High Yield Debt ITs

[Jam1]

Evening All,

Looking through the daveh’s post of the high yield investment trusts yield table has highlighted the range of high yield debt oriented ITs. I have held BIPS and HDIV for a few years and they are probably little better than break even given a -15% capital loss in each case as things stand.

I wondered what people’s experience was with such investments noting by way of example, SMIF and VTA yield 8.28% and 10.11% respectively.

Apologies for what looks to be a lazy post!

Jam (tomorrow)

[monabri]

I hold very small sums (percentage of overall portfolio) in BIPS,TFIF, HDIV & SEQI. All held since April 2018. They were among my first buys and were very much a tentative toe in the water.

BIPS XIRR = 2.8%
TFIF XIRR = 2.3%
HDIV XIRR = 5.9%
SEQI XIRR = 0.8% (May 2018)

Whereas

CTY XIRR = 12.6%
MRCH XIRR = 16.1%
MYI XIRR= 12.4%

but

HFEL XIRR = 1.7%

My average XIRR over the income Investment Trusts I hold is an XIRR of 8.5%.

[Jam1]

Thanks Monabri. Is this down to a more substantive impact on inflation on debt than equities? Hence, potential improved performance over next three years?

[daveh]

I recently added NCYF to my income portfolio. I thought now was a good time to add a debt fund as the price is down and yield is up. What I did was look at them in terms of yield and then look at their total return and how that had performed over the last few years and chose what I thought had the best combination of the two.

[Newroad]

Hi Jam1.

I have a number of family members each with similarly constructed portfolios. The equity component is age related (target 78% at birth, target 48% if we make 100) but 70% is probably a useful average current approximation. With that approximation in mind, each portfolio is constructed

35% passive equity (VWRL or VWRP)
35% active equity (FCIT, ATST or similar)
20% passive investment grade bonds (VAGP)
10% active non-investment grade bonds (BIPS or HDIV)

There is (an interpretation of) some theory from the book Smart Portfolios by Carver behind the above, you can check it out if you wish. I think over the long term, something like it is reasonable, rebalancing periodically according to taste. You can see some more detail here

https://www.lemonfool.co.uk/viewtopic.php?f=56&t=34988&p=511058&hilit=newroad+correlation#p511058

Clearly, it is the final 10% that is relevant to this conversation. The most germane bit from the link is, arguably, from the (three year) correlation matrix at the time

VWRL to HDIV: 0.57
VWRL to VAGP: 0.31
VAGP to HDIV: 0.45

So, a moderate* correlation between the three assets as proxies for their asset classes - that looks OK to me - so I'm fine to hold the 10% or so of HDIV or BIPS (which I've held since it was both IPE and CMHY). I'm not sure I would be investing materially more in high yield debt at present (though happy to rebalance into them) as I think the smart(?) money has chased the asset class already - which amongst other things has driven modest discounts in HDIV and BIPS to either side of zero.

Not sure how much the above helps you - but I hope a little.

Regards, Newroad

* and remember, this is likely to reduce - the recent period has been one of the highest correlations between equities and bonds for a very long time

[Jam1]

Thanks Daveh and Newroad. Yes note that the discount has past for BIPS and HDIV, albeit debt ITs are only 2% of my portfolio. VTAS Volta Finance seems to have comparable performance data on the AIC website and still has a discount and higher yield. However, looking at discounts over 5-10 years it looks to be infrastructure ITs (JLEN and HICL in my portfolio) that are on a rare (small) discount. Will think on for my regular trading decision this month.
Jam (tomorrow)

[tramrider]

I hold several different types of debt ITs as producers of high income, hopefully without losing much capital value. If the total return over 5 years is ~ 5 x yield, then they are stable. Most are at a high discount at present due to the rising interest environment over the last year. However, prices may rise and the discount may reduce when inflation drops a bit towards the end of this year. In that case, we can buy at good yield rates now, with the hope of a rising price and improved total return if it is more 'normal' in a year's time. Using figures from the AIC website:

......Yield%    5yr TotRet%   Prem/Discount%
NCYF   8.70         30.20         6.24
RECI   8.73         22.34        -6.85
VSL    9.85         76.85       -16.77
VTA   10.00         20.09       -14.64

NCYF always seems to be at a fairly stable and worrying premium, but has managed a decent total return.
RECI seems to have a form of backing of property assets, but these are also under strain at the moment.
VSL may be in the process of winding up, which might return the NAV amount trapped by the discount.
VTA suffered strongly last year but appears to be recovering slowly.

All of the total returns look better than the average building society account.

Tramrider.

[daveh]

I looked at the four funds in the table below:

TIDM     price (p)    5year performance    yield
NCYF      ~52           1=                    8.63
SMIF      ~76            3                      8.32
BIPS       ~165         1=                     6.63
HDIV       ~67           4                     6.49

The price was noted so I had a quick check that there hadn't been a big price movement during the time between researching and I got round to buying. The performance ranking was from their 5year total returns taken of the stock exchange page for each share so i also had a look at the return graphs for each share to see how they had performed. I decided i would buy NCYF initially and think about doubling up with BIPS later. So far I have bought NCYF twice, and will continue to top up (probably, unless something more interesting pops up) until I have a holding at or around median level. I'm basically buying when the available cash in my ISA reaches a level that makes a purchase sensible costs wise.

I just had a quick look at the table I posted from the AIC and the yields seem similar to the table and the 10Year NAV performance for NCYF and BIPS are similar at 67 and 65% resp. and HDIV is trailing a bit at 45%. So I would come to the same decision now.

[richfool]

May I double-check my understanding as to how corporate bond funds like NCYF work in times of rising and falling interest rates.

My thinking/understanding is that as interest rates rise, the SP of a bond fund like NCYF will likely fall thus producing a higher dividend yield, but that when interest rates are considered to be near the top or about to fall, the SP will likely rise, as investors buy in, in order to secure the higher yield?

The first part of that seems to be taking place as the SP has been gently falling (and the yield rising) over the last few months as interest rates have been rising. I assume therefore when we have had one or two more rises and the outlook for interest rates is downwards, the share price is likely to rise as investors buy in to secure that higher yield.

I would welcome any clarification or corrections of my understanding on this.

[88V8]

May I double-check my understanding as to how corporate bond funds like NCYF work in times of rising and falling interest rates.
My thinking/understanding is that as interest rates rise, the SP of a bond fund like NCYF will likely fall thus producing a higher dividend yield, but that when interest rates are considered to be near the top or about to fall, the SP will likely rise, as investors buy in, in order to secure the higher yield?

With a degree of variance, the SP will reflect the value of the underlying assets.
Investor demand for those ITs drives the discount or premium.
The SPs of FI have been falling as interest rates rise, and yields have risen accordingly.

When rate rises cease there will be a flattish bottom for a while, then as rate cuts come over the horizon we can expect SPs to rise again.

As you say, now is a good time to buy.

I hold AXI (hmmph), BIPS, MCT, NCYF, SHRS, SMIF, TFIF and may add, although I also plan to buy various Prefs and there is only so much in the kitty...

V8

[moorfield]

I recently added NCYF to my income portfolio. I thought now was a good time to add a debt fund as the price is down and yield is up. What I did was look at them in terms of yield and then look at their total return and how that had performed over the last few years and chose what I thought had the best combination of the two.

NCYF is one that IAAG has highlighted as a 10yr increasing dividend iirc.

One thing that niggles maybe it's just me is that the fund manager insists on calling himself "Franco" including the quotes in all the company literature. His real name is Ian.

[monabri]

I recently added NCYF to my income portfolio. I thought now was a good time to add a debt fund as the price is down and yield is up. What I did was look at them in terms of yield and then look at their total return and how that had performed over the last few years and chose what I thought had the best combination of the two.

NCYF is one that IAAG has highlighted as a 10yr increasing dividend iirc.

One thing that niggles maybe it's just me is that the fund manager insists on calling himself "Franco" including the quotes in all the company literature. His real name is Ian.

Typically 0.01p per year.

Financial year end Dividend yield Dividend cover Total dividend paid
30/06/2022 8.70% 0.93 4.48p
30/06/2021 8.10% 0.94 4.47p
30/06/2020 9.30% 1.03 4.46p
30/06/2019 7.30% 1.01 4.45p
30/06/2018 7.20% 1.03 4.42p