Our Income Portfolio’s capital value has taken a pounding from the recent crisis in the financial markets. Its ability to generate income, fortunately, has not.
The damage to capital has been felt keenly by our bonds and our property and infrastructure investment trusts. As we wrote yesterday, investors expect there to be a gap between what these assets yield and the yield on “risk-free” government bonds.
When the latter yield goes up, as it has done dramatically in recent days, the yield on the former normally goes up too, to maintain the gap. A rise in yields, in both cases, entails a fall in price.
For example, our Halifax perpetual bonds have lost 7.4pc since before the mini-Budget, while Newcastle Building Society’s “Pibs”, which are like bonds, have fallen by 5.8pc. Similar assets from the Bank of Ireland have lost only 2.4pc, however.
Our Tesco bonds, which unlike the other three have a maturity date, have fallen by 3.9pc. The average fall across these four bonds since last Thursday’s close is 4.9pc.
It goes without saying that, in the absence of a catastrophe that results in the failure of one of these institutions, we will receive our contracted interest from them regardless of the volatility in the prices of their bonds; it is precisely this certainty in highly unpredictable times that earns them their place in a portfolio dedicated to income.
Turning to our property funds, Triple Point Social Housing has fallen by 10.5pc since last Thursday’s close, while Regional Reit has lost 13.9pc and Urban Logistics Reit 19pc. Residential Secure Income is 10.4pc in the red and Sirius Real Estate is down by 8.7pc.
Real Estate Credit Investments is a slightly different beast – it lends to property companies – but as an income fund it is subject to the same pressure to maintain the yield gap against gilts and it has fallen by 7.9pc since before the Chancellor set off the bond market rout. The average fall across the property funds is 11.7pc.
Again, we have no reason to fear for the income we receive from these property trusts. Triple Point and Residential Secure operate in regulated markets and their income is to at least some extent backed by the Government; there is a shortage of the kind of warehouses Urban Logistics specialises in and Sirius operates in Germany, where interest rates, although rising, are under less pressure than here.
In fact, we can expect our income to rise over time from these funds, thanks to inflation links or market dynamics, although a severe recession could affect the likes of Sirius and Regional.
Our portfolio also contains two infrastructure funds, Sequoia Economic Infrastructure and Gore Street Energy Storage. They have fallen by 8.7p and 9pc respectively since last Thursday’s close.
Sequoia is a defensive fund that lends to infrastructure owners and whose income has some linkage to inflation, while Gore Street is building a business in what appears to be the highly lucrative niche of supplying “surge” power to electricity grids. Their dividends are more likely to rise than fall.
What of the other main plank of our Income Portfolio, our four “equity income” investment trusts? Murray International has fallen by 5.6pc since Thursday, while Schroder Income Growth has lost 7.1pc and JP Morgan Claverhouse 5.1pc. The last of the four, Lowland, is 10pc lower. On average their fall is 7pc.
Why have the property and infrastructure funds fallen more severely than the stock market funds and bonds?
In the case of our bonds Questor will have to speculate that our mixture of retail bonds, Pibs and former Pibs may have been somewhat overlooked as traders were kept busy with the violent moves in the gilts market.
Our equity income trusts do own some of the FTSE 100’s multinational stocks, which should in theory benefit from the weak pound. Otherwise it could be a not unreasonable perception that property funds are more “bond-like”, even if their income is not fixed.
While falls in capital value are hardly cause for celebration, we have to accept volatility in return for higher income. We can at least take comfort from the stability of that income.
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