Alternative income assets such as infrastructure and property funds remain attractive despite imminent interest rate rises, according to Peter Elston, chief investment officer at Seneca.
Mr Elston runs the £83m Seneca Income and Growth investment trust, which has zero exposure to US shares, as he believes the market will underperform as interest rates in that country continue to rise.
In contrast, Mr Elston has invested in real estate investment trusts (REITs) in niche areas of the market, and in healthcare trusts.
Mr Elston said it is likely alternative income assets will underperform in a climate where UK interest rates have been rising for several years, as rates will then be much higher, and the economy slowing down, causing investors to move back to bonds for income.
But he said at this stage in the UK, where rates have yet to rise and where it is expected even if the Bank of England increases them on Thursday (2 October) any further rises will be slow, alternative assets remain attractive.
Among the Reits Mr Elston is invested in are Civitas Social Housing and Primary Healthcare Properties.
Civitas Social Housing invests 25 per cent in general needs housing and 75 per cent supported housing and extra care housing.
"Essentially [this is] buying operating assets off registered providers (RP) - housing associations, local authorities - and owning the physical asset and leasing it to the RP on long term leases," he said.
"[The] rationale is to enable the RPs to realise capital and expand their offering with new stock. [The fund targets] RPI linked 5 per cent dividend yield plus c. 1-2 per cent growth [with] debt capped at 40 per cent LTV."
Mr Elston, an industry veteran who formerly held senior roles at Aberdeen Asset Management, said investors should also ignore the stout premiums at which Civitas Social Housing and Primary Healthcare Properties trade to their net assets.
He said the net asset values of the trusts in question are much higher than published in the accounts, due to the conservative accounting policies that are deployed.
The Seneca investment trust trades at a premium to net assets of 1.2 per cent.
Investors such as Tony Yarrow, who runs Wise Investments, take the view that the strong performance of alternative income assets in recent years has been a function of low interest rates.
Mr Yarrow’s theory is the yields on those assets are rendered more attractive relative to the risks of the investment, because the yields on lower risk assets have shrunk due to the prevailing interest rate environment.
Philip Milton, who runs Philip Milton and Co, an advisery firm in Devon, said he tends to buy trusts at deep discounts when looking for alternative assets.
David.Thorpe@ft.com
