Investment Companies News

The exposure of Shires Income investment trust to preference shares led to a fall in net asset value over the first six months of the year.

The £114m company holds preference shares to sustain its high income. Most are issued by banks and have therefore had a torrid time in the recent credit crunch. As a result, the company’s net asset value fell 4.6% over the six months to 30 September.

The trust was also affected by the performance of smaller companies relative to larger ones. The trust’s largest holding is Shires Smaller companies, which makes up 8.4% of the overall portfolio. The increasing cost of index-linked debenture stock and short-term borrowings also knocked the net asset value.

The trust will pay a second interim dividend of 4.4p on 31 January, which equals the 4.4p paid on 31 October. The yield is currently 6.3%.

The share price performed better over the period, rising 2.2%, reflecting the move from a 4.5% discount at the start of the period to a 1.2% premium at the end.

The total gearing on the trust fell from 38.8% to 27.7% over the half year. The group removed all gearing on its equity investments and now only has gearing in fixed interest, mostly on its preference share portfolio.

The investment adviser on the trust – Glasgow Investment Managers – was taken over by Aberdeen Asset Managers on 24 August. Trust manager Iain Lynn moved across in the deal, so the day-to-day running of the trust remains unchanged.

Lynn believes UK equities currently offer good value and there is plenty of scope for growth in the trust in the second half of the year. He believes the markets will be supported by takeover activity, as corporate buyers are now showing renewed interest. Confidence in the corporate sector remains high, despite the volatility in financial markets.

He also believes recent revisions to economic growth forecasts may allow a cut in interest rates within the next six months.

The shares were down 6.25p to 258.75p today. The trust is now on a 6.4% discount to net asset value, which offers investors the chance to benefit from both a narrowing of the discount and an improvement in performance.

However, investors will have to be convinced that the manager can do it and performance has been patchy over the past three years. To be fair, markets have not favoured the high income holdings necessitated by the trust’s income targets. However, there are better funds out there.