Shires Income Trust (SHRS) - views

[richfool]

I am pondering adding the above to my portfolio of IT's, perhaps in the volatility arising from the general election if it gives me a suitable opportunity.

It's in the UK G&I sector, has a yield of c 5.1%. Discount of -9% to -12% according to sources (below).. TER 1.04%.

SHRS's holds 42% FTSE100 stocks, 17% FT250 stocks, and includes a modest exposure to fixed interest (25%) and a tranche of ASCI (Aberdeen smaller companies trust). So gives some diversity, as well as a respectable dividend yield. I do hold other UK G&I's as well as global IT's. Noted that it's a bit on the small side at c £100m.

Does anyone have any particular views about it?

http://citywire.co.uk/money/investment- ... undID=3205

http://www.hl.co.uk/shares/shares-searc ... ty_details

[tjh290633]

I can remember it getting adverse reviews at one time, possibly when Luniversal started compiling his baskets of ITs on TMF.

It may be down to the level of fixed interest stock held.

TJH

[baldchap]

I am confident enough to have set them up as a purchase on my providers next cheap dealing day.

I already hold CTY and FGT in the same sector, but as stated SHRS have a bit more fixed interest exposure.

Let me know before Monday if I am making a terrible mistake

[forrado]

Following the August 2007 takeover of a failing Glasgow Investment Managers by Aberdeen Asset Managers, Shires went through an absolutely torrid time for near 4 years that saw revenue returns collapse and the annual payout slashed by 40%. Since 2011 it’s been a slow rebuilding process that has seen revenue returns first stabilise and then gradually inch higher. Only in the last two financial years, following replenishment of the revenue reserves, have annual pay-outs to shareholders been increased from the 2010-11 level of 12p to the present 12.75p per share.

Similar to another high yielder, Merchants Trust (MRCH) - which is one of my ISA holdings - Shires is a trust heavily reliant on borrowings to sustain above market average pay-outs. Where Shires differs from Merchants is that it notionally matches its indebtedness against holdings of preference shares that generate high levels of income, whereas Merchants holds no such preference shares or fixed interest securities. The current Shires portfolio split appears to be 73.7% in favour of 40 ordinary equity holdings with 7 named preference shares accounting for the other 26.3%, which is greater than the debt burden of 21%. The trust’s gearing coming via a £20m short-term loan facility due to rollover December 2017.

The on-going charges ratio of 1.04% looks a bit steep to me; mind you having said that, given the £100m size of the trust, anything less than 1% I suspect wouldn't just make it a viable proposition for Aberdeen. Also, in the last five financial years I see an average of 5% of revenue returns have come via option writing - a practice that is becoming a growing feature amongst UK equity income ITs.

Using Trustnet’s comparison tools to measure a variety of performance features of Shires v. Merchants, I reckon Shires just about comes out ahead of Merchants (though not by much) in terms of:
• 5-year total return of 81.3% v. 77.5%
• 3-year lower standard deviation volatility of 10.25 v. 10.65
• However, Merchants beats Shires in terms of a higher 3-year Beta score of 1.1 v. 0.92, meaning there are periods when Merchants will outperform its benchmark to a greater extent than Shires. Which should come as no surprise given Merchants 100% exposure to ordinary equity stocks.

When looking at Morningstar classifications, Shires is in the GBP Adventurous Allocation category (whatever that means) and benchmarked against the FTSE 350 High Yield Index while Merchants is categorised as UK Large-Cap Value Equity and benchmarked against the FTSE All-Share.

All things considered, if it’s a high yielder you want then Shires, as it currently stands, should do a job. However, what I would be inclined to do is hold back at this share price juncture, which I see is some 5% off its 260p 52-week high - and, showing signs of weakness. Looking at the graphs; both the Shires share price and NAV have been on the climb since February 2016, which has pushed the trust up into a top quartile performance position on a 12-month view. Appears to have been very much a beneficiary of Sterling's weakness. The discount having remained in a range of 8% to 12% for the past 18 months, having previously been in single figure premium territory before that. Like I said, I would be looking for more share price weakness before I’d be tempted to make a move.

[richfool]

Thank you Forrado, for that comprehensive background and assessment.

I have noted that there are a number of IT's with historic debentures at higher rates than currently achievable, which was one reason why I have always avoided Merchants. (I believe L'Uni had commented on that in the past). I noted your comment that SHRS has a short term debt facility due to roll over at the end of this year.

I do like the fact that SHRS would give me some exposure to fixed interest, which otherwise I don't really have much of, apart from via Personal Assets and ASCI, both of which I hold, - which is useful as I am much less conversant with fixed interest.

I will keep an eye on SHRS and watch for a cheaper entry point, which is what I am also doing with SLPE (in terms of a top up of the latter).

[richfool]

Are there any views on how the fixed interest holdings/part of Shires portfolio ought to perform from here on. This is a summary of them taken from the Factsheet on HL:

Ecclesiastical Insurance 8.875% 6.0
Royal & Sun Alliance 7.375% 5.5
General Accident 7.875% 4.8
Santander 10.375% 4.6
Standard Chartered 8.25% 3.6
Rea Holdings 9% 1.0
Balfour Beatty 10.75% 0.6

http://www.hl.co.uk/shares/shares-searc ... ty_details