Several of the recent additions to our Income Portfolio have issued updates in recent weeks. All were bought with the intention to make our income more secure.
Is our strategy working? We’ll cover some of these updates in the coming weeks and will start with the Sequoia Economic Infrastructure Income fund.
This trust, known as Seqi, is unusual in that it makes money from interest on loans advanced to the owners of infrastructure assets such as bridges. As these assets themselves tend to generate stable incomes, the trust’s dividends will, we hope, prove far more reliable than those in other parts of the market, where coronavirus has taken such a toll.
The signs are good. In May last year the trust increased its annual dividend target from 6p to 6.25p a share, and in the annual report for the year to March the board said it expected, in the “absence of any significant restricting factors”, to pay that amount “for the foreseeable future”.
It said it had carried out a “comprehensive portfolio and balance sheet review” in light of “exceptional market volatility arising from the Covid-19 pandemic and oil price collapse”.
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Its assessment of cash yields allowed the “reaffirmation of dividend cover and target for the financial year ending March 31 2021”. The actual dividend paid for the past financial year was 6.1875p, which reflects the fact that the target was raised part way through that year.
We are, as always, less concerned about the value of a trust’s assets, which can be expected to wax and wane in a way that we hope dividends will not. The portfolio’s net asset value per share fell from 103.41p to 96.69p over the financial year as a result of the downturn in the financial markets generally, including those markets used by the trust’s independent valuation agents as pricing benchmarks for its assets.
Once dividends were taken into account, the trust’s total return on the basis of net asset value over the year was minus 0.9pc. Although the trust does not expect the pandemic to affect its ability to pay the dividend, it has modified its investment strategy in response to the crisis.
In a move that this column finds reassuring, the board said there had been a “redirection of the investment adviser’s resources from origination to enhanced credit and portfolio monitoring” – in other words, for now it is paying less attention to investing in new loans and more to making sure that its existing ones do not get into trouble.
The managers are keeping at least one eye on possible new holdings for the portfolio, however. While the trust said it had imposed restrictions “on certain new investments”, this was done with a view to “preservation of balance sheet capacity to take advantage of difficult market conditions and opportunities to invest in new loans on attractive terms”.
It explained that “in the current environment there is the possibility that a number of high-quality economic infrastructure investments will appear on the secondary market at attractive prices”. The secondary market is where lenders that originated loans sell them on to other investors.
“As the company slowly ramps up deployment of its cash as the market improves, these opportunities could be a significant source of [outperformance] without sacrificing credit quality,” it added.
Even if we assume that the global economy can recover well from the pandemic there is concern that vastly increased government spending across the world will stoke inflation. We can take comfort from the fact that 70pc of Seqi’s portfolio consists of “floating-rate investments”, which means that it will receive higher rates of interest on its loans if interest rates generally rise.
Another positive development is that the ongoing charges ratio for the year to March was 0.96pc, compared with 1.02pc the previous year. We see this as reasonable in view of the detailed research needed before money is invested in assets of this type.
This trust is doing what we hoped of it and we will hold.
Questor says: hold
Share price at close: 104p
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