Six alternative and balanced niche investment trust tips
26th February 2015 10:42
Our annual compendium of niche selections identifies opportunities in the closed-ended investment company and investment trust sectors that are not on offer in the open-ended universe.
This may be because the assets in which the trust invests are too illiquid to be sensibly suited to an open-ended fund, as is the case with the commercial property, infrastructure and renewables choices selected below.
We have also included an example where the governance of the trust, combined with its closed-ended capital structure, allows it to take a multi-generational approach as a family-controlled trust.
For the rest of our niche investment trusts tips for 2015, read: Five niche investment trust tips for growth and income investors.
Different selections are liable to show at their best in different market conditions. Thus, infrastructure trusts should be relatively immune to stock market gyrations, as should commercial property vehicles, though both could be vulnerable to a sharp rise in interest rates.
Funds of hedge funds, meanwhile, should be able to provide positive returns even in a market downturn (though most failed to do so back in 2008).
For most investors, it is sensible to hold a range of different asset classes, including some with an attractive yield and some which are more capital growth-oriented, some which are relatively immune to market movements and others which capitalise on the long-term income and growth that equities have historically achieved.
As always it is important to think about your time horizons and how much you can afford to lose in riskier but potentially more rewarding vehicles.
Family trusts
Caledonia Investments
We have retained our 2014 selection in this category, following a 25.6% gain over the year.
Will Wyatt, who was appointed chief executive of in July 2010, is a member of the Cayzer family, which owns 48.5% of the trust's shares.
Wyatt himself has a multi-million pound personal stake, which gives him a big incentive to make sure it invests wisely, controls its costs, and keeps all members of the family happy by consistently raising its dividend.
On taking office, Wyatt divided Caledonia's portfolio into four investment pools, each delegated to a trusted lieutenant. Strategic stakes in quoted companies account for a third of assets and unquoted companies for another third.
Funds investing in those parts of the world where Caledonia prefers to rely on third-party managers, account for a fifth, and the balance is mostly invested in large quoted multinationals with good dividend growth prospects.
It took time for the reorganisation to bear fruit, but Caledonia's three-year returns are looking good, helped by a rewarding year in 2014.
Close to half the trust's assets are in the UK, with the balance fairly evenly split between North America, Europe and Asia. Gearing is mainly restricted to the unquoted portfolio. The discount to net asset value (NAV) has fallen from 21.6% when we first made Caledonia our family trust three years ago, and there is now much less to gain on this front.
However, on a reasonable rating and with a steadily growing dividend, Caledonia continues to offer shrewdly managed exposure to a well-diversified mix of assets.
Private equity - Direct
HgCapital Trust
One of the class acts of the private equity sector, with an outstanding 10-year record, is this year's choice in the direct private equity arena. The managers were correctly cautious before and after the 2008 financial crash, which means it has had relatively few maturing investments, so its results over the past five years have been lacklustre.
However, its cash resources have been reduced to 17% of the portfolio, which has been built up since the crash and is performing well - with the 20 largest investments recording average sales and earnings growth of over 10%.
The eponymous management group specialises in mid-market buyouts in the UK and northern Europe in technology, media and telecommunications (TMT), as well as the services and industrial sectors.
It seeks out high-quality companies that offer scope to generate strong repeatable returns. Once Hg has found a successful business model it looks to make multiple investments in the same area by using its specialist knowledge and networks.
UK-based investments account for half the trust's portfolio, with most of the balance in the Nordic region, Germany and Italy. TMT accounts for 61%, and includes a growing exposure to lower mid-market buyouts managed by a specialist team formed in 2011.
Two of the trust's larger holdings were recently sold for mark-ups of 55 and 30% on their end-2013 carrying value. Buyers have been sniffing round a number of HGT's other holdings, but the managers expect to maximise returns by holding on.
Shares in HgCapital have recently fallen back from a premium to NAV to a double-digit discount.
Commerical property
Schroder Real Estate Investment Trust
This is our new property tip, because it offers a good yield, is making improvements to its portfolio and should benefit as rental growth ripples out from London to more buoyant regional centres.
Its dividend is paid quarterly, and is fully covered by recurrent earnings. The dividend was cut by 30% two years ago, as part of a major overhaul which included refinancing the trust's borrowings on more attractive terms.
Since then the managers have reduced void periods, sold off a number of lower-yielding properties, and redeployed the proceeds in higher-yielding properties or those with potential for improvement.
has been managed since launch in July 2004 by Nic Montgomery and Duncan Owen. The duo moved to Schroder Property Investment Management in January 2012, taking the trust's mandate with them. The move allowed the trust to co-invest with other Schroder funds, and to take stakes in much larger properties.
Around half SREI's portfolio is in the South and South East, and a quarter each in the Midlands and Wales, and in the North and Scotland. The managers focus on property in supply-constrained locations offering strong underlying fundamentals.
The premium on the shares has been limited by a series of placings to fund further property purchases, with further placings expected over the next few months. However, SREI's NAV, as well as its yield, will hopefully continue to be boosted by astute asset management.
Funds of hedge funds
BlueCrest All Blue
has performed relatively well within its sector over the past year, achieving a NAV total return of 7%. It remains our selection for this category.
The fund invests substantially in AllBlue, the flagship multi-strategy fund of hedge funds managed by BlueCrest Capital Management, which has generated annual average returns of 8.9% since launch in 2006. It held up well in the 2008 setback, and has made relatively steady progress since then.
It invests in seven underlying hedge funds with complementary strategies and a low correlation either to each other or to broader asset markets. All are managed by members of the BlueCrest team.
BlueCrest All Blue imposes no management or performance fees, so the only charges are those on the underlying funds, which is unusual. The board uses new issuance and share buy-backs to keep the discount relatively tight, and is committed to a continuation vote if it averages more than 5% over 12 months.
Infrastructure
International Public Partnerships
An above-average and hopefully growing yield is the main attraction of infrastructure trusts, especially as their revenue is largely government-backed and has a reasonable element of inflation linkage. As a result most trade on double-digit premiums to NAV.
(below-average premium can be attributed to a mix of reasons, including objections to changes in its management arrangements in 2013, and worries about its exposure to weaker currencies through projects in Australia, Belgium and Germany.
However, the Guernsey-based fund has rewarded its supporters by raising its total annual dividend every year since launch and hopes to raise it from 6.3p to 6.45p in 2015, funded entirely from cash flow. That gives the shares a prospective yield of nearly 4.8%.
The managers aim to continue to grow its dividend at least in line with inflation and to maintain an internal rate of return at around the 8.8% level, which it has achieved since launch eight years ago, with relatively low levels of volatility.
Like most infrastructure trusts, INPP has undertaken a series of secondary fundraisings, with a November 2014 placing lifting its net assets to over £1 billion.
The new funds are helping to finance INPP's latest investment in offshore transmission cables and related infrastructure, which will generate an attractive revenue stream over 20 years, fully linked to the retail prices index.
As a result of the trust's latest offshore contract, energy accounts for over 30% of its portfolio, with education next highest at 22%, then transport, justice and health.
It has stakes in over 115 projects across eight countries, with an average concession life of 23 years. Should inflation take off it is well-protected, as its inflation linkage is the highest in the sector.
Renewables
Bluefield Solar Income
Investors who want a higher yield and a lower discount than currently available via infrastructure investment companies might prefer one of the growing range of renewable energy trusts. We prefer solar energy specialists to wind, as solar is less politically contentious and less damaging to the landscape.
As none of the companies concerned has a long track record, we are opting for Bluefield Solar Income (BSIF), as it has the highest yield and has achieved the highest NAV total return over the past year, but trades on the lowest premium in its sub-sector.
Its portfolio is well-diversified by geography (stretching from Cornwall to Norfolk), asset type (including agricultural and industrial) and subsidy.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Editor's Picks