Funding Circle fund cuts dividend target as currency hedging costs rise
THE FUNDING Circle SME Income Fund (FCIF) has reduced its annual dividend target as a result of increased costs of hedging its portfolio’s currency exposure.
The investment trust, which backs loans across Funding Circle’s platforms in the UK, US, Germany and the Netherlands, said there had been a “material increase” in the cost of hedging dollar-denominated assets back into sterling.
The fund previously targeted annual dividend returns of six to seven per cent, but as a result of a reappraisal of the anticipated currency hedged returns available from the portfolio over the next 12 months, FCIF said its annual dividend target from the end of the third quarter of 2018 will be five to six per cent.
An announcement to the London Stock Exchange on Friday said the increased hedging costs were driven by divergent monetary policy and economic prospects in the US and UK, which has seen a “significant widening” of the sterling/dollar interest rate differential over the past eighteen months.
“This phenomenon is now assessed as being structural as opposed to transient, with a not insignificant risk of further material divergence,” the update said.
Richard Boleat, chairman of FCIF, said the portfolio was still performing as anticipated.
“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.
“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.”
Analysts at Numis suggested investors would be disappointed at the prospect of a dividend cut.
“The difficulty for FCIF is that the US accounts for a growing proportion of Funding Circle’s origination,” Numis said.
“This means that the US weighting is likely to rise further if FCIF continues to take loans in proportion to Funding Circle’s overall business.
“In theory, the board of FCIF could decide to take a lower allocation to the US in future, or it could change its hedging policy in relation to overseas assets, which would boost yield but would increase the net asset value volatility.
“We expect that the board or managers will seek to consult shareholders to discuss the fund’s future strategy.”