Investors looking for better returns should set their sights on ‘alternative’ trusts, according to analysts at Stifel, who have highlighted six companies which invest in sectors such as space, shipping and forestry.

Alternative trusts, which sit outside of conventional equities and bonds, saw their discounts widen to all-time highs last year as the income-producing funds had to compete against rising interest rates while suffering higher borrowing costs.

The asset class may be diversified, covering everything from infrastructure and property to song royalties and debt, but share price performance was almost unanimously poor, with falls across all sub-sectors bar private equity, which enjoyed a bounce back in performance as investors looked beyond peak rates and the exit market started to recover.

Stifel investment companies analyst Sachin Saggar said many alternative funds ended 2023 ‘trading at historically wide discounts to net asset value (NAV)’.

‘We can think of these in two broad camps: those funds that come under the tag line of “if it ain’t broke, don’t fix it” but suffering due to wider macro issues; and others where there have been some obvious structural issues or sector-specific negative influences,’ he said.

Saggar expects markets to be less volatile in 2024 and this will produce ‘increasingly more data points on NAV [net asset value] validity’ that will help funds with ‘long and strong performance track records and stable dividend coverage’ to re-rate over the next 12 months.

He added that as investors’ appetite to risk increases the companies that have had ‘stable fundamentals and have shown good governance’ should expect more capital.  

Stifel’s top six alternatives

Taylor Maritime (TMI )

The £222m Guernsey-listed bulk shipping carrier owner derated in 2023 to sit at a discount of 34% as the widely anticipated recovery in the Chinese economy failed to materialise.

Although the ‘spot rates’ at which vessels can be rented out are close to a dividend breakeven amount of $14,000 a day and manager Edward Buttery has put more vessels on short-term charters to help cashflow, the discount has remained stubbornly wide.

Shipping vessels remain in demand as geopolitical and climate issues squeeze the supply of carriers and reduce fleet size in the dry bulk sector, which could push vessel prices higher and increase spot rates, creating the ‘most obvious catalyst for a share price re-rating’, Saggar said.

‘If spot rates remain stable or improve from current levels, we expect upside to the current NAV and a narrowing of the discount to NAV,’ he said.

‘In this scenario, we would expect a potential 20%-plus return to the current share price while the dividend of 8 cents per year is maintained.’

Saggar added that there are other reasons to own the company, including the liquidity in the market allowing vessels to be sold at close to carrying value.

There has also been insider buying, with the company actively buying back stock, but the analyst said that the manager is not wedded to maintaining the listed fund if value is not reflected in the shares.

‘The Buttery family is wealthy and entrepreneurial in its own right,’ Saggar said. ‘We see little reason for the manager to stay the course and expect some form of corporate action if the current malaise continues.’

This action will either be a switching to an operating company or a sale of the assets. 

SDCL Energy Efficiency (SEIT )

The renewable infrastructure investor capped a tough 18-month period with a £129m write-down of its asset value in December as higher interest rates increased its discount rate to 34%.

Although the fund was not impacted by any negative news on underlying investments last year, its high exposure to the US – which makes up 56% of the portfolio – meant it has borne the brunt of the higher-for-longer interest rate theme, while inflation protection is also lower than its wider peer group.

Saggar said that investors have also been deterred by the ‘complexity and diversity of the underlying investments’ which makes it hard for many to grasp the direction of the portfolio.

‘If a portfolio manager holds a basket of infrastructure names, your bias is to hold those with the longest track records that are easily understood,’ he said.

‘Articulating the benefits of an energy-efficient industrial business park, onsite waste recycling cogeneration and a US solar developer is a much more difficult task.’

Despite this, Saggar said that the portfolio is ‘structurally robust’ and should benefit from a ‘natural rerating as focus shifts from high-level macro to company-specific news’.

Manager Purvi Sapre of Sustainable Development Capital does need to ‘iron out’ some bumps, notably US utility service provider RED-Rochester, which has downwardly revised forecasts, and ensure delivery of committed projects, both of which should help the share price.

‘We see limited downside to the share price from current levels and investors are paid a healthy dividend yield of 10% while they wait,’ Saggar said.

‘It is harder to quantify the potential upside given the catalysts are softer but we would be disappointed if shareholders do not receive a 20%-plus return in the year.’

Seraphim Space (SSIT )

The £101m portfolio of space technology investments sits on a hefty discount of 55% as the high-risk fund suffered from the change in investor sentiment.

Its shares have fallen 64% over the past two years but Stifel analyst Will Crighton said the discount is ‘more than pricing in the risks surrounding valuations and funding requirements’.

Optimism is also picking up as companies are securing further funding, often from new investors, and the discount narrowed at the end of the year from 70% in mid-November.

‘We think there is more room to run,’ said Crighton. ‘Share price volatility is high with the potential for fullbacks, which can be used as buying opportunities.’

The portfolio is high-risk in nature and the trust is therefore likely to continue trading at a wider discount than the private equity sector, which typically sits at 20% to 40%.

‘A discount to NAV of 50% is still comfortably wider than this range, and a rerating to this level would be a 12% share price appreciation,’ Crighton said.

‘With an expectation of falling risk-free rates over 2023, we think there is scope for discounts to narrow across the whole private equity sector, with a rerating for Seraphim to a 40% discount equating to a 35% share price appreciation.’

Foresight Sustainable Forestry (FSF )

The share price of this £108m investor in UK forest and woodland faced the chop in 2023, with the discount widening swiftly from 10% in June to 36% now as the forestry market slowed and valuations were off their peaks by as much as 20%.

However, the fund is at the start of a significant planting programme that is expected to yield sizeable valuations gains, and potentially adding 20p to NAV by spring 2025 if planting is successful, said Crighton. Around 4,500 hectares over 37 projects are expected to be planted. 

Carbon credits are also increasingly in the spotlight, and concerns about the integrity of credit are causing a shift to the high-quality credit that the fund provides.

‘Based on the historical gains so far, planning gains could add 12p to NAV this year, though this gain is subject to fluctuation with the size of it more likely to be clearer following the March valuation,’ said Crighton.

‘However, should mature forestry valuations remain stable, with the worst of the fall behind, we think the NAV could grow over 10% in the year to September 2024, which would also likely lead to a discount narrowing. The combined effect could lead to a share price rerating of over 20%.’

3i Infrastructure (3IN )

This £2.9bn infrastructure behemoth needs no introduction but its popularity didn’t stop it falling to a 10% discount last year.

The fund takes a private equity approach to its investments rather than investing in private finance initiatives (PFI) like its peers, a strategy that has helped it deliver realisations at strong gains and provide impressive long-term performance. In the six months to the end of September, the fund delivered a total return of 6.3%.

Stifel analyst Iain Scouller said the fund has also ‘delivered good dividend growth over the years and it targets an increase of 6.7% in the year to March 2024’.

The fund has been reducing debt – which peaked at 16% of NAV in mid-2023 – with the sale of waste treatment and recycling plant Attero at a 31% premium to its previous valuation, which reduced it to 13%.

However, Scouller said 3i Infrastructure has a ‘relatively high project-specific risk-reward’ given it only has 12 company investments and has a ‘relatively high fee structure’ which includes a performance fee of 20% of returns above the hurdle of 8% growth in NAV a year.

‘3i Infrastructure has been consistent at delivering or exceeding its annual return target of 8% to 10% and in the year ended 31 March 2023, its NAV total return was 14.7%,’ he said.

‘We expect another solid year in 2024, with many of the portfolio investments continuing to deliver good earnings growth.’

He said the double-digit discount is ‘relatively attractive and ‘assuming the portfolio delivers 10% to 12% over the year and the discount also narrows to low-single digits, the potential share price return is at least 15%’.

NB Private Equity (NBPE )

Last year may finally have heralded a turnaround for private equity, which was held back by concerns over the value of underlying investments and high interest rates ramping up borrowing costs.

In a sector that is starting to look appealing to investors, Scouller picked NB Private Equity for his recommendation list thanks to its low company-specific risk, given the largest 10 investments represent 37% of NAV, the leverage is ‘modest’ at 5% but it still has a $300m (£235m) debt facility outstanding, and it has ‘minimal’ outstanding commitments of $43m.

Three-quarters of the portfolio is ‘a vintage of four years plus and therefore is ‘pregnant with potential exits’, said Scouller.

‘If we assume a typical private equity holding period of four to five years, this implies the portfolio has significant scope for realisations in the year ahead,’ he said.

The fund has a strong record of realisations, and even in the tough market last year, announced $127m of exits in the first nine months, versus $143m for the whole of 2022. This helped grow the NAV 4.8% in the first half of 2023, which was the last major valuation point.

Scouller also noted the simplification of the capital structure, with the final tranche of zero dividend preference shares to be redeemed in October this year, with a value of $80m.

‘Thereafter, there will only be one class of shares – Class A – plus bank debt and we think this simplification may help the shares’ rating, given shareholders’ wariness over dual share structures,’ he said.

The peaking of interest rates should be a boon to private equity more generally in 2024 and underlying company debt costs should start falling.

‘NB Private Equity has a good story to tell,’ Scouller said.

‘The shares are trading at £16.40, a 26% discount to our NAV expectation. In the year ahead, assuming a fair wind, we expect NAV return growth of 5% to 10% and if there is a narrowing of the discount to between 20% and 15%, this implies a price return of 10% to 15%.’

Scouller said a discount at the narrower end of the peer group is ‘justified given the strength of the balance sheet, with minimal outstanding commitments and a good medium-term track record’.