Two Income Trusts from One Manager, Two Very Different Rate Bets

Two income trusts run by the same specialist manager can behave very differently when interest rates move. That's the first thing to understand about TwentyFour Asset Management's pair of listed funds. Both sit in the specialist debt sector, but one is built to shrug off rising rates and the other is far more exposed to them. This is general information rather than personal advice, but the contrast is a useful case study in how a fund's structure shapes its outcomes.

A floating-rate portfolio built around asset-backed debt

TwentyFour specialises in asset-backed securities (ABS), and the larger of the two trusts, the TwentyFour Income Fund (LSE: TFIF), is a straightforward expression of that focus. With roughly £1 billion under management, it holds securities whose income comes from pools of underlying assets such as corporate loans and mortgages. The manager runs about £24 billion in total and is owned by the Swiss asset management group Vontobel.

The key feature is that those underlying assets are floating-rate, meaning the payments they produce move up or down as interest rates change. About 15% of the portfolio is investment grade, 52% is sub-investment grade and 33% is unrated. That mix tells you the fund leans toward higher-yielding credit rather than the safest end of the market.

The fund aimed for a total return of 6% to 9% a year on its original 100p issue price, including a minimum annual dividend of 8p paid quarterly. Its net asset value (NAV) total return has averaged just under 8% a year since it launched in 2013. NAV total return captures both the income paid out and the movement in the value of the underlying holdings, so it's a fairer yardstick than the dividend alone.

Reaching for premium yields with a broader toolkit

The smaller sibling, the TwentyFour Select Monthly Income Fund (LSE: SMIF), works on a wider canvas. At around £300 million, it aims to capture what the manager describes as premium yields in less liquid securities across global credit markets. Liquidity is the key word here. Assets that don't trade as frequently often pay more to compensate investors for waiting to sell.

That broader remit brings in Additional Tier 1 (AT1) capital securities issued by banks, payment-in-kind notes (often linked to private equity deals), leveraged loans, ABS and corporate bonds. At the end of September, just under 40% of the portfolio sat in AT1 securities, with about a third in ABS and 15% in securities issued by insurers. Roughly a third of holdings are rated BBB, the lowest investment grade tier, and most of the rest sit below investment grade. About 7% is unrated.

Ratings can be misleading when read at face value. In some cases, a rating reflects where a security sits in a bank's capital structure rather than how strong the borrower is. AT1 notes are designed to absorb losses if a bank runs into serious trouble, so they are typically rated several notches below the same bank's senior debt. Investors get paid for taking that extra risk, but the rating label alone doesn't tell the whole story.

SMIF's second-largest holding illustrates the point. It's a Nationwide 10.25% Core Capital Deferred Share, similar in character to bank AT1 debt. Fitch Ratings rates Nationwide as a group at A, five notches below its top AAA grade, yet the AT1 capital sits at BBB-, just above sub-investment grade. The gap between those two ratings is the capital structure at work.

Why rising rates hit one trust harder

SMIF targeted 8% to 10% a year on the 100p issue price, made up of a 6p annual dividend paid monthly and a capital return of 2p to 4p. The dividend target has been met consistently. Capital growth, however, has been hard to find. Since 2014, the trust has delivered a NAV total return of 6.4% a year, and most of that has come from income rather than rising asset values.

The main drag is duration. Longer-dated securities lose more value when rates rise, and SMIF holds plenty of them. The Nationwide holding is a clear case: it matures in 2049, is very sensitive to rate moves, and has fallen about 10% in 2026 as expectations for interest rates have risen. Since the start of 2022, its value has dropped around 35%.

Interest rate duration is a handy way to measure this exposure. More than half of SMIF's portfolio matures in five years or more, and its duration of 3.5 implies the portfolio would fall by about 3.5% if rates rose by 1 percentage point. TFIF works the other way round. Because its underlying debt floats, higher rates feed through to its income rather than eroding the value of its holdings.

Reading the payouts with care

SMIF pays 0.5p a month, topped up with a final payment at the end of its financial year in October. This year's final payment is 0.912p, bringing the total to 6.66p per share. Against the current share price, that works out to an 8.4% yield. On paper, that's an attractive headline figure, and it's easy to see why investors focus on it.

Yield on its own doesn't capture everything, though. A high payout from a fund whose capital base is shrinking can be less than it seems, and a trust's yield moves with its share price. TFIF's underlying portfolio, by contrast, is described as generating a yield of over 10%, and its floating-rate design means that figure isn't locked to the value of long-dated bonds.

Here's the thing: neither trust is a savings account. Both hold credit that can lose value, both are listed and can trade at a discount or premium to NAV, and both depend on the manager's credit selection. Anyone weighing them should look at the full picture, including ratings, duration, dividend history, NAV performance and how much of their own money they can afford to see fluctuate.

My read is that the pair illustrates a broader lesson about income investing. A higher headline yield often comes with more exposure to rates, lower-quality borrowers or less liquid assets, and sometimes all three. A floating-rate fund and a long-duration, premium-yield fund can share a manager and still suit very different investors. Checking how each trust earns its income, and what happens to it when rates move, is the step that matters most before deciding anything.