Questor: this fund is less risky than it looks and its 10pc yield gives our income a nice boost

Last week we took the reluctant decision to sell Next. We felt we could not afford to own shares in a company that had suspended its dividend at a time when our portfolio’s overall income was below target.

And, as we said in one of our mini-podcasts to the Questor WhatsApp group, we should judge the portfolio’s estimated income for the year, £23,500, against an inflation-adjusted figure rather than the headline £25,000 – the figure derived from our target yield of 5pc on the £500,000 notionally invested at the outset in 2016.

Our true income target this year, if we are to keep pace with the rise in the cost of living, is £27,500. This leaves the £23,500 figure 15pc short. Getting some income from the £11,340 realised from the sale of Next (we invested £10,000 in January 2017) would go some way to closing the gap.

In choosing a home for this money, we seek a high yield alongside good prospects for income security. The latter is in short supply at the moment: hundreds of companies have cut or suspended their dividends as a result of the pandemic. We have had to fall back once more on the sector in which a large proportion of this portfolio is already invested: property.

This time, however, in an attempt to get some diversification, we are choosing a property debt fund.

This means that, rather than owning buildings and receiving rent, the fund, Real Estate Credit Investments, lends to property-related firms such as housebuilders, hotel chains and owners of student housing.

• Sign up to our Business Briefing newsletter for a snapshot of the day's biggest business stories
• Read Questor’s rules of investment before you follow our tips

Hold on, you say: surely those are some of the very sectors most severely affected by the lockdown? Is there not a huge risk that such borrowers will be unable to make their loan repayments to the fund because their own income has dried up?

At first sight, perhaps – and certainly some investors take that view, to judge by the 10pc that this trust now yields. But a closer look at how its investments are actually managed, and how they are performing now, in the midst of the closure of most of the retail and hospitality sectors, paints a different picture.

When we first tipped this trust, in October 2017 for our Investment Trust Bargain format, we described the management team’s experience and nous in finding pockets of value in parts of the commercial property market no longer served by traditional lenders such as banks.

The circumstances may have changed but the investment team behind the trust, which numbers 32 people at Cheyne Capital, the management firm, still have the expertise and agility to navigate the Covid-19 crisis not just so that damage is limited but with an eye to opportunities thrown up by dislocation in the markets, Questor believes.

An update that Cheyne published earlier this month included much to reassure investors. It has already written off one asset that it believes to be at risk, at a cost of 1.6p per share, while a loan to a housebuilder has been reduced in value by 58pc, or 5.5p a share, on the trust’s books.

A 9.7pc reduction in the value of its bond portfolio accounts for another 8.9p per share. All these losses are notional, as the assets concerned have not actually been sold, but sales that have taken place account for a 2.1p per share loss.

All told, the fall in value is 18.1p a share. The current net asset value is 147.6p a share. The manager also set out in detail how it was seeking to preserve its income in the long term by working with its borrowers to see them through the crisis.

These plans are all well and good but the proof of the pudding is in the dividend. Reassuringly, the trust announced, alongside its update, a quarterly divi of 3p a share. It reiterated its intention “to pay a stable quarterly dividend” and said the “cash forecasting and stress scenarios” outlined in the update “give us the confidence that the company can maintain its dividend cash coverage”.

A quarterly divi of 3p means an annual total of 12p. At the current share price of 120p that represents a 10pc yield. Questor sees that as more than adequate recompense for the risks involved. At that rate, the fund will pay us £1,134 a year, which will take the portfolio’s estimated total to £24,634 or 90pc of our inflation-adjusted target.

Questor says: buy

Ticker: RECI

Share price at close: 120p

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.