UK Edition
Questor: caught up in the Invesco Enhanced Income debacle? Switch to City Merchants High Yield
A popular income trust is likely to lose its highly experienced and respected management team. What should investors do?
Invesco Perpetual Enhanced Income, a bond fund, is currently managed by Paul Read and Paul Causer, who have worked together at Invesco since 1995 and on the trust since 2001, and by Rhys Davies, who joined more recently.
But last month, as reported here briefly at the time, Invesco served notice on the board of Invesco Perpetual Enhanced Income, giving the trust a year to find a new manager.
The asset management firm’s action was unusual enough (it followed attempts by the board to negotiate lower fees). But events took an even more unexpected turn this week when Invesco and other fund houses, acting this time in their capacity as shareholders in the trust, ordered the board to hold a general meeting and to ask investors to vote on resolutions that the chairman and another director be sacked and replaced by two nominees suggested by the fund groups.
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
Analysts at Winterflood, the broker, said they expected the move to be successful, possibly even without the need for a general meeting, although they stressed that the replacement directors, if appointed, would be independent of Invesco and that as a result its reappointment would not automatically follow.
Shareholders are entitled to feel bemused and uneasy at these developments.
If Invesco does in the end cease to run the portfolio, finding new managers of equal quality who are prepared to run it along the same lines will not be easy for the trust’s board. In any event the shares are likely to come under pressure until its future is resolved (they fell by 4.5pc on the day of the announcement).
While we hold the fund under its current managers in high regard we have not tipped it in the past; however, our advice to anyone who does hold it is now to sell.
The obvious replacement is City Merchants High Yield, which is managed by the same team at Invesco Perpetual. There is no dispute between the board and the managers of this trust.
City Merchants is run on broadly similar lines to Invesco Perpetual Enhanced Income, although there are a couple of differences. The most significant from investors’ point of view is that its yield is lower: 5.1pc against Enhanced Income’s 6.6pc. This is partly because the latter fund uses “gearing” (borrowing) equal to about 19pc of assets, while City Merchants currently does not, although it has the option to do so.
City Merchants does, however, have more of its money in lower-grade bonds. Both portfolios are well diversified, with about 150 holdings each. City’s top 10 gives a flavour of its international mix and liking for banks and insurers: it includes Lloyds Banking Group 7.875pc and 7pc perpetual bonds, a Société Générale 8.875pc issue, Aviva’s 6.125pc perpetual bonds and some 7.875pc bonds issued by Origin Energy of Australia that mature in 2071.
Many of its sub-investment-grade holdings are due to mature relatively soon, making them less sensitive to rising interest rates. Six per cent of the fund is in floating-rate bonds, which pay more when rates rise.
City Merchants is larger than Enhanced Income and has a lower management charge, with no performance fee on top.
It has paid a dividend of 10p a share since 2011 and the board has signalled its intention to pay the same this year. The dividend was exactly covered by earnings in 2017. “Revenue reserves” are relatively limited, however, which means that any future fall in the trust’s income could result in a dividend cut.
It has tended to trade at a premium since 2014 and the current figure is 2.3pc – not high enough to make buying the shares unwise, especially for those who switch from Enhanced Income, currently at a similar premium.
Questor says: buy
Ticker: CMHY
Share price at close: 193.25p
Investment trust news
MedicX, which invests in GPs’ surgeries, is to cut its dividend from next year by an estimated 42pc so that the payment is covered by earnings. The shares lost 7.1pc as a result.