Higher yield but there are pitfalls, says experts
MOST wealth managers believe that ‘alternative’ assets can provide invaluable diversity to an investor’s income portfolio. But they warn against overpaying for such income by buying shares in ‘overpriced’ trusts – in other words, stock market-listed investment companies whose shares are standing at a big premium to the value of their underlying assets.
Moira O’Neill, head of personal finance at fund platform Interactive Investor, says: ‘Nothing in life is guaranteed, least of all returns on alternative investments. But get it right and alternatives can help diversify your income stream – offering a higher dividend yield than conventional equities and with a better level of predictability than you might imagine. Yet there are pitfalls for the unwary.’
She likes investment trust Impact Healthcare that makes its income from a portfolio of properties let out to companies providing residential care home services. The trust pays quarterly income and the annual dividend yield is around 5.5 per cent. O’Neill and AJ Bell’s Laura Suter are fans of investment trust TR Property that invests primarily in the shares of property companies – rather than physical property (as Edison Property does, see above). It pays dividends every six months. The only slight drawback is a low annual dividend yield of 2.8 per cent.
Jason Hollands, of Tilney Wealth, also likes property trusts BMO Commercial Property and UK Commercial Property because their shares are currently trading at a discount. Respective annual yields are 5.3 per cent and 4.2 per cent. Yet he warns investors away from alternative asset trusts specialising in generating income from managing big infrastructure projects – such as toll roads, hospitals and prisons.
‘Such investments have been in high demand,’ says Hollands. ‘As a result, most trusts in this area have shares trading at eyepopping premiums to their underlying asset values.’
For example, shares in HICL Infrastructure are sitting at a 13 per cent premium – expensive.
One quirky alternative asset trust is Tritax Big Box that leases big warehouses to online companies so they can fulfil their orders. The income it generates is equivalent to around 4.7 per cent a year.
Adrian Lowcock, of Willis Owen, and Interactive’s O’Neill are fans. Lowcock says: ‘Tritax is able to get companies to sign up to long leases on their buildings because the online firms need consistent and reliable locations.’ O’Neill describes it as a ‘much punchier alternative income option’. The shares currently trade at a small discount.