16th Jan 2015 09:59
LONDON (Alliance News) - TwentyFour Select Monthly Income Fund Ltd said Friday its portfolio manager may have to make new investments during periods of market stress and volatility if it is to meet its minimum yield target without diluting the underlying credit quality of the portfolio, amid its expectations that the anticipated quantitative easing of the European Central Bank will tighten spreads and reduce yields across fixed income products.
TwentyFour Select Monthly Income Fund launched with slightly more than GBP100 million in capital in March 2014, and raised a further GBP23.2 million in equity between then and September.
The closed-ended investment company, which has a policy of investing in a diversified portfolio of credit securities, said it is currently generating yield in excess of 6% net of fees, with the portfolio manager, TwentyFour Asset Management LLP, continuing to source suitable investments to meet the minimum yield requirements.
"The portfolio manager believes that the current macro backdrop is highly likely to result in continued central bank intervention and support and this in turn is expected to result in further tightening of credit spreads," TwentyFour Asset Management LLP said in its investment review.
"As such one of the key challenges going forward is the re-investment risk in order to maintain the minimum dividend, without a deterioration in asset quality. Fortunately, a combination of reduced market liquidity and heightened uncertainty continues to result in spikes of volatility," TwentyFour Asset Management LLP added.
The portfolio manager said that using periods of heightened volatility to source assets and increase the running yield of the company may become more challenging over the medium term and may result in agreeing less new issuance of company shares.
The portfolio manager said yields have widened quite significantly since the company's launch, meaning bonds maturing now can be reinvested at better yields than previously achieved.
"As an example, the yield on the Bank of America Merrill Lynch Euro High Yield Index at the end of March 2014 was 3.7%, falling to a low of 3.44% in mid-May, the period in which the initial funds were invested. As a contrast, the yield on this index reached a high of 4.67% in mid-October and is currently at 4.2% meaning the portfolio manager has been able to reinvest any maturing bonds at much improved yields," TwentyFour Asset Management LLP said.
"The overall mark-to-market yield on the company is now 7.82%, in comparison to a purchase yield of 7.3% achieved in May last year," TwentyFour Asset Management LLP added.
The portfolio manager said that it is unlikely that bond prices could rally to the extent that reinvestment risk becomes a major factor, in the medium term at least, given the geopolitical, Eurozone, oil and UK and US rate-rising risks at present.
The spread duration on the company is currently at 3.8 years, providing security against short term maturities. Overall, the managers do not have any concerns around finding bonds that meet the dividend hurdle and also do not expect reinvestment risks to pose any threat to this in the medium term," TwentyFour Asset Management LLP said.
TwentyFour Select Monthly Income Fund shares were up 0.3% at 96.99 pence on Friday.
By Samuel Agini; [email protected]; @samuelagini
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