates went up. So the valuation reflects the value the managers expect to get back when the loans are repaid.”
Tepes points out that though it is a fixed income trust, because of the way it is valued and as the average length of loans is just four years, it shouldn’t be overly affected when the Bank of England does eventually decide to raise interest rates.
Unless, however, were the central bank were to hike unexpectedly to around 4 per cent.
While the trust offers a decent yield, this means it is trading on a 4.3 per cent premium to NAV, which may be a turn off for some investors.
Tepes says investors could turn to closed-ended funds within the IT Property sector.
But while they offer similar yields and are on similar premiums, she says they tend to carry more risk as they are equity trusts and are reliant on occupational rates.
Source: FE Analytics
“It is trading on a premium and if it were on a discount it would be better, but you have to put into the context of what else is out there? There aren’t many other trusts like this available for investors as you get that security of capital and an attractive yield.”
The ICG Longbow UK Commercial Property Senior Secured Debt trust has traded on a 9 per cent premium at points over the past 12 months, according to the AIC.
The closed-ended fund has ongoing charges of 1.5 per cent.
