Since the global financial crisis it has been a challenging time for income investors, having had to navigate a period of lower yields on traditional assets and deal with other structural changes in asset classes, company business models and investment themes.
As investors broaden their search for income, many have started to look towards alternative assets. For many years, property was the asset that dominated most investors’ alternatives allocation.
In recent years, however, the range of alternative investment options available to investors has expanded in size, depth and breadth and now encompasses a wide range of asset classes.
- Many investors are looking to alternative assets for income
- Some of them are not very liquid
- Infrastructure holds good prospects
There are a number of real assets investors can gain exposure to, including various forms of real estate, infrastructure, commodities and renewable energy.
On top of that there are specialist credit and alternative fixed income offerings, as well as specialist macro, event-driven or long/short investment strategies that focus on a particular investment style or process.
Tackling new challenges
Once seen as a niche area, figures show the alternative investment industry has grown steadily in the past decade, rising from $3.1tn (£2.5tn) of global assets under management in 2008 to $10.3tn by June 2019, according to alternative asset specialists Preqin, and has been predicted to grow to around $14tn by 2023.
For many years, alternatives were the preserve of institutional or high-net-worth investors, but they are now moving into the retail mainstream, as individuals, confronted with volatile financial markets and retirement savings gaps, seek different sources of income and returns.
Investment managers have enabled this trend by making products more accessible, packaging alternative investment strategies into regulated mutual funds.
For the more illiquid and niche investment areas, accessibility has been improved through the use of investment trusts as a fund structure.
These closed-ended investment vehicles allow a broad range of investors to access otherwise unreachable investments, such as renewables, infrastructure or private equity, which are generally quite illiquid asset classes.
From an income point of view, the structure of an investment trust allows it the flexibility to build up income reserves that can help smooth income distributions. Open-ended funds do not have this capacity, which is why investment trusts have more impressive dividend track records.
Indeed, there are 21 investment trusts that have increased their dividends for 20 or more consecutive years, of which 12 have an equity income focus.
In periods where companies’ payouts come under pressure, these income reserves can be particularly valuable.
This was the case during the global financial crisis, and this feature should once again help support many trusts in the current environment given the swathe of dividend suspensions from so many businesses.
Two infrastructure investment trusts — HICL Infrastructure and International Public Partnerships — have also benefited from this structural advantage, and have increased their dividend payout every year for more than a decade.
Infrastructure is a growing area of interest for income investors, mainly because of the long-term sustainable income streams from projects that are often backed by governments.
This can include hospitals, schools or transport networks, all of which can be considered quite defensive, ‘real assets’, with revenues that are often inflation-linked in some way.