The continued search for income and investments that are uncorrelated to traditional equities and bonds is pushing more investors towards alternative asset classes.
Property, for example, was a consistent favourite for investors in 2015 in both open-ended and closed-ended vehicles, with the Association of Investment Companies (AIC) Property Direct UK and Infrastructure sectors the third and fourth most popular for adviser purchases in the third quarter.
But with low interest rates looking set to continue and global growth appearing anaemic at best, there is a small but growing trend to more unusual and potentially more illiquid asset classes appearing in the investment trust world.
|Popularity of alternatives|
Annabel Brodie-Smith, AIC communications director, notes:
“Interestingly, alternative assets are popular with advisers, with Property Direct UK, Infrastructure and Debt being advisers’ third, fourth and sixth most popular sectors within the investment company industry. The Infrastructure sector is the most highly rated sector overall on an 11 per cent premium in comparison with the average investment company, which is on a 7 per cent discount.”
From aircraft leasing to peer-to-peer lending, to the recent launch of the HealthCare Royalty Trust, the range of products available is growing, with 18 trust launches in 2015 investing in what could be considered alternative asset classes.
Annabel Brodie-Smith, communications director at the AIC, explains: “Yield-generating alternative assets are continuing to dominate launch activity within the investment company industry. The two most popular alternative assets when it came to launches last year were the Debt sector, where six firms were launched, and Property, with four companies launching – two investing in the UK and two in Europe.
“The search for income led to a number of more unusual investment companies, including [those] investing in aircraft leasing and diversified equipment leasing. However, the industry has always had a number of these types of firms investing in unusual assets and this is part of a long-term trend.”
One of the reasons for this trend is the structure of trusts as a fixed number of shares and the ability to engage in gearing make them suitable for many types of illiquid and alternative assets.
James Burns, head of the multi-manager team at Smith & Williamson, notes one of the most interesting areas is aircraft leasing, where listed vehicles include Doric Nimrod Air Three and newer offerings such as Amedeo Air Four Plus. These firms buy and lease commercial aircraft.
He notes Doric Nimrod Air Three raised funds using a combination of debt and equity to buy four Airbus A380 aircraft, which were then leased to Emirates airline for 12 years. Equity investors benefited from an 8.25 per cent dividend yield, with no foreign exchange risk – the only risk to the dividend is that of the airline collapsing and being no longer able to lease the aircraft.
Mr Burns explains: “At the end of the 12-year lease period, investors’ initial capital [£1 per share] is returned to them as long as the aircraft can be sold on for about 40 per cent of their initial value. If they are sold for more than that, investors benefit from capital growth as well as the income they have received.