Jonathan Maxwell, CEO of the Investment Manager, SDCL, said:
“SEEIT’s active management of the assets in its portfolio has delivered substantial income to the Company, in line with previous years. This stable performance ensures that we can cover the target dividend of 6.32p which represents a double-digit yield for investors at the current share price.
“We are confident that the portfolio is well positioned to maintain its performance and secure opportunities that are accretive to NAV. As the market challenges faced by SEEIT and its peers continue, our priority remains reducing the current discount to NAV. We are highly focused on preserving value and upside for shareholders, while at the same time considering ways to cut costs and find capital efficiencies at project and company level.”
Brett Owens, Chief Investment Strategist Updated: March 28, 2025
Interest rates are trending lower, which means real estate investment trusts (REITs) are rallying. These “bond proxies” tend to move alongside bonds and opposite rates.
If you believe the economy is likely to continue slowing, then select REITs are intriguing income plays here. Especially those yielding between 7.2% and 13.2%, which we’ll discuss shortly.
As I’ve been saying for a few weeks, the real story is in longer rates, namely the 10-year Treasury.
To recap, Treasury Secretary Scott Bessent has been upfront that he and President Trump are focused on the 10-year Treasury rate (the “long” end of the yield curve), and not the Fed benchmark (the “short” end).
That’s generally a boon for bonds and bond proxies (like preferred stocks, as well as certain equity sectors such as utilities). Naturally, lower 10-year yields will make REITs’ generous yields even more attractive, too, but in general, REITs have thrived much more often than not during periods of falling Treasury rates.
For example, let’s consider the 2010 to 2016 period in which the 10-year Treasury eased lower and lower:
REITs Rallied From 2010 to 2016
Of course we’re not looking to buy a pedestrian ETF. We are here for the dividends, the bigger the better! Our mandate is income so let’s review five REITs paying up to 13.2%.
Rayonier (RYN) Dividend Yield: 10.6%
This first name rarely shows up on lists of high-yield REITs, and for good reason! Its yield is artificially inflated right now.
Florida-based Rayonier (RYN) is a specialty REIT that boasts a little more than 2.5 million acres of timber-growing land across the U.S. South, U.S. Pacific Northwest and New Zealand. That land is used in forestry products such as paper, sure, but also a lot more: hunting, recreation, beekeeping, mineral exploration, and in some cases, even community development.
Some of those acres are going away. The company in March announced it would sell its entire 77% interest in a New Zealand joint venture for $710 million. That JV accounts for 70% of its total NZ acreage and all of its productive acreage.
This is just the latest sale in a massive “right-sizing” at Rayonier, started in 2023, meant to streamline operations and financial reporting, improve resource allocation and, in the case of the NZ disposition, reduce exposure to log export markets and focus on its lucrative U.S. acreage. Rayonier originally targeted $1 billion in asset sales, but once the NZ transaction closes, its total dispositions will be closer to $1.5 billion.
Why am I focusing on all this M&A? Well, for one, RYN is making itself more attractive operationally while also raising funds to reduce its leverage.
But it also speaks to Rayonier’s payout potential.
Rayonier pays a merely so-so regular dividend that yields 4%. But in January 2025, the company paid out a massive special dividend of $1.80 per share (+6.6% in additional yield)—after making $495 million in dispositions during the fourth quarter. That follows a smaller 20-cent special dividend in January 2024 in the wake of a smaller timberland sale.
In other words, it’s possible that another big windfall might be on the way for shareholders after its $710 million New Zealand asset dump.
Longer-term, a healthier operational base and a healthier balance sheet could free Rayonier up to improve its regular distribution. The chart shows that the regular dividend is declining by 5% for the March payment, but it’s not really a cut—RYN paid out 25% of its special dividend in cash, and 75% in new shares, so the lower payment is just an adjustment to account for 7 million-plus new shares issued.
Could We See 3 Special Dividends in 2 Years?
Armada Hoffler Properties (AHH) Dividend Yield: 7.2%
Armada Hoffler Properties (AHH) is a diversified REIT with 71 buildings. It gets the majority of its annualized base rent (ABR) from mixed-use office buildings (57%), with another quarter coming from mixed-use multifamily and the rest from mixed-use retail.
The last time I looked at Armada, in September 2024, it was yielding just a hair under 7%. Since then, the yield has ticked up to 7.2%. Unfortunately this is a case of a double dividend raise the “wrong way”—via a falling share price that sniffed out a payout cut!
Falling Price Sniffs Out Lower Payout
Armada looked like one of many real estate COVID bounceback stories. Occupancy was in the mid-90s. Same-store cash net operating income (NOI) was improving. It had recouped its dividend to near pre-COVID levels. Dividend coverage from adjusted funds from operations (AFFO) was a little tight but not sending out warning flares yet.
Still, I said AHH wasn’t yet an ideal situation.
In February, Armada delivered lousy guidance for 2025, expecting normalized FFO to decline anywhere between 15% and 22%. And in March, the company hacked its quarterly dividend by 32%, to 14 cents per share.
Armada had been working to improve its balance sheet, including reducing its exposure to variable-rate debt, and its guidance implied double-digit savings on general and administrative expenses. But tight coverage clearly was going to become undercoverage, so Armada pulled the trigger, with management noting the dividend would now be fully covered by “property income without any consideration of fee income.”
It’s possible AHH represents a healthier 7% yield today than it was last year, and because shares have fallen off a cliff, they trade at a cheaper 10 times starkly reduced AFFO estimates. But it’s a nonstarter without seeing more operational improvement first.
Brandywine Realty Trust (BDN) is another hybrid REIT with a heavy office bent, but large (and increasing) focus on residential and life sciences buildings. It’s also very acutely focused, with its 64 properties located in either greater Philadelphia or Austin, Texas.
I looked at it just a few months ago, it was trading at just 6 times FFO estimates. It’s trading at 7x now—but not because shares have improved. The company delivered a shoddy fourth-quarter report and disappointing guidance for 2025, and that has sent the stock back to the mat in 2025.
Brandywine’s wholly owned portfolio is performing decently. The problem is with its joint ventures. BDN is experiencing a heavy drag from its development projects. Some of its construction has been funded by expensive capital, and its arrangements with partners require Brandywine to recognize full interest and other costs until the projects become profitable. Estimates for JV FFO are tumbling as a result, and investors are responding by unloading shares.
Despite a massive 13% yield, we don’t want what they’re selling.
BDN’s Dividend Hasn’t Gone Anywhere. Its Stock Price Is Jealous.
Easterly Government Properties (DEA) Dividend Yield: 10.1%
Federal government housing, anyone?
Didn’t think so.
Easterly Government Properties (DEA) is an office REIT on the exact wrong side of DOGE. This REIT owns 100 properties that it leases out to U.S. government agencies such as Veterans Affairs, the FBI, and the Drug Enforcement Administration, among others. And its buildings go beyond offices, spanning outpatient facilities, warehouses, courthouses, labs, even built-to-purpose properties.
DOGE, however—which wants to boot federal employees by the tens of thousands and reduce real estate footprint—is problematic for DEA. Alas, there are a couple of hopeful points for longs.
For one, Easterly has offices in more than two dozen states, but it doesn’t own any property in Washington, D.C., where Elon Musk appears to be concentrating his focus for now.
But more importantly (and more of a complication): Much as it might want to, DOGE can’t just rip up real estate contracts. Instead, many real estate contracts the government does want to get rid of will likely just have to run their course—and in some cases, they might have a change of heart by then.
“Every year we give ideas to the U.S. government on how to improve a facility,” CEO Darrell Cratetold Institutional Investor. “With DOGE, people all of a sudden are receptive to ideas.”
While Easterly might defy the odds and not die by DOGE’s sword, this is a company that already had a longstanding problem consistently growing FFO. Hard pass on this double-digit divvie.
Gladstone Commercial (GOOD) Dividend Yield: 8.1%
Gladstone Commercial (GOOD) isn’t a spectacular prospect right this second. Acquisitions are few and far between, and growth has flatlined, with few immediate catalysts on deck.
But it might just be building itself into a potential long-term winner.
If “Gladstone” sounds familiar, that’s because GOOD is part of the Gladstone family of REITs and business development companies (BDCs), which also Gladstone Land (LAND) and Gladstone Investment (GAIN) and Gladstone Capital (GLAD).
Gladstone Commercial owns 135 single-tenant and anchored multi-tenant net-leased properties, leased out to 106 tenants across 27 states.
The biggest strike against Gladstone has long been its office properties. Weakness in offices forced GOOD to reduce its payout by 20% in 2023, and even today, office occupancy of 94.3% pales compared to its industrial occupancy of 99.4%.
Fortunately, Gladstone has been reducing that office exposure, which is now down to 33% of annualized straight-line base rent. Most of the rest is industrial, though it does own a little bit of retail and medical office real estate. I’d like to see it pare down even more of its office portfolio, but GOOD is being constrained by a weak market for sellers.
An Increasingly Diversified Portfolio: That’s GOOD!
In the meantime, Gladstone has been reducing leverage and producing results that have largely been in line with expectations.
Which, whilst it’s always a good time to be a dividend hunter, some times are better than other times.
The ‘unpleasant conclusion’ given by five key indicators
27 March 2025
AJ Bell’s Russ Mould explains what the outlook for the global economy is, after reviewing several important measures.
By Gary Jackson,
Head of editorial, FE fundinfo
Investors should keep a close eye on indicators such as transport stocks, small-caps and copper in order to gauge the possible direction of the economy and financial markets, according to AJ Bell.
The second presidency of Donald Trump in the US, coming after more than a decade of unorthodox monetary policy, failed attempts at austerity, ballooned government debt and the fallout of the Covid pandemic, means investors are split on whether the globe is headed into inflation, deflation or stagflation.
Russ Mould, investment director at AJ Bell, said: “All three of those potential endgames would require a different portfolio allocation, at least if history is any guide, with inflation perhaps leaning toward select equities and ‘real’ assets such as commodities, deflation favouring cash and bonds and stagflation, the worst of all worlds, putting gold and commodities (again) in the driving seat.”
To help investors guess what might be coming, AJ Bell offers up five indicators that can give a steer on what is happening in the global economy.
Transport stocks
Proponents of Dow Theory – which is a form of technical analysis derived from Wall Street Journal editorials of Charles H. Dow – watch transportation stocks as a bellwether of the wider economy.
Because a strong economy means there’s strong demand for goods, products need to be shipped from manufacturers to retailers and wholesalers to replenish shelves. Therefore, strong performance from freight, truck, airline and shipping companies suggests the economy is doing well.
Of course, the opposite also stands. If transportation companies are struggling, then it suggests diminishing economic activity.
Performance of Dow Jones Industrials and Dow Jones Transportation indices over 1yr
Source: FE Analytics
“It will therefore be of some concern to bulls of US stocks to see the Dow Jones Transport index slide by 18% from last November’s high, to leave it on the fringes of bear market territory,” Mould said.
This could indicate that the US is moving towards slowdown or recession.
Small-caps
The small-cap Russell 2000 index initially rallied after Trump won the 2024 election but, like the transportation index, is currently pointing to a slowdown or recession.
UK small-caps paint a similar picture.
Performance of US and UK small-caps over 1yr
Source: FE Analytics
“Small-cap companies tend to be less well-resourced than their multi-national, mega-cap peers, and are often more dependent upon their domestic economy as a result,” Mould said.
“As such, they can be seen as a guide to trends in local output, so the slide in market minnows on both sides of the Atlantic could be seen as a harbinger of an economic slowdown.”
Semiconductor stocks
The AJ Bell investment director also argued that silicon chip and semiconductor production equipment (SPE) manufacturers can also be a useful economic indicator. Silicon chips are widely used in electronic devices ranging from smartphones to cars to servers, meaning they are in demand from every part of the economy.
Although the industry’s annual sales are expected to reach a new all-time high of almost $700bn this year, it’s worth remembering that it is cyclical. Semiconductor stocks often experience booms driven by spikes in demand from new applications followed by busts, as output slows because of a wider economic slowdown.
Performance of Philadelphia Semiconductor index over 1yr
Source: FE Analytics
“The Philadelphia Semiconductor index, known as the SOX, consists of 30 major silicon chip and SPE specialists,” Mould said.
“It may be a source of discomfort to bulls to see the benchmark sit below where it lay a year ago, for all of the hoopla surrounding AI and the SOX has dropped to more than a fifth below last summer’s peak – bear market territory.”
Copper
Copper is used in many parts of the economy, from white goods to cars to construction. Because of this, it is often seen as a good guide to global economic health – so much so that its nickname is ‘Doctor Copper’.
Copper prices fell in 2024 on the back of China’s real estate bust but have bounced back this year. AJ Bell said the rally could be bolstered by more monetary and fiscal stimulus from Beijing as well as Germany’s proposals for debt-funded growth.
Copper over 1yr
Source: FE Analytics
However, part of the rise in demand could be copper traders buying up supplies in case the metal is subject to US tariffs. It could also be investors buying up real assets to protect against inflation or stagflation.
As such, Mould thinks the copper price could be indicating growth or higher inflation from here.
Government bonds
Interest rates have been trending downwards across the globe, with 193 rate cuts from central banks in 2024 and another 31 so far this year. However, 10-year government bond yields have not moved lower in anticipation of more to come, as might be expected.
This dynamic could be explained by worries over increased supply of government debt and concerns over the potentially inflationary impact of the US’s tariffs, according to Mould.
AJ Bell said bond yields seem to be pointing to inflation or stagflation.
10yr government bond yields
Source: LSEG Refinitiv data
Mould finished: “The unpleasant conclusion from these five trends is that the global outlook is deviating from the one which markets priced in so enthusiastically in 2024, namely a return to the low growth, low inflation, low interest rate world that had worked so well for bonds and long-duration assets such as technology stocks during the 2010s and early 2020s.”
He offered one final indicator that investors might want to keep an eye on: “If the environment really has changed – and we are now in an era of inflation or stagflation and not the low-growth, low-rate, low-inflation murk that dominated in the wake of the financial crisis – then it could just show up in how the CRB Commodities benchmark does relative to the S&P 500. Such a dramatic change may just favour commodities, at least if the experiences of the 1970s are any guide.”
A case study of Trusts added to the Watch List, starting with Property shares as that is where the market’s interest is at the moment. Not a recommendation to buy just posted in alphabetical order for you to DYOR.
As always timing and then time in if you want to GRS.
AEW UK REIT plc
NAV Update and Dividend Declaration
AEW UK REIT plc (LSE: AEWU) (“AEWU” or the “Company”), which directly owns a value-focused, diversified portfolio of 32 UK commercial property assets, announces its unaudited Net Asset Value (“NAV”) at 31 December 2024 and interim dividend for the three-month period ending 31 December 2024.
Highlights
· NAV of £174.30 million or 110.02 pence per share at 31 December 2024 (30 September 2024: £172.76 million or 109.05 pence per share).
· NAV total return of 2.73% for the quarter (30 September 2024 quarter: 4.85%).
· 1.22% like-for-like valuation increase for the quarter (30 September 2024 quarter: 2.94% increase).
· EPRA earnings per share (“EPRA EPS”) for the quarter of 2.35 pence (30 September 2024 quarter: 2.68 pence).
· Interim dividend of 2.00 pence per share for the three months ended 31 December 2024, paid for 37 consecutive quarters and in line with the targeted annual dividend of 8.00 pence per share, representing a dividend yield of 7.9%.
· Loan to GAV ratio at the quarter end was 25.03% (30 September 2024: 25.04%). Significant headroom on all loan covenants.
· Company continues to benefit from a low fixed cost of debt of 2.959% until May 2027.
· Disposal of Units 1-11 of Central Six Retail Park, Coventry, for £26,250,000, reflecting a net initial yield of 7.49% and a capital value of £213 per sq. ft, representing a 60% premium to the purchase price.
Henry Butt, Assistant Portfolio Manager, AEW UK REIT, commented:
“We are pleased with the growth in NAV per share and the dividend being covered by EPRA earnings for a third consecutive quarter, which continues to evidence the earnings accretion produced by the Company’s programme of ongoing asset management initiatives through income generation and void cost mitigation. Rental income has been buoyed by the billing of annual turnover rent for Next in Bromley, and Poundland in Coventry, while the Company’s ‘bottom line’ continues to benefit from a stabilised portfolio and tenant base.
The part sale of Central Six Retail Park, Coventry, at a very healthy premium of 60% to the purchase price, means the Company has capital to deploy on a pipeline of attractive investment opportunities, a significant amount of which is already under offer.
The Company has committed to pay its quarterly dividend of 2.00 pence per share, which has now been paid for 37 consecutive quarters.”
20/01/25
AEW UK REIT plc
Acquisition of high-yielding asset in affluent town
AEW UK REIT plc (LSE: AEWU) (“AEWU” or the “Company”) is pleased to announce that it has completed the purchase of a freehold, high-street retail asset at 13/13A, 114-119, 121-123 Bancroft and 3-4 Portmill Lane (the “Property”) in the affluent commuter town of Hitchin for £10,000,000. The purchase price reflects an attractive net initial yield of 8.31% and a capital value of £213 per sq. ft.
The Property, located in the centre of Hitchin’s high-street retail pitch, provides 46,905 sq. ft. of space across 12 retail units and a standalone office building, as well as car parking and service yards. The retail elements of the Property are fully let to a strong line up of 12 tenants, with recent leasing activity evidencing the strength of the location. Major tenants include Marks & Spencer plc, Next Holdings Ltd, Vodafone Ltd, The White Company and Holland & Barrett. The vacant office element to the rear provides various asset management options in the short-to-medium term, including new lettings or residential conversion.
Hitchin is a busy market town located in Hertfordshire with an affluent catchment. The town is served by rail connections to both London and Cambridge, underpinning its attractiveness as a commuter location.
The acquisition demonstrates the Company’s swift and ongoing redeployment of sale proceeds from the recent disposal of Central Six Retail Park in Coventry, with a significant amount of the remaining proceeds also under exclusive negotiation. In considering the re-deployment of the proceeds from Central Six, the Company has identified an attractive pipeline of investments available for purchase in the current market and is considering available growth opportunities for further earnings accretive acquisitions.”
Commenting on the purchase, Laura Elkin, Portfolio Manager of AEW UK REIT said: “We are delighted to have purchased this well-located asset at a day one yield that will enhance the Company’s earnings. Completing this acquisition marks a significant milestone in our strategy to reinvest capital generated from the recent successful sale of our retail park in Coventry into higher-yielding and value-add assets. We continue to actively monitor a pipeline of attractive potential investments, and believe the Company is well positioned to focus on the growth of the portfolio should the right earnings accretive opportunities arise.”
2 fantastic US growth stocks to consider for a fresh ISA this April
Thinking of opening or rebalancing a Stocks and Shares ISA this April? Consider diversifying into these two promising US growth stocks.
Posted by Mark Hartley
Image source: Getty Images
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. .
The past two months haven’t been kind to US growth stocks, as trade tariff turmoil sent many into freefall. Automakers and banks were among the worst hit, with Chrysler owner Stellantis losing 10% in a single day in March.
Now analysts are eyeing a recovery following news that the Trump administration may ease tariffs this week. The result could be great news for stocks that had a tough start to the year and are now trading at a discount.
For UK investors looking to add some diversity to their ISA this April, here are two promising US growth stocks to consider.
Uber Technologies
The ride-hailing and food delivery platform Uber (NYSE: UBER) is more often in the news for controversy than its stock performance. Yet despite several security issues — including data breaches and safety concerns — it remains the most popular ride-hailing app in the world.
Founded in 2009 and headquartered in San Francisco, its operations span across the Americas, Europe, the Middle East, Africa and the Asia Pacific.
The stock’s currently trading around $76, up 180% after five years of volatile price action. Investors who caught the $20 low in mid-2022 would have almost quadrupled their investment by now.
But several ongoing risks threaten continued volatility. Regulatory challenges are a key issue, with some regions attempting to ban the app on grounds of unfair competition. It also faces stiff competition from a plethora of lower-priced rivals like Bolt.
By adding additional revenue streams like food and freight delivery, Uber has successfully expanded its business. Adding to this is its recent partnerships with autonomous vehicle companies like Waymo, positioning it to benefit from the robo-taxi market.
Analysts expect revenue to reach $50bn by the end of 2025, with an average 12-month price target of $90.
Dell Technologies
Dell‘s (NYSE: DELL) a well-recognised name in the tech world, providing a broad range of IT products and services. The multinational tech giant sells everything from personal computers and servers to storage systems and networking products. Its varied customer base includes individual consumers, small businesses and large enterprises.
The stock currently trades at around $100 a share, up 410% in the past five years. Lately, performance has been underwhelming, with the stock down 44% from its May 2024 all-time high of $180.
Despite moderate revenue growth, it has struggled recently with declining profit margins. This has been attributed to the high costs associated with artificial intelligence (AI) server components like Nvidia GPUs. Competition from other major players in the AI-server market is also threatening its market share and profitability.
In its fiscal fourth quarter ended January, Dell reported an 18% increase in adjusted earnings of $2.68 per share and a 7% revenue increase to $23.93bn. This surpassed earnings expectations but fell short of sales projections.
Demand for AI infrastructure has been a key driver of growth recently, with Dell enjoying significant interest in its servers and networking segment. Reports indicate the company’s AI server backlog is around $9bn.
The growth’s reflected in its annual cash dividend, which climbed 18% this year, supported by a $10bn share buyback programme. These developments reinforce the company’s commitment to returning value to shareholders.
Analysts are overwhelmingly optimistic about the stock, expecting an average 36.5% increase in the coming 12 months.
Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:
With UK interest rates down to 4.5% and likely to fall further, it is becoming increasingly difficult to earn more than 4% from a deposit account. Inside a cash ISA, there is no tax to pay on interest income, but the chancellor is reported to be keen to chip away at the £50 billion locked up in them, ostensibly to encourage investors to shift into risk-taking assets, but more probably to generate extra tax revenue. What are the alternatives?
There are plenty of conventional investment trusts, especially those investing in UK shares, yielding over 4%, but many investors will not want the stock market risk. For them, Stifel, an investment bank and brokerage, has compiled a list of 33 relatively liquid “alternative funds” yielding between 4% and 15%, generated from what should be more predictable streams of income.
“A cynic would argue that these yields indicate the market is expecting many dividends to be cut,” it points out, “but many of these high yields have arisen due to sharp falls in share prices over the past year”, which is not exactly reassuring for those wanting to avoid risk to their capital.
“However, those now trading on wide discounts to net asset value [NAV] should have more upside than downside,” especially as “many of the funds have set modestly increased dividend targets for 2025 and projected dividend covers, based on revenues after deducting expenses, typically ranging from 1.1 times to 1.3 times.”
The leading investment trusts.
These include a number of funds investing in fixed interest, including the £300 million CQS New City High Yield Fund (LSE: NCYF), trading on a 6% premium to NAV and yielding 8.7%. It invests in high-yielding corporate bonds, which implies high risk, but the manager, Ian Francis, has delivered strong returns for 17 years by focusing on capital preservation, helped by an experienced team of analysts at Manulife CQS, the management company.
Strong performance (11% over one year, 25% over three and 42% over five), and the consequent premium to NAV, has enabled the fund to grow through share issuance (£13.3 million in the last year), although this has always been conservative to prevent the size of the fund swamping the opportunities.
Dividends have risen every year for 16 years, although the rate of increase has slowed to a snail’s pace in the last five years. Most importantly, the fund succeeded in generating positive returns in the last half of 2024, a difficult time for bonds generally, suggesting that it will continue to do so even if ten-year gilt yields head up to 5%.
TwentyFour Income Fund (LSE: TFIF) and TwentyFour Select Monthly Income (LSE: SMIF) have also performed well. TFIF, with £845 million of assets, has returned 15% over one year, 32% over three and 49% over five, while SMIF (£240 million of assets) has returned 17%, 28% and 40%. Their shares trade on a small discount and small premium to NAV respectively and yield 9.1% and 8.5%.
The key to TwentyFour’s success, says manager George Curtis, is “avoiding the accidents”. The investment-trust structure means that “managers are not forced to sell at times of crisis” and “enables us to take advantage of the premium return from illiquidity by investing in less liquid securities”. But the golden rule is “getting your money back by minimising defaults”.
TFIF doesn’t invest in bonds, but in “a diversified portfolio of predominantly UK and European asset backed securities”. Nearly half of the portfolio is in “mortgage backed securities”, mostly residential. Banks package together a large number of mortgages and then turn the package into tradable securities, injecting bank debt to raise returns. The top tier is prioritised in a return of capital while lower tiers are progressively riskier, but have higher coupons.
TFIF also invests in securities based on car loans, consumer loans and “collaterised loan obligations” (nearly 40% of the portfolio), which uses the same process to turn bank loans to companies into tradable securities. About 20% of the portfolio is “investment grade” (lower risk), 46% sub-investment grade (higher-risk, but above junk) and 33% is not rated, which means there is no independent review of the riskiness of the securities.
Around 36% of SMIF’s portfolio is invested in asset-backed securities, but most of it is in “subordinated” bank and insurance-company debt, meaning that it is a lower priority for repayment than other types of debt, thereby providing banks and insurance companies with an additional buffer to share capital in the event of a crisis. Slightly more of its portfolio (30%) is made up of investment-grade debt; 60% consists of sub-investment grade (but above junk) paper and 10% is “not rated”.
While TFIF invests in floating-rate debt and so has no exposure to changes in interest rates, SMIF invests in fixed-rate securities, but with short lives – nearly 90% repay within five years. This all sounds risky, but Curtis points out that the balance sheets of banks and insurance companies are “very strong”, while yields have tightened, “but are still well above those in 2021”. In the personal sector, “unemployment and divorce are the key factors behind defaults”. He notes that “economies have been resilient to higher rates and defaults have remained low. Interest rates in the UK are expected to flatten out at 4%, so it should be pretty easy to maintain 8% returns”.
Less risk, lower returns Those who are more risk-averse can still earn 8.9% from the £140 million M&G Credit Income Investment Trust (LSE: MGCI), although a portfolio yield to maturity of 7.8% means that it dips into capital to pay the dividend. Like TwentyFour, it invests in “private, semi-liquid assets, mostly held until maturity”, but at least 70% of its portfolio has to be investment grade (the current proportion is 77%). The trust is seeking to raise another £30 million.
MGCI’s lower risk means that its returns have also been lower; 8% over one year, 20% over three and 28% over five. The returns from the Invesco Bond Income Plus Trust (£350 million of net assets) at 9%, 14% and 24% are lower still, as is the yield of 6.8%, but it invests in a “very liquid” portfolio of listed bonds, which reduces the complexity of the portfolio, if not the risk: 70% of the portfolio comprises sub-investment grade paper.
As with the other funds, investing in a portfolio of seemingly low-quality bonds and credit has turned out not to have been nearly as risky as might have been expected. The global financial crisis of 2008-2009 was a shock to the credit-rating agencies who have learned to be a lot more cautious in their assessment of risk – just as the issuers of bonds and loan securities (and, behind them, people and businesses) have learned to be far more prudent.
The result has been that just as government bonds came to be, and probably still are, systematically overvalued, nominally higher-risk fixed-interest investments have been, and remain, undervalued.
