While few investors disagree over the importance of including alternative and diversifying assets within a portfolio, there remains debate over the best way to access such areas.
Alternative assets, as implied by the name, involve investing in less mainstream markets, typically in order to ensure at least part of a portfolio is able to weather a risk-off event. But as investors have turned towards private or more complex markets, the risks of doing so have come under scrutiny.
One such risk is liquidity. Here, at least, closed-ended funds have an advantage over their open-ended peers, which is reflected in the number of trusts investing in these assets.
The investment trust space offers more than 100 vehicles that focus on alternative assets such as private equity, hedge funds, specialist debt or lending and infrastructure. These areas, which often have the additional attraction of yielding more than fixed income and equity markets, have become a focus for both buyers and providers.
The Association of Investment Companies notes that the first half of 2017 was a bumper period for both primary and secondary issuance, with secondary markets raising a record £3.3bn. It was also vastly higher than the £1.8bn seen in 2016.
Chief executive Ian Sayers says: “Secondary issuance reached a record level and the number of new launches has picked up, demonstrating substantial demand for investment companies.
“It’s interesting to note that much of the issuance, both new and secondary, took place in high-yielding alternative asset classes such as debt, property and infrastructure. This reflects the suitability of the closed-ended structure for investing in these types of illiquid assets and continued investor demand for income.”
Yet allocating to investment trusts is not so simple, given the added consideration of discounts and premium, and the ability of investors to access these products via model portfolios. The latter issue remains an intractable one, but scrutiny of trusts’ share prices can provide an answer to the discount/premium poser.
Looking at the private equity space, for example, the more well-known fund of funds vehicles such as the £1.2bn HarbourVest or £732m Pantheon offerings still operate on substantial discounts, the former currently at 15.5 per cent and the latter at 18.6 per cent. This is doubtless in part due to the sector’s reputation for volatility, as well as individual corporate actions seen in recent years for both trusts. Performance figures show the vehicles have significantly outperformed benchmarks.
Expanding this out to the direct space, the sector’s overall best performer over five years is the 3i Group, with a 197 per cent return. However, the company does trade at a 49.5 per cent premium.
In the hedge fund world, the ‘event-driven’ subsector operates on an average discount of 12.1 per cent, while the macro and multi-strategy spaces sit on discounts of 9.9 and 9.3 per cent respectively.
In contrast, the general infrastructure subsector has a weighted average premium of 12.7 per cent across its seven funds, and renewable energy trusts sit on an average premium of 8.5 per cent. For specialist debt, one more reasonably valued area is the asset-backed space, where trusts are on an average premium of 1.1 per cent.