The investment trust cited a number of reasons for lower monthly returns partly due to higher US loan defaults.
The £329m Funding Circle SME Income fund saw a 0.1 per cent return in its net asset value (NAV) in August representing a sharp slow down in returns when compared to previous months, according to regulatory filings.
The NAV total return in August 2018 was 0.1 per cent compared to July’s 0.4 per cent. Barring its first negative month in June in NAV return terms, this is lowest monthly return since December 2015. This reflected an increased impairment charge attributable to two factors, the fund said. Firstly an accounting effect from its the gross assets increasing following drawdown and deployment of its Citi leverage facility resulting in an upfront impairment provision under new accounting rules IFRS9.
However, its investment manager noted, the benefit of higher income and cash receipts from the enhanced leverage “will be felt from September onwards.”
Secondly, it said that while the number of defaults from US loans in August was broadly in line with previous months (seven versus a 2018 average of six), the value of these defaulted loans was higher than the 2018 average.
US loans account for 23 per cent of gross assets and c.33 per cent of net assets, say analysts at Liberum.
“The board has stated it will reduce US exposure in the portfolio by c.10 per cent. The rationale for maintaining the US exposure in the fund does not stack up in our view. The fund provided 13 per cent of the overall funding mix for the platform in H1 2018. We can understand why the platform would want the status quo to remain but we believe the diversification argument for holding US loans in the fund doesn't hold given the costs involved.”
Geographic breakdown of Funding Circle SME Income's portfolio
Source: Funding Circle SME Income Fund
The news comes at the same time as the fund declaring a dividend of 1.312, a figure while previously guided by its board is lower than the past eight quarters. This is equivalent to an annualised 5.1 per cent yield.
Analysts at Numis Securities say the dividend is in-line with the Board’s revised guidance range of 5-6p, albeit towards the low end.
“It remains unclear whether the future quarterly dividends will be at the same rate or will reflect income received in the period. The decrease in dividend reflects the material increase in the cost of hedging US denominated assets (due to the differential between US and UK interest rates), which reduces post-hedging returns on these.”