Investment trust Shires Income issued its half-yearly results last week, with chairman Robin Archibald keen to emphasise the fund’s appeal to income seekers.
‘In the current environment, there is likely to be a continuing demand for an attractive and reliable level of income,’ he says.
He’s absolutely right, especially if both interest and savings rates continue to edge down. The trust offers investors a 5 per cent dividend yield plus the potential for capital growth on top.
Although the stock market listed trust, valued at £114 million, is an UK equity income fund, it’s a bit of an oddball.
This is because of its use of company bonds and dividend-friendly preference shares to boost the income it pays shareholders.
This can compromise the fund’s scope to deliver capital returns, although its performance numbers are more than satisfactory.
Over the past year, Shires has achieved a total return of 28.5 per cent, better than both the FTSE All-Share Index (20 per cent) and the average for its peer group of 17.9 per cent. Over the past five years, its 65 per cent return is superior to that of its peer group (56.6 per cent), but below the 73.8 per cent return from the FTSE All-Share Index.
‘The trust’s focus is on income,’ says investment manager Iain Pyle, who has been at the helm since 2018.
‘We are providing an income that more than competes against cash and bonds – and is inflation-busting. We also want to grow it.’
The 5 per cent portfolio yield beats inflation (3.6 per cent) and compares favourably against the 3.2 per cent yield from the FTSE All-Share Index.
In terms of income growth, Shires is on schedule to grow its dividend for a fifth year running.
The first two quarterly payments declared in the current financial year total 6.85p, which is up on the 6.4p paid in the same period of the previous year.
Shires’ share price is hovering at about £2.95.
‘The portfolio is 20 per cent bonds, 80 per cent equities,’ says Pyle. ‘We have 52 equity positions and the companies we hold have strong balance sheets, good cashflow, and a preference to grow their dividends.
‘If we are able to buy them when the stock market undervalues their shares, even better.’
One of its largest exposures is to construction companies – the likes of Balfour Beatty, Kier Group and Morgan Sindall.
‘It’s a sector that took time to recover from the collapse of Carillion in 2018,’ says Pyle.
‘But the companies we like now have stronger balance sheets and will benefit from any uptick in infrastructure spending. They represent good growth opportunities.’
Pyle, who works for fund manager Aberdeen, is not frightened of changing things around.
For example, in June last year he sold the fund’s stake in bakery chain Greggs after a strong share price run and a narrowing of the yield to 2 per cent.
He then bought back into the company at the end of this summer, after Greggs’ share price had fallen by more than half. Shares in the sausage roll specialist now yield 4.7 per cent.
The biggest of the seven bond holdings is with Ecclesiastical Insurance, which pays a coupon of 8.625 per cent.
Pyle says last week’s Budget will have little impact on the trust.
‘It’s good it is out of the way,’ he says. ‘If interest rates keep falling, things will get better. Many UK companies remain both undervalued and attractive.’
Annual fund charges are 1 per cent, the market ticker is SHRS, and identification code 0805250.
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