TB Wise Income Mar '08 Short Report
TB WISE INCOME: Fund Update, May 2008
This update is based on a review of the fund’s performance in the year to March 17th.
INVESTMENT OBJECTIVES The investment objective of this fund is to provide a starting yield roughly equivalent to a good building society account, with the potential for income growth and capital growth from a diversified portfolio of collective investment schemes, including unit trusts and open-ended investment companies, equities including investment trusts, bonds, Government securities, money market instruments and cash. The only restriction on asset allocation is a requirement to hold 10% of the fund in overseas shares, which is a condition for inclusion in the Active Managed sector. INVESTMENT REVIEW Our performance compared to our sector average and the FTSE-100 index for the period has been:-
Source: Lipper. Figures are to the close of business on Monday March 17th. It is difficult to find a useful benchmark to measure the performance of a fund with as wide a remit as this one. OVERVIEW During a career as a fund manager which has lasted twenty years so far, no fund I have managed has produced a performance as bad as TB Wise Income’s during the year under review. The losses were concentrated almost entirely into a three month period from September 20th to December 20th. As an investor, you will be aware of the ‘credit crunch’ and the ongoing problems in the world’s financial system. You are probably wondering whether it is sensible to continue investing in this fund, and if so, when its price might recover. I hope that what follows will address these concerns. If you would like to discuss anything in this report, please contact me or your usual adviser. By pure coincidence, March 17th, the period end date, was also the date when the stock market hit its lowest level (FTSE-100 index, 5415) since the credit crunch began to unfold last July. This makes the loss bigger than it would have been had the year-end fallen on any other day. Since March 17th to the time of writing, (May 6th), TB Wise Income shares have risen by 5.0%. PERFORMANCE AGAINST AIMS Our three aims are to offer investors in TB Wise Income a high starting income, income growth, ideally in line with inflation, and capital growth, again ideally in line with inflation or better. So far in the 2 ½ - year life of the fund, we have consistently delivered on the first two of our aims. Where the fund has failed is in the third aim, as the fund price of the A shares today stands around 2.5% below the launch price, where to meet our objective it would need to be at least 10% higher. As investors we have no control over the prices of the assets we own, as they react continually to supply and demand in the market. It has become increasingly clear that the right way to run this fund is to concentrate on the quality of the income streams we buy. Is the income paid by each of our holdings sustainable and capable of growing? Is each holding managed by capable people for whom income generation is a top priority? If we can’t answer “yes” to these questions with conviction, then we shouldn’t be holding the asset. If we are right about the quality of the income streams we are holding, then the prices must recover in due course. As the prices of the assets we hold has fallen and their income payments have stayed the same or risen, the yield on these assets has gone up. For example, an asset worth £1.00 paying a 4p dividend yields 4.0%. If the price of the asset falls to 80p, the yield rises to 5.0% and if the dividend then rises to 4.4p, the yield goes up to 5.5%. This simple example describes what has happened during the last few months, a good example being B.P., whose shares fell 7% in the second half of our financial year, despite raising their dividend by 30% during the period. Now, when we meet fund managers, the question about income sustainability is always asked. We continue to look carefully, as we have done since the fund was launched, at the record of the managers whose funds we hold at maintaining and increasing dividends over as long a period as possible. This was the reason why Royal Bank of YIELD The behaviour of the stock market appears to have been irrational over the last few months. In the circumstances, you would expect to see bank shares falling, and the house builders, and high street retailers, all of whose businesses are directly impacted by credit-related problems. But the shares of other companies, whose earnings are barely if at all affected by conditions in the credit markets, such as drug manufacturers, telecoms, and water companies, and even the oil giants, have fallen by as much as the rest. There have been forced sellers in the market lately. These tend to sell the best shares, the ones which can find buyers even in difficult markets, and in selling, they tend to depress the share prices of these excellent companies. There are more hedge funds today, many of them highly indebted, and some of the selling may come from this quarter. Anything that causes the prices of the assets we own to fall is an irritant, but it is also an opportunity, and we have used the bad days to pick up the shares of excellent companies and funds with high and sustainable payouts. As a result, the yield on TB Wise Income is now 5.6%, the highest it has ever been. With one or two minor queries, our research indicates that these yields are capable of being sustained and increased. We believe that the capital values should follow, but could not say when that revaluation might occur. INVESTMENT TRUST DISCOUNTS The prices of investment trusts are made by supply and demand in the stock market, unlike unit trusts, where the prices are made by the fund managers, based on the underlying values of the assets they hold. At times when investors are nervous, investment trusts can suffer twice; the asset prices fall, and investors are prepared to pay less for them. TB Wise Income holds investment trusts, all of which are at discounts to their asset values, and all the discounts have grown over the last year. As the markets recover the discounts are likely to narrow, which will work in our favour, especially as we have added to our best holdings on bad days. As a matter of interest, we have calculated what would happen if all the investment trusts the fund holds were priced at their current asset values, which would happen if the funds were unit trusts instead of investment trusts. At the time of writing 46.3% of TB Wise Income is in 18 investment trusts. The current asset values of the funds exceed their market values by a total of £1.08 million, just below 8.0% of the fund value. Put differently, as at May 6th each Wise Income A (Income) share represents assets worth £1.0480, which are valued by the market at 97.26p. THE PORTFOLIO The current holdings in the portfolio are as follows; percentage allocations at the last review point are shown in brackets. PROPERTY 14.8% (19.3%) In this sector we hold seven investment trusts, and no unit trusts. The funds are the same ones we held at the last review date. In the six months from the beginning of October to the end of March, the I.P.D. index, an overall index of U.K. Property (all regions, all sectors) fell by 14%; the investment trusts borrow money, which magnifies gains in rising markets, but has magnified losses in a falling market. However, the funds have all passed the income sustainability test; so far, none has cut its dividend payment, and none has said they will. The yields are high now, varying from 6.1% to 10.5%, and even at today’s much lower valuations, the trusts are at discounts varying from 16-35%. Our current intention is to dispose of a couple of the smaller and more highly-borrowed funds at a suitable opportunity, while holding the stronger ones (around 10-11% of TB Wise Income) for the longer term. The last few months have forced us to get to know the funds very well, which should prove useful when the cycle turns upwards again. Overseas Property 0.3% (0.3%) We have continued to avoid this area, partly on valuation grounds, and partly because yields are on the low side for this fund. Overseas property has not escaped from the general sell-off, but may become investable in due course. We hold shares in the Direct Shareholdings 10.7% (18.1%) Our direct shareholdings have to
Of the five companies currently held, none is likely to be affected much by the “credit crunch” or a consumer slowdown, partly because their businesses are global, not just in the The shares, and the proportions each represent of TB Wise Income, are B.P. (4.1%) Legal & General (2.4%) Glaxo Smithkline (2.0%) B.T. (1.1%) Vodafone (1.1%). As mentioned above, the holding of Royal Bank of We currently hold seven funds, the largest holdings being Invesco Perpetual High Income (6.4%), Artemis Income (4.6%) and Standard Life U.K. Equity High Income (4.3%). Recently, the best performers have been Standard Life and AXA. Unusually, the Invesco fund, normally a top performer, has struggled in 2008, a measure of just how difficult and irrational the markets have been. INVESTMENT TRUSTS The sector has been hit hard in the second half of the year, especially in the areas of mid and smaller companies. However, as the prices fell and the discounts and yields rose, we have taken opportunities to add to holdings. The managers of the trusts we hold are all capable and experienced, and there have been no manager changes during the period. We are currently holding eight trusts with an average dividend yield of 5.85%. Henderson High Income, TB Wise Income’s biggest holding (7.4%) yields 6.0%. As a policy Henderson High Income doesn’t pay out all the dividends it receives, and has accrued substantial funds which can be used to supplement future dividend payments should the need arise. OVERSEAS The fund holds the excellent Newton Global Higher Income (4.6%) and two European funds, totalling 6.1% currently. We are continuing to avoid Asia on valuation grounds, and We would normally expect to hold more overseas, and will look to add to holdings as opportunities arise. FIXED INTEREST Opportunities have arisen recently in the high-yield sector, which was sold off indiscriminately in March. We have bought small quantities of fixed interest debt issued by Aviva (Norwich Union),Balfour Beatty, and the Ecclesiastical Insurance company, all yielding around 8.0%. Since the beginning of April, our largest holding in this area, the Aviva prefs., have risen by over 12%. PROSPECTS The unwinding of the debt bubble is by no means over, and we can expect reduced levels of economic activity over the next couple of years at least. We continue to avoid the vulnerable areas, but intend to continue holding the most dependable income streams available. We believe that a gradual move towards more rational market valuations will also work in the fund’s favour. Judith and I continue to maintain a substantial personal holding in TB Wise Income, and have no intention of moving it anywhere else. I would like to thank you for your continued support of the fund through this most difficult period, and look forward to the opportunity of maintaining and enhancing your income in the months and years ahead. FUND SIZE As at March 17th, the fund size was £13,379 million, a rise of 6.6% over the year. BLOG I write regular commentaries on the markets and our funds which appear on our website at www.wiseinvestment.co.uk (blog =weblog). As new blogs appear, we advise anyone interested by e-mail. If you aren’t on our e-mail list, and would like to be included please contact Becky Yates (becky@wiseinvestment.co.uk). Tony Yarrow Fund Manager Wise Investments Ltd Investment Adviser to TB Wise Income May 7th 2008 |
TB Wise Income Mar '08 Short Report
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