Yahoo Finance Rishi Sunak will help this fund’s returns – and it’s on offer at a bargain price
If Rishi Sunak’s mere arrival in 10 Downing Street really does push down how much the Government pays to borrow, which is what seems to be happening, it will be positive for the listed fund we cover today – and others that offer “bond‑like” income.
To briefly recap the reasons, discussed here several times in recent weeks, investors expect income‑producing assets to yield more than the “risk‑free” return from government bonds or gilts (the term “risk‑free” assumes that the bonds are held to maturity, so price fluctuations become irrelevant, and does not cover the risk posed by inflation).
So when that risk‑free return goes up, as it did very sharply indeed after the mini‑Budget, the market ensures that less safe bond‑like investments continue to yield more than gilts. It does this, of course, by marking down prices. Hence the damage done to property, infrastructure and bond funds in recent weeks.
Now that this process has gone into reverse with the prospect of financial stability from the new administration, we can expect a recovery in the share prices of listed funds that invest in these assets.
One such is VPC Specialty Lending Investments. It makes loans to businesses, mostly American, which typically lend the money on to their own customers. These businesses are often tech start‑ups such as online providers of car loans and other types of short‑term consumer lending.
That type of lending may strike readers as quite risky, but VPC ensures that its own level of risk is considerably lower.
“We secure our loans against the loan books of our customers,” Gordon Watson, lead manager of the trust, tells Questor. “But we also lend only 80pc‑90pc of the value of those loans, which means there is a buffer before we suffer any loss should a customer experience a default.
“On top of that, we have a dedicated risk team and monitoring system that reviews the companies we lend to on a daily, weekly and monthly basis. We have had a few defaults, but in many cases we were able to recover much of what was owed.”
This steady source of income has enabled the trust to pay a consistent annual dividend of 8p a share since 2018. At the current share price of 78.5p this equates to a yield of 10.2pc – comfortably more than the 3.6pc offered by gilts due to be repaid in five years.
Better still, VPC has the scope to make more interest on its loans. They are all “floating rate”, which means its customers pay more as interest rates generally rise, but the trust’s loans are also typically of short duration, such as two years, so as it receives its capital back when existing loans mature it has the ability to relend the money at higher rates.
The trust does acknowledge, however, that an environment of rising rates does make defaults in its clients’ loan books more likely, which could affect its returns.
Nick Greenwood, who manages the Migo Opportunities investment trust, has about 1pc of his fund’s money in VPC.
“It is good at what it does,” he says. “It offers quite a large dividend, although this was even more attractive when interest rates were 1pc instead of 4pc; that change takes away a bit of a prop for the shares because people were buying these trusts when they were starved for yield elsewhere. There was a big premium relative to gilts, which has now gone.
“But over the longer term fundamentals will come back into play, by which I mean that investors will begin to appreciate the scope for trusts such as this one to raise their dividends.”
He points out that VPC’s 25pc‑plus discount has attracted the attention of two hedge funds, which eye the chance of a big profit if, for example, some of the trust’s assets can be realised at par value and returned to investors. Thanks to the short duration of its loans, this could be a simple enough process.
“You have a decent yield, the chance of dividend growth and a potential catalyst for narrowing the discount,” Greenwood says. “I was lucky enough to buy my stake at prices as low as 71p, but had I not done so I would be inclined to invest at the current price too.”
Questor says: buy
Ticker: VSL
Share price at close: 78.5p
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