This investment trust can help you obtain a much better return on your money than cash in the bank
Thursday 11 Oct 2018 Author: Daniel Coatsworth

Imagine a bank or building society with a poster in the window offering a savings account that pays 6% annual interest.

It would be quite feasible to expect queues down the road as the general public seizes the opportunity to get a much better return on their money than has been the norm over the past decade.

Sadly that 6% rate is nothing but a dream for savers at the moment unless they are prepared to take on higher risks and invest their money in the markets.

The idea of buying individual company shares can be too daunting for many individuals so they look for solace in investment funds as a source of regular income.

It is fairly easy to find equity funds which yield in the region of 3% to 4%. These products will have a portfolio made up of lots of stakes in individual companies.

To get a higher yield, you would have to look at places like property or infrastructure funds which may offer 5%.

WHERE TO FIND EVEN HIGHER INCOME YIELDS

Hitting the magic 6% income figure would inevitably mean venturing into more complicated investment products such as funds that invest in higher risk corporate bonds or other parts of the credit market.

Many investors are reluctant to go down this path as debt markets can be difficult to understand. If this resonates with you, we may have something to win you over.

We’ve come across a debt-focused fund that is very easy to understand, looks to be lower risk relative to some of the other ‘alternative investments’ on the market, and strives to pay that all-important high income.

Hadrian’s Wall Secured Investments (HWSL), an investment trust listed on the London Stock Exchange since June 2016, lends money directly to small businesses at an average 9% interest rate – the full range is 7.5% to 11%.

After paying the costs of running the trust and keeping back 15% of income to help pay dividends in tougher times, Hadrian’s Wall typically has enough money to pay a 6% dividend yield each year, based on its 100p stock market flotation price.

ADDRESSING A NICHE PART OF THE MARKET

‘We’re kind of like what a bank used to do 30 years ago,’ says Michael Schozer, chief investment officer at Hadrian’s Wall Capital, the trust’s investment adviser. ‘For example, a £7m manufacturer in Norwich who needed to borrow £3m would visit their local bank manager who’d they known for 15 years and get a loan.’

Schozer says mainstream banks have since phased out that method of lending in preference of having a more formulaic way of making loans via a centralised location. ‘That method has got rid of expensive people in the branches and introduced clear criteria to whom they will lend.’

Hadrian’s Wall specialises in loans to small businesses which may have been rejected by these banks because their situation was complicated rather than being a bad credit risk. It competes for these opportunities against challenger banks like Shawbrook rather than private equity which prefer larger sized loans.

Schozer believes the investment trust’s downside is limited because its loans are secured against physical assets. If someone can’t pay back the loan, Hadrian’s Wall takes ownership of assets and sells them to recover its money.

‘Any loan book has defaults; it is part of the industry. Imagine an equity fund manager saying all the stocks they buy have
gone up – it is unlikely. We’ve had one full repayment so far and no defaults yet,’ explains Schozer.

‘When we look at loans, we are doing secured lending. We look
at a) can the company pay?; b) if they can’t, do I have the legal right to take the asset?; c) How certain am I that I can convert that asset to cash?

‘If you are making consumer loans, every loan that defaults
you will lose a high percentage. If you are making secured loans, you will lose a very small percentage if you are properly structured. If you look at data over many years, senior secured bank loans tend to recover about 80%, unsecured might recover 50%.’

A LOAN SITUATION IN PRACTICE

The investment trust now has nearly 20 loans in its portfolio. The weighted average life of a loan is almost four years.

Among its portfolio is a £5.5m loan to the owner of petrol stations and mini-marts located in places where there is no immediate competition from large supermarket operators. The owner wanted to buy back two sites they built 10 years ago, plus they were also building a new site.

‘A bank would easily lend against a petrol station and a mini-mart, but they would want to see two to three years’ financial performance before they would lend. In our situation, the banks would only lend against two of the three properties as the third was too new. So we got the loan instead as we were prepared to lend against all three sites. These are nice cash flow operations.’

Hadrian’s Wall is often a bridge to future bank lending. In the petrol station example, it recognises that the owner is likely to refinance the loan at a much cheaper rate with a bank once they have three years’ worth of financial performance from the newly-developed site.

It uses brokers and arrangers to source new loans rather than employ a large salesforce of its own.

The investment trust has attracted numerous big name shareholders including asset managers Investec Wealth, Old Mutual and CCLA which manages investments for the Church of England and various charities. It is easy to see why they’re on board.

Ultimately Hadrian’s Wall is suitable for investors who want a nice income from a low volatility asset, recognising they won’t get much in terms of capital gains.

The 6% yield, while not guaranteed, means you can expect a nice return on your money and one that is significantly beating the current rate of inflation which can’t be said for most cash savings accounts. Buy now. (DC)

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