When country after country imposed lockdowns to prevent the spread of Covid-19 in 2020, the aviation industry was brought to a standstill.

But as the world has returned to normality – most recently, China abandoned its zero-Covid policy – aircraft leasing funds have been given a new lease of life.

According to the Association of Investment Companies (AIC), shares in London’s four investment trusts focused on the sector have soared over the last year.

During the 12 months to Monday, Amedeo Air Four Plus’s (AA4 ) share price total return was 60.9%, Doric Nimrod Air 3 (DNA3 ) returned 45.1%, Doric Nimrod Air Two (DNA2 ) returned 69.8% and DP Aircraft I (DPA ) returned 144.4%, including chunky dividends reinvested.

Those gains made aircraft leasing the top-performing sector among London-listed investment companies in 2022.

There has also been some recovery on an underlying net asset value (NAV) basis, although both wide share price discounts and premiums to published NAVs persist.

The issue today is whether to stay invested after that initial recovery opportunity, now that more attractive yields can be found in vanilla fixed income?

Answering that question requires looking back to the genesis of the listed sector in an environment of chronically low interest rates.

After the 2008 global financial crisis, Marc Gordon, the owner of specialist manager Nimrod Capital, thought of ways he could provide investors with an alternative income stream.

‘Banks had considerably narrowed down the people to whom they were lending… and there were several airlines who had major plane deliveries coming,’ Gordon told Citywire. ‘They were looking for alternative and diversified sources of financing for their planes.’

After discussions with Emirates, Gordon brokered a deal to lease an Airbus A380 to the airline, which would provide investors with a 9% income for a fixed 12-year period.

That became Doric Nimrod Air One, which was wound up in February this year after the UAE-based airline bought the plane from the investment company.

‘Via the redemption of shares, DNA1 does not exist anymore. It was a very clean and neat thing to happen. Emirates paid us £25m, which we distributed to shareholders. They got 60p in capital, having had 108p in dividends over the last 12 years,’ Gordon said.

Redmayne Bentley’s James Andrews (pictured) held DNA1 until its recent liquidation.

‘Emirates has proven to be a very strong counterparty. Despite having parked their planes, they still paid for the lease costs and did not renege. Hence, DNA1 paid its dividends throughout the pandemic,’ said Andrews.

Although he is evaluating whether to invest in DNA3, which is leasing four Airbus A380 aircraft to Emirates for a term of 12 years, he remains cautious, pointing to the issues Amedeo Air Four Plus had with its counterparty Thai Airways.

In May 2020, Thai Airways filed for bankruptcy protection after it could not continue to pay back its $9.8bn debt due to worldwide lockdowns.

Bangkok’s Central Bankruptcy Court approved the airline’s business rehabilitation plan that September. The business has since had to cut operating costs, renegotiate its leases and nearly halved its workforce.

‘Amedeo had to suspend dividends for most of 2020 and 2021 because Thai Airways were renegotiating leasing deals,’ said Andrews. ‘That was the nice thing about DNA1. It had one counterparty and one plane, whereas Amedeo had diversified its airlines and had a mix of planes. But with that, you get more exposure to risk.

‘Airplane leasing funds appealed previously because you could not get much income anywhere else. But now fixed income is more interesting. There is less need to go up the risk spectrum to get that income stream.’

Amedeo continues to be backed by big multi-asset investors. According to Refinitiv data, Royal London Asset Management holds an 8.9% stake in the fund, Newton Investment Management holds 7.7%, and Columbia Threadneedle Investments has about 5% of the shares.

Andrews believes investors can be easily enticed by the high levels of income that this alternative asset source can offer, but it is important to consider all eventualities before diving in.

‘The secondary market is also key. You must ask yourself: what type of plane is it? How often are they sold?’ he said.

‘With airplane leasing funds you are looking at the creditworthiness of the counterparty, but you also must think about the asset and the money that is going to come back to you.’

Anyone who has held the funds still listed today for the past five years has had a very turbulent ride.

According to AIC data, Amedeo and DP Aircraft 1 shareholders have lost 35.9% and 93.7%, respectively. Meanwhile, DNA3 returned 9.9% and DNA3 returned 13.9%the five years.

However, Dhruv Satish, an investment associate at Fidelity International, believes that aircraft leasing can prove lucrative even in a high-interest-rate environment.

Fidelity’s £26m Absolute Return Multi Strategy fund invests in both DNA2, 1.9% of the fund, and DNA3, with 1.8% of the fund allocated, according to Morningstar.

‘They offer a particularly high yield with positive inflation beta over a longer period, as well as providing portfolio diversification from equities and bonds given its idiosyncratic return drivers,’ Satish said.

He noted the substantial recovery since Covid, both in terms of capital upside and an attractive yield, as clarity has improved.

‘We remain selective, preferring the funds with the most security on income and clarity on aircraft residual value.’

Amadeo has a historic dividend yield of 15.5%, while DNA3 yields 16% and DNA2 yields 17.8%, according to AIC data. DP Aircraft has not paid a dividend in the past year.

Dan Cartridge, an assistant fund manager at Hawksmoor Investment Management, established a position in DNA2 in January 2022 before exiting a year later.

‘The investment was only appropriate for our highest-risk Global Opportunities fund given the small and illiquid nature of the trust and the wide range of outcomes possible when planes come to the end of their lease,’ he said.

Between Cartridge buying for the fund and the final sale, the shares returned 95%, he said. But as prospects for other asset classes began to improve as government bond yields rose and credit spreads widened during 2022 and into 2023, like Redmayne Bentley’s Andrews, he felt it was time to exit.

‘We could deploy capital into less complicated asset classes with similar if not more attractive return prospects.’