Five alternative trusts for income investors

Our week-long event focused on investment trusts offering income via a diverse range of strategies and asset classes got off to a strong start with M&G’s Adam English, manager of M&G Credit Income (MGCI).

M&G Credit Income (MGCI) takes full advantage of the investment trust structure, offering ordinary investors exposure to a very broadly diversified portfolio of debt instruments including public and private debt, aiming to deliver an income linked to interest rates with an explicit target of 4% ahead of the interbank rate.

The bulk of the trust’s holdings are in ‘floating rate’ debt, which means it is able to offer a dividend which will increase with rising interest rates, putting it in a potentially attractive position for investors seeking protection from rising rates.

Adam described the very active approach he and the team at M&G – which draws on research from almost three hundred investment professionals within the business – take to managing the portfolio, which has performed strongly amid whipsawing markets in recent years.

Adam added risk to the portfolio in the spring and summer of 2020, buying higher yielding bonds – benefitting from the risk-on mood which seized markets in the period that followed. He began to take risk off the table in the autumn of 2021, as credit spreads became more compressed, particularly moving away from public debt markets.

“Returns have ticked down as we’ve retreated but this is a conscious decision which gives us the firepower to take advantage of volatile markets,” he said. That firepower is supported by an undrawn £25m debt facility, which the managers can use to gear up their exposure when the time comes and, with spreads becoming ‘more attractive in the wake of the sell-off in public markets’, the trust is well-positioned for the future.

On Tuesday, Invesco’s Rhys Davies joined us in the morning to talk about Invesco Bond Income Plus (BIPS). Bond focused investment trusts are few and far between and BIPS is the largest trust in the AIC Debt – Loans & Bonds sector, offering a chunky yield of 6.4% via a portfolio of bonds rated BB or below.

As the headwinds faced by businesses – soaring inflation, a weaker pound – have mounted in recent years, companies seeking to raise capital via debt issuance have been forced to offer higher coupon (interest) rates, meaning the choice available to high yield bond fund managers has grown according to Rhys.

Even previously ‘investment grade’ companies like Asda are now an option for high yield investors – describing them as ‘fallen angels’. The increasing availability of yield is matched, however, by the increase in risks as the business environment becomes more fraught.

So, while Rhys is cautiously optimistic about the opportunity, BIPS is positioned cautiously to reflect these risks, with a preference for bonds with shorter durations – which are less vulnerable to the impact of rising interest rates – and a keen focus on credit analysis of the issuing companies.

Rhys said: “We are still in a phase where a degree of caution is warranted, and we haven’t yet seen the riskiest parts of the high yield bond market re-priced to reflect the risks that they face.”

Wednesday’s presentation came from Ailsa Craig and Marek Poszepczynski, co-managers of International Biotechnology (IBT), which has performed particularly well versus its peers this year. The trust pays a dividend from capital, equivalent to 4% of NAV, via a portfolio comprised of biotechnology stocks, most of them in the United States, as well as a number of unquoted stocks which are managed by a team including Dame Kate Bingham, who led the UK’s COVID-19 task force during the darkest times of the pandemic.

This unique combination makes the trust a highly differentiated option for investors seeking an income which is not correlated to the usual sources and, with biotech stocks badly beaten up in recent months, the managers are very bullish on the outlook and are positioning the portfolio to reflect that optimism.