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Trust Insider: trust issues - the most successful of this year's IPOs
by James Carthew on Oct 01, 2013 at 00:01
With managers back from their summer breaks the new issue season is upon us and provided that markets do not have any dramatic upsets between now and Christmas I think we will see quite a few new funds launched, as well as a number of sizeable C share issues.
Although it is too soon to know how they will fare over the long term, I have been pleasantly surprised by how successful this year’s crop of new issues have been and I thought it might be worth having a closer look at some of them over the next couple of weeks.
The first of these is TwentyFour Income fund (TFIF). TFIF launched in March 2013 and raised £150 million. The prospectus was written in such a way that it could carry on expanding the fund up to a maximum of 500 million shares at any time before the middle of February 2014 without going through the rigmarole of issuing new prospectuses for each issue.
It has been taking full advantage of this; notably with a £31 million issue in June and a £30 million issue that has just completed.
The big attraction is a decent dividend yield, as has been the case for most issues for some time now. TFIF’s yield target is 5% in the first year of operations and 6% thereafter (payable in quarterly instalments).
Asset backed securities
TFIF generates its income by investing in a portfolio of European (including UK) asset-backed securities (ABS). Investing in ABS can give you access to a vast range of things – from credit card receivables to copyright or patent royalties but the most commonly traded ABS are packages of mortgages (RMBS – residential mortgage-backed securities) and packages of loans (CLOs – collateralised loan obligations).
A collection of receivables is packaged together in a special purpose vehicle. The vehicle is divided up into tranches – the senior tranche ranks first in the queue for interest payments and repayment of its share of the vehicle. Because it has the best security, it gets paid a lower return than lower ranking tranches.
The lowest ranking tranche (sometimes referred to as the equity) gets the highest return but, because it bears the first loss, carries the highest risk. The issuers of ABS get rating agencies to rate the tranches – the top tranche, usually the largest, may be rated AAA and the bottom tranches may be rated BB or lower (sub-investment grade). At the end of August 2013, 51% of TFIF’s portfolio was invested in RMBS and 31% in CLOs, with the balance spread across other types of ABS, including 8% in loans to small and medium enterprises.
At least half of TFIF’s portfolio must be invested in investment grade rated securities and there is a maximum limit of 5% on investment in any one ABS. The aim was to have between 30 and 50 holdings. There was no intention to use gearing to enhance returns so, although the fund itself can borrow up to 10% of net assets, this will be only be used on a temporary basis.
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