A rush to back alternative assets for diversification and income is making fund managers' job harder as prices rise, but they say paying a bit more is still worth it.
Data from the Association of Investment Companies (AIC) showed all twenty of the fastest growing investment trusts on the UK market over the past five years were mandates investing in alternative assets, particularly with an income focus.
Priyan Rayatt, investment trust analyst at Peel Hunt, said he has seen two main drivers of alternative assets, "an insatiable desire for yielding investments" and for higher yields than bonds are offering.
"A decade ago a UK investor could achieve 5 per cent interest rate from an orthodox high-street savings account, whereas now you would struggle to find rates greater than 1 per cent.
"This makes alternative sources of yield look very attractive on a relative measure.
"Sectors such as social infrastructure offered around 5-6 per cent yield over a decade ago, however it is only recently that they have become a core allocation to a number of investors as their predictable long-term cash flows are considered valuable relative to prospective interest rates.”
Many of the better alternative income assets trade at substantial premium to net assets, but they remain good value, according to Ian Barrass, who runs the £130m Henderson Alternative Assets Investment Trust.
Mr. Barrass said that the sector has grown in the years since the financial crisis as banks have stepped away from financing projects such as renewable energy or infrastructure.
He runs an investment trust, Henderson Alternative Strategies, and an open-ended fund, the £68m Henderson Diversified Alternatives Fund, which has a focus on income.
With growth in mind, he is invested in the Blackstone GSO Credit Fund, which he describes as a ‘higher risk” product, but one he is happy to own as he believes the rewards presently justify the risks.
When investing for income, Mr Barrass said he likes two trusts in particular, the £2.6bn HICL Infrastructure and the £1.1bn John Laing Infrastructure, both of which trade at a premium to their underlying assets, either because of a perception the assets are undervalued or because investors are particularly bullish about infrastructure.
Among the top ten investments in the HICL trust are hospitals in Birmingham and Bristol, and the A63 motorway.
Mr Barrass said these assets tend to be public private partnerships between the government and the trust. The trust finances the building of the assets, in exchange for which the government repays the cost, plus a profit, annually.
John Laing Infrastructure is a £1.1bn trust that invests globally. Among the top ten investments in the trust are Barcelona's Metro stations, Connecticut service stations and Forth Valley Royal Hospital.
Mr. Barrass said the way both of those trusts value the assets they hold is extremely conservative, meaning the premium at which those trusts trade is justified because the net asset value of the trust is likely higher than is reflected by the conservative accounting standard.