As the hunt for income has intensified, debt trusts have proliferated. Further figures from the AIC show that at 31 January 2013, its debt sector consisted of just eight trusts.
Five years on the situation had changed dramatically, with the number of vehicles swelling to 26, and total assets rising from £1.4bn to £7.7bn in the process. To put this into context, the total number of trusts across all sectors rose by 24 over this period, suggesting debt trusts accounted for a significant proportion of product launches.
Such rapid growth in this niche area is fairly easily explained. Other assets that have previously quenched investors’ thirst for income, such as gilts and corporate bonds, are still struggling to offer the desired yields as interest rates hover just above zero – in the UK at least.
In the US, recent Federal Reserve rate hikes have raised the prospect of loftier bond yields in years to come. But the demand for riskier debt should still prove strong, so long as investors are compensated for this risk.
Yet this is not always the case. Last autumn, two analysts from Canaccord, Alan Brierley and Brian Newell, downgraded the P2P Global Investments trust from hold to sell, citing an expectation that it would remain below its return target of 6 to 8 per cent a year for some time.
The downgrade followed on from predictions of further problems in the P2P lending space following a number of writedowns, as well as accusations of ambiguity around disclosure levels.
Performance
This month we have made a slight alteration to our usual performance-comparison table: the trusts have been measured by their performance over two years. Ten-year data has been omitted as only one trust has been in existence for this long.
The top 10 performing trusts in the AIC sector over this time frame are listed in Table 1. Overall, average annual growth of 10.8 per cent over two years makes for positive reading, although even among the top 20 trusts, individual performance is hugely disparate. The product trumping all others, Fair Oaks Income, averaged 29.9 per cent a year over the past two years, whereas at the other end of the table, TwentyFour Income registered an average 11.9 per cent a year.
Fair Oaks’ success, much like that of its peers, was largely achieved in the 2016-17 period – a real purple patch for the sector. The average vehicle mustered 19.3 per cent growth, with five topping 40 per cent. The Fair Oaks trust grew by 63.3 per cent, bettered only by the Axa IM Paris Volta Finance vehicle, which returned 63.4 per cent. This helped offset three years of less-than-stellar returns, particularly during 2015-16, when eight of the 12 trusts suffered losses.
A glance under the bonnet of the Fair Oaks product reveals a highly diversified strategy. It invests in collateralised loan obligations – that is, portfolios of loans sold to companies – often lower-rated firms in terms of credit quality. Its top 10 holdings account for less than 6 per cent of the entire portfolio, with the manager clearly looking for strength in numbers. At the end of January, the trust comprised 1,145 issuers of debt.
