Funding Circle SME Income fund cuts dividend target

The investment trust has been one of the best performing P2P and direct lending portfolios in recent years but rising costs for FX hedging are expected to affect returns.

The £352m Funding Circle SME Income fund has reduced its target dividend citing increased costs and lower gearing, according to a regulatory filing.

It said in the stock market update that the cost of hedging US Dollar denominated assets has risen “materially” over the past 18 months.

This, it adds, is due to “divergent monetary policy and economic prospects in the US and UK” over the past 18 months. This in turn has prompted a significant widening of the GBP/USD interest rate disparity.

It believes that this is structural rather than short term with the potential to widen further. In addition in the update it says that its leverage is reducing down from its current level of 45 per cent - from a target of 50 per cent - with likely further scope to fall further in the coming months as its facility with the European Investment Bank begins to amortise. But, it adds, it is currently looking to bring the gearing back up to 50 per cent.

The Funding Circle SME Income fund has been paying a quarterly dividend of 1.625p  per quarter - which is equivalent to 6.5p per year - for the past two years or so. 

Now, it expects this to come down to 5-6p following the updated guidance from the quarter ended 30 September 2018. This represents a reduction of 7 per cent - 23 per cent.

Richard Boleat, the investment trust’s chairman, says the portfolio is increasingly exposed to diverging macroeconomic and monetary policy but credit quality remains strong.

“I would like to emphasise that the credit performance of the Company's portfolio remains in line with expectations. The Board is considering a number of responses to changing macroeconomic conditions, including potential leverage transactions expected to enhance returns, and we will report to investors further in the near future," he said.

"Our geographical diversification means that we, in common with many other cross-border businesses, are and will continue to be exposed to divergent macroeconomic and monetary policy effects and this is the decisive factor that has led to today's revised guidance,” he said.

Analysts at investment bank Liberum say US assets account for 24 per cent of the portfolio.

"We would expect the dividend to be at the upper end of the 5p-6p range. Nevertheless, the company raised additional equity capital as recently as 4 May and the reduced dividend guidance less than two months later is likely to lead to negative sentiment.”

The Funding Circle SME Income fund currently trade on a 6.6 per cent premium to net asset value [NAV] but Liberum says this is likely to move slightly lower today. At the time of publishing the shares are trading 2.86 per cent lower.