UK Edition
Questor: the investors who once swarmed around Honeycomb have gone and it yields 10pc. Buy
Questor investment trust bargain: in a shock reversal, a 10pc premium has given way to a 20pc discount – yet the assets continue to perform
Double-digit yields have featured in Questor several times in recent weeks and last Friday we had to report, a little shamefacedly, that one had proved to be exactly what an elevated yield normally is: a warning of an impending dividend cut.
So it is with some trepidation that today we tip another trust whose shares yield almost 10pc. We do so in the belief that the times we are living through are so extraordinary that things that would normally be impossible in the stock market are regular occurrences.
Today’s trust, Honeycomb, yields 9.7pc. Yet it has paid the same quarterly dividend of 20p since the second quarter of 2017 and its portfolio, which consists of loans originated directly with borrowers in various niche markets, has shown no sign of stress even during the economic upheaval of the pandemic.
“Honeycomb has consistently delivered attractive returns, including in the face of recent extreme headwinds,” said Alan Brierley, an investment trust analyst at Investec, the bank. He said he had been “impressed with the operational performance” of the trust since its flotation in December 2015, “with returns broadly in line with the target” set at that time.
- 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
Mr Brierley said he was reassured not just by the 4.1pc return from the portfolio over the past three months but by the degree of internal scrutiny to which they would have been subjected.
Although he acknowledged that the return figure was unaudited, he pointed out that the trust’s auditor was PwC, one of the world’s largest accountancy networks.
In addition, the chairman of the audit and risk committee was Jim Coyle, chairman of the audit committees of HSBC UK and Scottish Water, an independent non-executive member of the UK oversight board of Deloitte, another large accountancy firm, and a former group financial controller at Lloyds Banking Group. “This gives us much comfort,” Mr Brierley said.
He said “the experience this year has proved the resilience of the portfolio and effectiveness of the process and risk controls” at the trust.
Honeycomb has in fact been “a model of consistency in terms of manager, strategy and target returns” throughout its existence, according to Mr Brierley.
Readers may therefore be surprised to hear that until the publication of his research note on the trust last month he had rated it a sell. This was, however, largely due to valuation: he said the fund had “inexplicably traded on an elevated premium for much of its life”.
While its net asset value has indeed risen with great consistency, the share price got well ahead of it. This started to change about a year ago as investors grew nervous about other funds in the specialist debt sector and accelerated when coronavirus struck. In the process a premium of about 10pc gave way to a discount of almost 20pc.
Mr Brierley said poor sentiment towards the sector was well founded. “The majority of companies have overpromised and under-delivered,” he said. “We believe Honeycomb is one of only a handful to have the potential to survive and thrive.”
Questor says: buy
Ticker: HONY
Share price at close: 822.5p
Update: BlackRock World Mining
“This is not the kind of trust to buy and hold forever,” we said of BlackRock World Mining in August 2017, quoting an investor who held it. In January of that year we had called it a “speculative” bet for “spare” money.
In the circumstances it may be surprising that we have not advised readers to sell since. But we do so now. In the process we cement a gain of about 11pc against a fall in the FTSE 100 of about 21pc.
We are prompted by another note from Investec that criticises the trust for an abrupt change of index against which it measures itself, and for what the bank called the “retrospective” use of that index, and for its failure to outperform the mining sector.
Such outperformance is “conspicuous by its absence”, Investec wrote, adding: “We have sympathy with the argument that investors looking for exposure to the sector would be better served by investing directly into BHP and Rio Tinto or buying a passive investment vehicle.”
Questor says: sell
Ticker: BRWM
Share price at close: 413p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.