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Delivering diversification

10 January 2020

Seneca Global Income & Growth explains why they look beyond bonds and equities to specialist investment companies.

It is a truth universally acknowledged that an investor in possession of a good fortune must be in want of diversification. Whilst formerly, a traditional allocation between bonds and equities might have served this purpose, such an approach may no longer be sufficient. At Seneca Investment Managers, we believe that following an extended period of strong returns from both of these mainstay markets, a greater degree of diversification is the order of the day.

This is an area in which investment trusts come into their own. Many options for further diversification come in the form of assets which are unsuitable for inclusion in open ended funds. Recent history has reminded us that neither property nor private equity are well suited to open ended structures. The illiquid, long-term nature of these assets sits ill with the daily inflows and outflows of OEICs.  For these, fixed pots of capital such as investment trusts are far more suitable.

As multi-asset investors we aim to provide our clients with diversification across various asset classes. The investment trust we manage, Seneca Global Income & Growth Trust plc, has both income and growth objectives and it is therefore important that we construct a portfolio with the ability to meet our goals whilst diversifying risk and reducing volatility. In order to do this, we allocate approximately a quarter of the portfolio to closed ended funds, principally across property, infrastructure, private equity and specialist financials.  To implement this approach, we invest in a range of carefully researched trusts which we believe will offer, over the long term, lower levels of correlation with other investments we hold. Many of these trusts have interesting stories to tell.

In the field of aircraft leasing, we own Doric Nimrod Two and Doric Nimrod Three. Returns from both will principally be driven by the ability of Emirates, the airline which leases the relevant aircraft, to meet its lease obligations, whilst the residual value of the aircraft is expected to have a further positive impact on returns. Holding both products diversifies our risk across two different management teams.

For property exposure, we focus on specialist REITs such as Assura, rather than the wider property market. Assura provides modern GP surgeries on long term leases, whose rental streams are ultimately supported by the NHS. We prefer these more niche areas of property to the wider property market at this stage of the cycle. 

On a more musical note, we invest in the Hipgnosis Songs Fund, a vehicle which buys catalogues of song writers’ rights, featuring work by artists such as Sister Sledge, the Kaiser Chiefs and Dave Stewart.  Returns will depend on growth in emerging market music expenditure, the take-up of global streaming, and the royalties paid by digital platforms.

The drivers of each of these investments are very different, both from one another and from the drivers of more conventional asset classes. What they have is a common focus on generating attractive levels of asset backed, long term income, whether the asset be an aeroplane, a building or a song catalogue.  In addition to diversifying our portfolio by asset class, holdings such as these also diversify the streams of income which support the growing dividend we pay.

There is now a wide range of trusts for investors to choose from offering exposure to a diverse spectrum of assets. If like us you believe a traditional bond equity mix is no longer sufficient to guard against the vicissitudes of the markets, the specialist investment trust market now offers a real opportunity for careful and selective diversification.
 

Seneca Global Income & Growth Trust plc

Your Capital is at risk. Before investing you should refer to the Key Information Document (KID) for details of the principle risks and information on the trust’s fees and expenses. Net Asset Value (NAV) performance may not be linked to share price performance, and shareholders could realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital. The Investor Disclosure document, KID and latest Annual Report are available at senecaim.com

The views expressed are those of Gary Moglione at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca Investment Managers Limited and do not constitute investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.  Seneca Investment Managers Limited (0151 906 2450) is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP20 001

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