Given the lack of new issues coming to market, I wonder if Oliver would be interested in doing an analysis on these two investment trusts, SMIF and CMHY.

SMIF pays a monthy distribution, currently 0.50p a month, and yielding about 6.1% at the time of writing. Trading at around 2-3% premium.
CMHY pays a quarterly distribution, currently 2.50 a quarter, and yielding about 5.4% at time of writing. Trading also at a premium of 2-3%, a few basis points higher than SMIF.

When looking at the latest accounts for SMIF, I was a bit surprised at the income statement, which seems to show that the fund is not generating enough income to pay the monthly distribution and thus cash reserves are going down quickly.

Could more enlightened minds share their thoughts about these two high-yield bond investment trusts please?

What are the risks/probabilities of these investment trusts blowing up? How can we find out the most recent leverage figures?

I would not mind too much if they move to a discount as long as income distributions are stable.
I was happy getting 6% yield with my small holding in SMIF and I was expecting share price would go down as the market would price in rising yields at some point in the near future....but looking at the SMIF accounts has got me a bit worried now. Any views in the forum?


  • According to the Barclays Stockbrokers website, SMIF is paying £0.50/month this year but paid out much less in 2014. CMHY looks more reliable to me but, to be honest, I don't understand investment trusts properly and am much more comfortable with individual bonds or equities
  • These are simply investment funds that invest in bonds. The structure of an investment trust is different from the more well known oeic or unit trust and this gives some advantages and disadvantages. The managers of both funds run well known oeics, so City Merchants is run by Paul Causer and Paul Reed who also run many of the Invesco Perpetual bonds funds and Twenty Four asset management are fixed income specialists with a couple of award winning and well respected funds. Reading the accounts both say they have no leverage (although one feature of investment trusts v oeics is they can borrow to invest and potentially enhance returns) and both say they believe they will be able to keep paying dividends at the current level and they haven't been reduced at all recently. I can see the change in the accounts you mention on SMIF and the reduction in cash seems to be offset by some kind of derivatives but I too don't understand it

    Send them an email and ask what is happening. I find that boards of investment trusts are often happy to talk to private investors and I used to enjoy going to many AGM which were again often geared to smaller investors.

    If you believe in the managers and their strategy and understand how the structure of investment trusts affects returns then these funds should be fine but you need to do your research. The Twenty Four fund specifically invests in some illiquid fixed interest which is why they are structured as an investment trust. In an oeic if people want to withdraw their funds the underlying investments have to be sold. In the investment trust they do not - the share price will vary instead in line with demand and supply. Hence they can take a longer term view on some of these holdings.
  • With regards to trenator's original observation on SMIF, that cash reserves are "going down quickly" and consequent concerns as to sustainability.......
    As I understand it, the managers of this investment trust seek to make fixed income investments in such a manner as to obtain a total return which over time will justify the distributions made by way of dividends. Such return may come in the form of income received but equally may derive from capital gain.
    A simple example would be the purchase below par of a bond with a fixed redemption date. "Income" would be the cash interest receipts, whilst "capital gain" would come from appreciation in value as the bond is held to maturity. Both would contribute to the total return.
    Cash levels only matter insofar as they are managed in such a way as to allow payment of all liabilities, not least share dividends, as they fall due.
    Managers' skill in finding assets to buy at prices which allow sufficient total return is paramount.
    An excerpt from Managers' most recent report of performance over the most recent six month reporting period:
    "Despite a challenging period (particularly in the 2nd half of 2014) the Company's performance has generally improved over the course of the period. The NAV total return in the period was 2.28p per Share. Net of 4.07p per Share of dividends declared in respect of the period, the capital value of the NAV per Share decreased by 1.79p per Share."
    So, yes, over this (short) measurement period, more has been paid out by way of dividend than has been earned by way of total return.
    What actually matters over the longer term if NAV is to be at least maintained going forward, is the ability to source fixed interest investments which will generate sufficient total return, after all expenses, of 6% pa to cover cash dividends. TwentyFour Asset Management appears confident this can be achieved in current markets.
  • Thanks everyone for comments, I think there is [usually] always something to be learnt by sharing views with other people. In the end I topped up a tiny bit and will wait to see how the rest of the year pans out in terms of equity prices and credit yields.

    There is some issuance in the market but sadly it is at the £50k or £100k min level. Yields pretty low, even for lowly-rated, risky issuers.

    I think that exec-only platforms (HL, Selftrade, Barclays, Youinvest, etc) are becoming an impediment to the development of a retail bond market by insisting in distribution fees of 0.25% or even 0.50% for new issues... but this is probably for another post.
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