Investment Trust Insider on funds winding up

Investment Trust Insider on funds winding up – James Carthew: boards pull the plugs on funds in trouble

It is quite rare that large, relatively new investment companies suddenly decide to fall on their swords but recently we have seen at least three of them do it. What’s going on?

First to go was Funding Circle SME Income (FCIF). I last wrote about the lender to small businesses in January 2018 after it had merged its ordinary and C-share portfolios and had become a £320 million closed-end fund. I was reasonably optimistic about its prospects as it had been churning out fairly steady monthly returns that were sufficient to meet its dividend objective.

However, I did warn though that the company was reliant on the quality of its underwriting (credit assessment) and that its borrowing could magnify any losses and a weak economy could lead to rising defaults by borrowers.

In April 2018 FCIF reported its first monthly loss, although this was due to its adoption of new accounting rules rather than rising defaults. Under IFRS9 lending funds have to set aside money in advance of anticipated loan losses rather than responding to defaults when they occur. FCIF made a provision equal to 1.1% of net asset value (NAV), turning a 0.5% return for the month into a 0.6% loss.

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