Alternative asset classes are best accessed via investment trusts due to their structure, according to several portfolio managers.
David Hambidge, director of multi-asset funds at Premier Asset Management, explained: “Given that liquidity on the majority of alternative assets is poor or in some cases virtually non-existent, then an investment trust with its fixed (or semi-fixed) capital structure is the best structure for these investments.”
He said alternatives have gained in popularity since the financial crisis, largely as a result of plummeting bond yields, and noted investment trusts have “raised huge sums, particularly in the income space”.
Alex Scott, deputy chief investment officer at Seven Investment Management, which in June confirmed its alternatives exposure had reached its highest ever levels, revealed the firm made use of investment trusts in some of its funds.
“In our view, the closed-end investment trust structure is well suited to holding less liquid underlying assets (for example, infrastructure, private equity or illiquid credit instruments) – it provides a tradable, reasonably liquid fund structure so that otherwise inaccessible assets can be accessible to a broader range of investors,” he explained.
But Mr Scott acknowledged investment trusts come with their own set of complexities, with their share prices able to diverge significantly from underlying asset valuations.
He warned: “It’s important to understand the drivers of this – not only supply and demand for the shares, the timeliness, accuracy and conventions of valuation methodology used for calculating NAV, any discount control or redemption mechanisms that an IT may have, the structure and strength of the board, the nature of the shareholder register and so on.
“Discounts may mean that there’s value on offer and an investment trust is unjustly neglected by the market; or they may simply mean that NAVs have not yet caught up with reality – it’s important to be able to understand which is which.”
The advantages of the investment trust structure were thrown into sharp relief following last year’s referendum when in many cases investors with money in open-ended property funds were prevented from redeeming due to the illiquidity of the asset class, meaning many fund managers chose to close to redemptions.
Annabel Brodie-Smith, communications director at the Association of Investment Companies, said: “After the UK referendum last year we saw a number of open-ended property funds have to suspend trading, meaning that investors weren’t able to buy or sell them and this has happened before during the financial crisis.
“While sentiment towards property changed and property investment companies’ share prices suffered, investors could still sell their shares if they wanted to and investors were able to buy them.”
Alternative assets, such as infrastructure, have become more mainstream investments, with many investors using them in their portfolios because they are often uncorrelated to equities and fixed income.
Mr Hambidge added: “One of the first sectors to capture investors’ interest was the social infrastructure space with companies such as HICL (formerly HSBC) infrastructure and International Public Partnerships having produced a reliable and robust income stream for over a decade.
“In addition, these companies have also produced excellent total returns with a fraction of the volatility of equities and little correlation to equities or bonds.”
Read the full guide to investing in alternatives to learn more and bank 60 minutes of structured CPD.
eleanor.duncan@ft.com
