InvestmentsAug 18 2014

Rock-bottom interest rates fuel rise of alternatives

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A glut of new launches and share issues has seen the proportion of investment trust assets held in areas other than equities exceed one-fifth.

The popularity in recent years of investment trusts investing in assets such as infrastructure and debt has meant that non-equity investment trusts now make up 21 per cent of the industry, according to data from Winterflood Securities.

The majority of investment trusts that have been launched in the past year have invested in assets other than equities.

Even those that are invested in equities tend to be focused on niche areas, rather than those that have traditionally been core to investors’ portfolios. The current trend is for emerging market equities, real estate investment trusts (Reits) and resources equities.

Winterflood data shows that when all forms of issuance are taken into account, including new trust launches, C-shares and warrants, money raised for equity trusts made up only 22.4 per cent of the total fundraising so far in 2014.

In contrast, 34.5 per cent of the £3.2bn raised this year went into bond or debt trusts, with 19 per cent going into property trusts and 15.2 per cent for infrastructure trusts.

Innes Urquhart, investment trust research analyst at Winterflood, said the percentage of assets in non-equity trusts had definitely risen in recent years.

He said part of the reason behind the trend was that investors were increasingly drawn to sectors “where funds typically provide yields that are particularly attractive in the current low interest rate environment”, such as infrastructure or debt.

A growing portion of these new trusts are typically trading on a premium to their net asset value because of the yield on offer. Winterflood calculated that the average trust with a yield of more than 2.5 per cent is currently trading on a discount to its net asset value of 3 per cent, while the average trust with a yield lower than 2.5 per cent is on a discount of 9 per cent.

The disparity in discounts comes in spite of a recent severe drop in the premiums on UK property trusts after several of them revalued their holdings upwards at the end of June. This generally led to sharp increases in the trusts’ net asset values.

However, Mr Urquhart pointed out that the emergence of sectors such as infrastructure and debt “will have been partially offset by a reduction in the size of the hedge fund sector”. This has suffered through poor performance and a decrease in interest from investors in recent years.

Mr Urquhart also rejected the suggestion that the investment trust sector may eventually come to be dominated by non-equity investments.

He said: “While alternative asset classes are playing an increasingly important role within the sector, we continue to believe there is a place for investment trusts focused on listed equities, particularly where the benefits of the investment trust structure are utilised.”

Well-managed investment trusts that are focused on equities have tended to outperform their open-ended equity fund peers in the long term using gearing and the benefits of having a fixed asset base.

Who dares wins

HICL Infrastructure

HICL Infrastructure has been one of the big winners of the increasing demand for non-equity investment trusts.

HICL was the first listed infrastructure trust to launch in the UK in March 2006 and has since grown to be by far the biggest in the sector.

The management team behind the trust, InfraRed Capital Partners, has spent the eight years of the trust’s life raising more capital on the stock exchange to buy up infrastructure assets.

Primarily the trust has invested in the UK, but competition for the sort of projects the team looks to invest in has encouraged rising prices. In response, the trust recently made its first investment in Australia.

Greencoat UK Wind

The AIC sector covering renewable energy infrastructure trusts is a very new creation but already has six occupants.

The trailblazer for the sector was Greencoat UK Wind, which was launched in March 2013 to invest in UK wind-power projects.

The £363.9m trust owns stakes in 12 wind farms and states that its goal is to deliver a sustainable dividend that increases with inflation.

It aims to pay a dividend of 6.16p per share this year, which at the trust’s current price would give a yield of 5.6 per cent.

In spite of Greencoat UK Wind being the first renewables trust launched, the sector already has assets of more than £1.3bn, and all but one of the trusts is trading on a premium to net asset value.

TwentyFour Income

Part of a range of new investment trusts invested in more niche areas of the fixed income marketplace, the TwentyFour Income trust is already the third-largest trust in the AIC Debt sector in spite of being launched in 2013.

The management team at TwentyFour has already capitalised on the popularity of the trust by issuing more shares, but it continues to trade on a consistently high premium.

It has delivered strong performance since its launch by investing largely in residential mortgage-backed securities (RMBS) and collateralised loan obligations (CLO).

TwentyFour has since launched another investment trust, TwentyFour Select Monthly Income, although that trust has been designed to invest in assets that are even more niche than its predecessor.