Ex­plor­ing al­ter­na­tive as­sets to gen­er­ate more than 4% div­i­dend yield

The in­vest­ment trust in­come story does not end with stocks and bonds

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It is tes­ta­ment to the flex­i­bil­ity of in­vest­ment trusts that they can of­fer ex­po­sure to such a di­verse col­lec­tion of po­ten­tial in­vest­ments. Be­yond the stan­dard form of listed com­pa­nies they of­fer more niche in­ter­ests which span from pri­vate eq­uity to wind farms and even loans to ship­ping com­pa­nies.

All of this means in­vestors can ac­cess in­come from a va­ri­ety of dif­fer­ent sources be­yond tra­di­tional as­set classes like stocks and bonds, plus gen­er­at­ing re­turns that are of­ten un­cor­re­lated to the fi­nan­cial mar­kets.

A BET­TER FIT

The closed-ended struc­ture of in­vest­ment trusts makes them a bet­ter fit with less liq­uid as­sets such as prop­erty and other ‘al­ter­na­tive’ as­sets.

Many of the in­vest­ment trusts which in­vest in al­ter­na­tive as­sets, of­ten along­side eq­ui­ties, sit in the As­so­ci­a­tion of In­vest­ment Com­pa­nies’ (AIC) Flex­i­ble In­vest­ment sec­tor which is largely made up of multi-as­set funds.

The ta­ble shows the higher yield­ing names in this group­ing with as­sets of £50m or more.

Te­tragon Fi­nan­cial (TFG)

in­vests in a mix­ture of bank loans, real es­tate, eq­ui­ties, credit, con­vert­ible bonds, pri­vate eq­uity, in­fra­struc­ture and TFG As­set Man­age­ment, a di­ver­si­fied al­ter­na­tive as­set man­age­ment busi­ness.

It is pos­si­bly too com­plex for some in­vestors and this is re­flected in a more than 42% dis­count to net as­set value (NAV). This dis­count may also re­flect the dif­fi­culty of valu­ing the un­der­ly­ing as­sets in the port­fo­lio. De­spite th­ese is­sues, bro­ker Stifel points out that Te­tragon has con­sis­tently grown its div­i­dend since 2009.

The £475m as­set Aberdeen Di­ver­si­fied In­come & Growth (ADIG) was launched in its cur­rent for­mat in Fe­bru­ary 2017 through the merger of Black­Rock In­come Strate­gies Trusts and Aberdeen UK Tracker. It has a wider re­mit than tra­di­tional multi-as­set funds, in­vest­ing in ar­eas like farm­land and trade fi­nance. At 119.5p it trades at a 0.6% dis­count to net as­set value, and in­vestors can ex­pect a div­i­dend yield in the re­gion of 4.4%.

THE IN­FRA­STRUC­TURE SPACE

Some trusts fo­cus on spe­cific types of al­ter­na­tive as­set, per­haps most notably in­fra­struc­ture.

In­fra­struc­ture as an in­vest­ment theme has be­come in­creas­ingly pop­u­lar in re­cent years. It is rel­a­tively un­cor­re­lated to the eq­uity mar­ket and can pro­vide a pre­dictable stream of in­come, of­ten ris­ing ahead of in­fla­tion, over the long term.

The £1.45bn takeover of John Laing In­fra­struc­ture ear­lier this year by a con­sor­tium of funds helped re­vive sen­ti­ment to­wards the in­fra­struc­ture space which had pre­vi­ously suf­fered as the idea of pri­vate money be­ing in­vested in pub­lic projects be­com­ing more po­lit­i­cally un­pop­u­lar.

Among the in­vest­ment trusts with ex­po­sure to the in­fra­struc­ture space is HICL

In­fra­struc­ture (HICL) which trades at a 6% pre­mium to NAV and of­fers a div­i­dend yield of 5.2% ac­cord­ing to data from the AIC.

Other con­stituents of this in­vest­ment trust sub-set in­clude In­ter­na­tional Pub­lic Part­ner­ships (INPP) and GCP In­fra­struc­ture (GCP).

WHY OPEN-ENDED FUNDS AREN’T SUITABLE FOR ILLIQ­UID AS­SETS

You may won­der why illiq­uid as­sets such as in­fra­struc­ture projects are dom­i­nated in the closed-end space (i.e. in­vest­ment trusts) rather than opened­funds (unit trusts and Oe­ics). The rea­sons why are fairly straight­for­ward.

In­vestors are en­ti­tled to re­deem their in­ter­est in tra­di­tional open-ended funds at net as­set value, and if a large num­ber of in­vestors want to sell their in­ter­est in a fund at the same time the com­pany might have to sell as­sets to meet th­ese re­demp­tions. (i.e. raise cash to pay money back to the in­vestors).

In con­trast, in­vest­ment trusts – also known as in­vest­ment com­pa­nies – have a fixed num­ber of shares and can trade at ei­ther a dis­count or pre­mium to their net as­set value based on mar­ket sen­ti­ment.

When some­one wants to sell their in­ter­est in an in­vest­ment trust, they are sim­ply sell­ing their shares to some­one else in the mar­ket. The fund man­ager doesn’t have to do any­thing to the port­fo­lio be­cause of the buy­ing and sell­ing of shares be­tween in­vestors.

‘Struc­tural ad­van­tages of in­vest­ment com­pa­nies in­clude the abil­ity to fo­cus on ac­tively manag­ing un­der­ly­ing port­fo­lios with­out the dis­trac­tions of in­flows/re­demp­tions, which are of­ten sen­ti­ment driven and at the wrong time in the cy­cle,’ says in­vest­ment bank Canac­cord Ge­nu­ity.

In ad­di­tion, open-ended funds can strug­gle to sell illiq­uid as­sets fast enough to meet re­demp­tions – notably this was the case for sev­eral UK prop­erty funds in the wake of the Brexit vote in June 2016 and they had to sus­pend trad­ing as a re­sult.

The Fi­nan­cial Con­duct Author­ity re­cently pub­lished a series of pro­pos­als which would force open-ended funds in­vest­ing in illiq­uid as­sets to sus­pend trad­ing in cer­tain cir­cum­stances and for the prod­ucts to be badged as hav­ing high liq­uid­ity risk. (TS)

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