Early last year we launched the Ravenscroft Higher Income Fund to allow investors to benefit from the significant value we saw in income assets following the turmoil in bond markets during 2022. We designed the Fund to capitalise on more than a decade’s worth of experience running the Ravenscroft Global Income Fund, combined with a broader mandate to help investors access the best income streams from the widest range of assets. As we arrive at the fund’s first birthday, we wanted to thank everyone who has entrusted us with their money and to report back on how the first year has gone.
The fund has returned 8.8% (including income and capital gains1) which we are very pleased with and, and, more importantly, we hope you, our clients, are pleased with as well. This reflects what we had hoped to see when we launched the fund; that the higher levels of income on offer, as well as many bonds trading under their face value and hence offering capital gains, would combine to provide both income and growth. We are on track to have delivered our goal of around £6.002 of income by the end of June however this will have taken us a little longer than we had originally hoped, 14 months as opposed to 12. The reason for this is that the fund grew in size rapidly towards the end of last year and due to a quirk of the fund’s accounting this had the effect of converting some income into a capital gain. This therefore reduced the 2023 Q4 dividend to £1.10 from the fund’s average of around £1.50 per quarter. For the avoidance of doubt, there was no negative effect to the overall return received by investors. It was purely a change to how returns were delivered. Clearly meeting or surpassing the income target is our goal and we have therefore taken the proactive step of implementing additional processes to manage future flows. The good news is that this shortfall in income has pleasingly been more than offset by £3.99 of capital growth leading to the fund’s strong overall return in the first 12 months.
Within the fund, we only made one change during the year as most of the underlying assets behaved as we had expected. This change was to introduce an interesting new fund, Royal London’s Sterling Extra Yield Bond Fund, in exchange for a reduction in the two more volatile investment trust positions: The Renewables Infrastructure Group (“TRIG”) and Sequioa Economic Infrastructure Income (“SEQI”). This new addition increases the diversity in the portfolio and reduces the influence of the short-term volatility that these trusts can display on the fund overall. We have one more idea that is currently in the due diligence stages that might allow us to increase diversification within the equity component of the fund as well. If this comes to fruition, it will be added to the portfolio in the coming months. Overall, however, we are pleased that we have had to make relatively few changes to the portfolio so far as it speaks to the majority of the portfolio performing well.
At an underlying investment level, we have had a number of very strong performers over the year. Notably Pacific EM Equity Income Opportunities Fund. This is an active global emerging market value fund and had some strong stock-specific results helping it return 28.5% over the year. The bond side also did well with Titan Hybrid Capital Bond Fund benefiting from latent value in the portfolio to return 16.6%. The GAM Star Cat Bond Fund also did well, returning 14.9% on the back of very strong income generation. The key laggard was TRIG which, after suffering along with the whole of the UK investment trust industry, fell -10.9% over the year. The investment trust sector, especially renewable energy related trusts, has been hit with large structural institutional sellers, driven by regulation and industry consolidation, at the same time as higher cash interest rates have eroded demand from retail investors and challenged some business models. Throughout the year, we have had multiple meetings with the TRIG team, which have been productive, although we believe a short-term recovery in the share price remains contingent on lower interest rates. TRIG has recently sold several of their underlying projects and these sales imply that the current share price is conservatively valuing TRIG’s assets. Based on this we believe we have a cushion against material further downside and the appealing income of 7.4% p.a. looks largely secure. As such we remain happy with the position at the new smaller weighting within the Higher Income portfolio.
Looking forward, we remain very positive regarding the outlook for the Higher Income Fund and its underlying investments. Equity valuations look reasonable with pockets of good value. On the bond side, we still have attractive bond yields with the chance of future gains. Given pricing today therefore, we should be able to again produce an income of around 6%, give or take, with the chance of some modest capital growth over the next few years if market conditions are steady.
So, once again we would like to say thanks again to our investors for their support and we will continue to keep you informed regarding the Fund’s progress.
Regards,
Bob Tannahill
On behalf of the Ravenscroft investment management team
- All returns are quoted in Sterling total return terms (including income and capital gains/losses) and run for the period 19/05/2023 to 19/05/2024 unless otherwise stated.
- Dividends and capital value changes are quoted for the O distribution class. The £5.60 figure includes an estimate of the 2024 Q2 dividend, £1.50, which is yet to be confirmed. Quoted share price is as at 19/05/2024. (GG00BM8NFK98)
