Funding Circle SME Income (FCIF) has launched a review with the Funding Circle lending platform as the high-yielding debt fund battles to improve shareholder returns after two dividend warnings.
This week the £283 million Guernsey-based investment company revealed another disappointing monthly return with net asset value (NAV) virtually flat in January, as rising defaults on UK loans continued to sap returns.
At 85.4p the shares languish on a 10% discount below the 31 January NAV per share of 95.2p, having achieved a total return of just 0.03% in the month. They yield 6.5%.
FCIF picks its loans from the Funding Circle platform which lends to small and medium-sized businesses neglected by high street banks since the 2008 financial crisis. It pays a 1% annual servicing fee to Funding Circle but there are no other fund management charges.
Last summer the company alarmed investors with a dividend warning and before Christmas revealed the reduced quarterly pay-outs would not be covered by income this year.
In an update to investors this week, it said: ‘The board is undertaking a review in conjunction with Funding Circle, actively considering a number of measures to improve shareholders’ total NAV and share price returns.
‘The company expects to update the market in the forthcoming weeks after further consultation with major shareholders.’
Invesco Asset Management is its biggest backer with 27% of the shares, much of it held in the funds and investment trusts run by Mark Barnett, the struggling equity income manager who has invested widely in the peer-to-peer and alternative lending sector.
The January disclosure extends FCIF’s poor performance from last year. It grew NAV by just 0.7% in 2018, well below its original target of 6-7% which it hit in the previous two years with a 7.1% portfolio return in 2017 and 6.7% in 2016.
FCIF’s slump in returns was caused first by the worsening performance of US consumer loans, to which it has steadily reduced exposure from 25% to 18%, followed by rising defaults from UK loans taken out in 2016 and 2017.
FCIF has increased its investments in UK loans to 64% of its assets. Liberum analyst Conor Finn calculated the impairment rate on these had risen to 7% in the ten months to the end of January, up from 2% for the previous financial year.
‘The volatility in UK loan performance is expected to continue for a number of months which will make it difficult for the company to achieve the guidance of a 4% NAV total return in the 12 months to December 2019,’ said Finn.
FCIF explained it typically saw a seasonal rise in delinquencies in December and January due to the difficulty of contacting borrowers over Christmas and the slowdown businesses can see over the festive period. It expected loan performance to improve in the coming months.
The company has bought back 2.2 million of its shares since December in a bid to narrow the discount but analysts believe it will not succeed in re-rating the stock until performance improves.
Launched in November 2015, FCIF initially did well and saw its shares peak at 108p in March last year. Since then they have tumbled well below their 100p flotation price, leaving original shareholders with a three-year total return, including dividends, of just 5%.
The underlying portfolio has done better, with a total NAV return of 16.2% over three years, although the falling share price means shareholders have not received that return.
Once fully invested in 2016, the company paid a series of eight quarterly dividend payments of 1.625p per share. Following last June’s dividend cut there have been two quarterly dividends of 1.312p, the latest declared last month.
Meanwhile, Funding Circle (FCH) shares have also struggled as investors have worried about the impact of Brexit on the UK economy and rising loan arrears. Since floating last September, its stock has slid 20% to 354p.