..or part three of the IT's a Christmas Carol Tale. So here it is Merry Christmas everybody's having fun, here's to the future now it's only just begun! The party is in full swing and the revellers are enjoying themselves but to recap the investment trust I mentioned in the last couple of posts continues to languish on a 20% or so discount. This is despite a decent long term track record, a 4%+ yield which I forgot to mention has increased for 29 years in a row too. Come on what is it I hear you cry - well we will get to that.
First lets look at the issue of performance which I also mentioned in the bear points yesterday. In terms of performance if we take the last three or five years and the underlying Net Asset Value Performance (NAV), this has been slightly ahead of the FTSE All Share, which is good, but toward the lower end of the sector performance, which is not so good. We also saw yesterday in share price terms that holders had underperformed the index over the last 10 year which is disappointing. Now some of this may be explained by discount movements and the drag of the expensive debt which I also mentioned yesterday and will come on to again in a moment.
Before that lets take a look at the Asset Allocation which I mentioned in the bear points as being unusual for its sector, the UK Equity Income Sector. In addition to the UK equities that they hold which are split 50/50 between FTSE and Mid / Smaller Companies they also hold around 30% of the fund in UK Property. Now this may or may not appeal, but personally I quite like exposure to equities and property as a way of growing and protecting my capital and income from the ravages of inflation. Now may be you are wary of property right now and that might put you off, but I'm not going to debate that here I'll just let their track record in this area (shown below) speak for itself.
That track record equates to an annualised total return of 13% according to the managers in the Annual report and accounts. This compares to an all in cost of the expensive debt that I mentioned (which they used to finance the properties) of around 9%. This figure is arrived at because apparently the two debentures which carry coupons of 9 3/8% & 11% were issued at a premium. Now of course if they wanted to repay these or refinance these in the short term the would also have to pay a premium which in last years reports and accounts was put at around £12m over te £40m book or par value. This is why the discount which is often stated with debt at par can be lower if you adjust the debt to market value.
Any way that is all a bit complicated and technical, but in this case it is not something you should have to worry about if you are prepared to buy and hold this one for the next 10 to 11 years or so. This is because in last years annual results the Chairman set out their plans to address the discount. Subsequently the AGM approved an ordinary resolution which requires the Board to put an Ordinary Resolution to Shareholders in 2024 in relation to the future direction of the Company, including proposals that provide an opportunity for any Shareholder to realise their investment in full at NAV, less costs, by 31 March 2027 at the latest. So with this in place you know you can look forward to the discount of 20% being closed over the next ten year which will give your returns around a 2% per annum tail wind. In addition as the debentures roll off in 2021 & 2026 any potential dilution from paying a premium to refinance them should have disappeared. Thus unlike most active funds which start off 1 to 2% behind due to costs this one in share price terms should at least be about 1% ahead if the discount reduced in a straight line, which odf course it probably won't.
Also Worth noting that to take advantage of the low rates for long term money, they have also borrowed £15 million from Santander UK plc for ten years at a rate of 4.5% p.a. including all costs. The money is being invested in properties with yields well above this, and it replaces the original £5 million loan arranged in February 2015. It enables them to look forward to their dividend prospects in the current
year with some confidence, although at the moment they said it was too early to make a forecast.
Summary & Conclusion
Sorry if that was all a bit boring and dull, but then it is a bit of a boring and dull idea and as I said before not one for Tiny Tim traders as it is unlikely to provide much excitement in the short term apart from the latest dividend of 2.6p which is due to go XD on 29/12/16. However, if you want some good Value & Income (VIN) from UK Equity & Property holdings then this could be a good one to lock away for the next tern years. In the meantime you should then be able to enjoy a 4% and likely growing yield which is now being paid out quarterly. If that has tempted you to join me as a shareholder in this one then I suggest you take a look at their website here and you should certainly take a look at the report and accounts which I attach below. Finally all that leaves is for me to wish you all a very Merry Christmas and a Happy and Prosperous New Year.