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.
The fund manager said the revenues from many of the assets held in those trusts are paid, directly or indirectly by the UK government.
He said: “The underlying assets are like a quasi-government bond, the revenues come from the government, the same as the income paid by a government bond does. Yet if you look at the yield on a UK government 10-year bond, it’s between one and two per cent, the income from these trusts is much higher.”
Mr. Barrass said the growth in alternative investment trusts owes much to the decline in bond yields witnessed since the financial crisis.
Lower bond yields have given birth to a generation of “tourists”, he said, that is, investors whose natural habitat is the bond market and whom he expects will sell their alternatives exposure when bond yields rise.
Mr. Barrass added that such a sell-off would represent an opportunity for long-term investors in the alternatives market as the prices of some of the better funds would fall.
One area of the market where he is struggling to find value is in the property market.
He has turned to Germany for his exposure, investing in Summit Germany, a UK-listed business that invests in German property.
Scott Spencer, investment manager on the BMO multi-manager team, said he likes alternative assets, believing they can offer returns that are "uncorrelated" to wider markets. He tends to invest in alternative assets via investment trusts as a way of managing liquidity.
Mr. Spencer recently sold his position in Medix UK, an investment trust that owns GP surgeries. He said he still likes the assets of the trust, but it raced to a premium of more than 20 per cent and he felt there were better alternatives.
He gave the exmaple of an unlisted, Jersey-domiciled fund, Darwin Leisure Property Fund, which is invested in, among other assets, UK caravan parks. Mr Spencer said returns from these assets have proved durable in various economic conditions..
david.thorpe@ft.com
