The aftermath of the financial crisis has seen investors pour capital into income generating alternative assets perceived to be low risk but market watchers have warned the dangers won’t be evident until interest rates rise.
As previously reported on FTAdviser, trusts investing in alternative income assets have been the fastest growing AIC sector over the past five years.
The AIC said 70 per cent of the investment trust launches over the past five years have been in the alternative income sector.
Many trusts in the specialist property and infrastructure sectors have high yields and trade at high premiums.
Ian Barrass, who runs the £132m Henderson Alternative Strategies Investment Trust, said the accounting methods used by his trust to value their assets are sufficiently conservative to justify the premium to net assets at which they trade.
But Tony Yarrow, who manages £250m across two funds, and also runs Wise Investments, a financial planning firm, said he is seeing investors so fixated on not losing money from conventional assets such as equities and bonds that they have rushed into alternative income assets with little awareness of the levels of risk being taken.
Mr Yarrow said: “Investors today have an insatiable appetite for investments which pay a high rate of interest and appear not to be risky.
"Current favourites include infrastructure, clean energy, and peer-to-peer lending funds, and more recently, social housing and warehouse trusts, all offering income in the region of 5-6 per cent per annum, more or less inflation-proofed, over the medium to long term.”
Mr Yarrow said the underlying problem is central bank policies of exceptionally low interest rates and quantitative easing have failed to achieve their aim of boosting economic growth through the 'wealth effect', and have instead caused investors to take risks they would not usually take.
The wealth effect is the economic theory that if people feel better off, they will spend or borrow more, creating economic activity.
Low interest rates and quantitative easing aim to put the theory into practice by pushing up the prices of assets such as property, shares and bonds, on the assumption the owners of those assets will feel richer, and have the confidence to spend or invest more.
Instead investors are remaining ostensibly cautious.
However Mr Yarrow said popular investment alternative investments such as peer-to-peer lending have not been tested in a world of higher interest rates, which he said he expects to rise soon.
Some are even avoiding more traditional risk assets.
Jonathan Davis, who runs Jonathon Davis Wealth Management in Hertford, said he has been preparing his clients portfolios for higher inflation, and higher interest rates, and generally avoiding UK equities.
He said investors “do not need to have an allocation to the UK, they need to make money”.
David.Thorpe@ft.com
