What gives specialist sectors an advantage?
The hunt for income has shown no sign of slowing. Alternative assets, in areas such as infrastructure, debt and property, can offer a high level of income, and, being illiquid assets, they are particularly suited to being held in a closed-ended fund. Indeed, of the 49 investment companies yielding over 5%, 32 (65%) are from specialist sectors*. What gives these specialist sectors an advantage when it comes to yield? Why would investors consider these specialist sectors as part of their income portfolio?
The AIC has today hosted a press roundtable on alternative income with Stephen Ellis, Manager of GCP Infrastructure, Gary Kirk, Manager of TwentyFour Select Monthly Income Fund, and Kenneth MacKenzie, Manager of Target Healthcare REIT. The managers discussed infrastructure, debt and property respectively, and their views have been collated along with those of Duncan Ball, Co-CEO of BBGI, Graham Emmett, Manager of Real Estate Credit Investment (RECI), and Jason Baggaley, Manager, Standard Life Investments Property Income.
The income advantage
Stephen Ellis, Manager, GCP Infrastructure, said: “Infrastructure assets are the things that a society or economy needs to operate, and we are all involved in these assets as consumers, whether via our tax bills for healthcare and education, or through our utility bills for energy. It is only relatively recently however that a wider case has been made for infrastructure as a core investment class. Infrastructure investment quite rightly attracts investors seeking long term, reliable income. This is because, firstly, infrastructure assets are typically expensive, and need to be capable of generating a predictable, long-term cash flow in order to justify the initial expenditure to get them built, and secondly, because the assets are so important to the society or economy that they serve they will often have explicit or implicit governmental support.”
Gary Kirk, Manager, TwentyFour Select Monthly Income Fund, said: “Fixed income has been the primary beneficiary of global central bank intervention since the credit crisis began in 2007/08. Since 2009 a combination of artificially low interest rates, forward guidance and outright asset purchase programmes have set the foundations for investors to reap the benefits of unprecedented stimulus. The European Central Bank is the latest incumbent to undertake a significant program of support which, as a side effect, will drive yields and credit spreads in to historically tight levels. Even in the US where quantitative easing has finished and rates are expected to rise later this year; the Fed remain accommodative and the environment expected to continue to be supportive for credit over the medium term. We therefore see investment in credit, particularly where some degree of illiquidity premium can be sourced, is the ideal place for the longer term investor to be invested.”
Kenneth MacKenzie, Manager, Target Healthcare REIT, said: “The advantages of holding healthcare property as an ‘alternative’ within a portfolio are twofold. Firstly, with favourable underlying population dynamics demand for investment in the sector is high. Approximately 15% of over 85 year olds are expected to make use of residential care of one form or another and to meet this demand the UK's ageing care home stock requires to be substantially upgraded and new facilities built. Secondly, there is a real income advantage. With long-leases on our properties, often up to 30 years, we are able to create a stable, long-term and inflation linked income paid in the form of a 6% dividend paid quarterly.”
Jason Baggaley, Manager, Standard Life Investments Property Income, said: “Commercial real estate can form part of a balanced portfolio as it provides diversification and a combination of equity and bond like characteristics. The IPD index has a market income yield of 5.5% for the UK currently and by having a balanced portfolio it is possible to provide a sustainable and growing income yield to investors. The UK commercial real estate market offers investors a mix of exposure to upwards only open market rent reviews (good at times in the economic cycle such as now where there is growth in market rents) and also indexed reviews to either a fixed percentage or RPI.”
Growth in infrastructure
Duncan Ball, Co-CEO, BBGI, said: “The listed infrastructure sector was initially focused on PPP/PFI and economic infrastructure, but in recent years the sector has expanded to also include renewables investment companies and infrastructure debt funds. While the return, risk profiles and investments policies vary between the companies in the sector, the group has delivered stable, predictable dividend income to investors while also delivering low price volatility and low correlation with other asset classes. The sector has also benefited from improved understanding amongst investors of the asset class and strong performance relative to broader markets. The London listed infrastructure sector has matured to the point where it now warrants inclusion in most well diversified portfolios.”
Opportunities in debt
Graham Emmett, Manager of Real Estate Credit Investments (RECI), said: “RECI sees strength in the real estate debt sector in the UK and Western Europe, with the investment manager Cheyne Capital continuing to find exciting risk/reward opportunities in both loans and bonds. We believe there is a continuing opportunity to take advantage of the systemic structural changes in Europe's financing markets and the disintermediation of the banks. These markets provide good investment risk/reward opportunities, which gives the added advantage for RECI of an attractive dividend yield for investors seeking income and liquidity of the stock.”
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- *Yield data downloaded from AIC website 11/03/2015.
- The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 342 members and the industry has total assets of approximately £124 billion.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.