Investment company managers comment on specialist strategies.
150 years after the first investment company was launched, the industry is still expanding investors’ options to new and innovative areas. Of course there are many well-known investment companies investing in equities and alternative assets, but today we are looking at some specialist investment companies which include those investing in the uranium industry, shipping, specialist equipment such as helicopters and aircraft leasing.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC) said: “As the oldest form of collective investment, investment companies are the trailblazers of the investment world. It’s good to see this pioneering spirit prevails today with investment companies investing in innovative areas, offering investors even more choice. Investment companies are particularly suitable for investing in these sorts of illiquid assets as their closed-ended structure means managers do not have to buy and sell their holdings to meet redemptions. Clearly, these companies have specialist strategies and could be considered as part of a balanced portfolio for the long term. If investors are in any doubt as to whether investment companies are suitable for them they should speak to a financial adviser.”
The Association of Investment Companies has collated comments from managers and directors of specialist investment companies on the opportunity their asset class presents and what it could offer to investors.
What are they investing in?
Robin Hallam, Chairman of Amedeo Air Four Plus said: “Wide body aircraft are assets with long useful lives (typically 25-30 years), are regularly inspected and overhauled and are typically operated by only the largest international airlines. The wide body sector possesses some unique characteristics relative to other asset classes: namely the manufacturing market is a duopoly, Boeing or Airbus, which provides excellent visibility of future supply and new model development. Furthermore, air passenger transport, which has historically roughly doubled every 15 years, is forecast to continue growing as the emerging middle class increasingly travel more – thus supporting the case for larger aircraft.”
Paulo Almeida, Fund Manager of Tufton Oceanic Assets said: “Over the past few years, Tufton has invested over $1 billion in shipping. This asset class took much longer than most to recover from the global financial crisis. Due to the supply-side improvement of the past few years in both shipping and shipbuilding, we believe that the current risk-return profile in shipping is superior to many other asset classes. We also believe this is the first listed equity anywhere that aims to offer institutional investors exposure to a diverse portfolio of ship types with low revenue volatility and low to moderate leverage.”
Jeremiah Silkowski, CEO of SQN Capital Management, the Manager of the SQN Asset Finance Income Fund said: “The SQN Asset Finance Income Fund invests in a diversified portfolio of business-essential, revenue-producing hard assets and equipment. The fund invests across more than 12 different asset classes and industries. Each investment that the fund makes generates recurring income and is secured by tangible underlying assets. A sample of investments in the portfolio have included manufacturing equipment in the automotive industry, ground support equipment at major UK airports, and project and equipment lease financing for both traditional and renewable energy assets.”
What’s the opportunity?
Keith Watson, Portfolio Manager of Geiger Counter said: “The uranium market is just exiting a seven-year bear market following the 2011 tsunami in Fukushima which led the Japanese to close their reactors. This removed approximately 12% of global demand and caused uranium to fall 85% to $20/lb. We believe this forgotten sector has seen significantly improved fundamentals over the last 12 months and looks ready to enter a far more bullish environment. Demand growth is strong, led by China which is rolling out nuclear power capacity at a rapid pace and which is expected to rise over 50% during the next three to four years as they tackle chronic domestic air quality.”
“The supply side of the market has also significantly improved as supply reductions have been seen across the board. Kazatomprom, the largest global producer, announced a 10% cut to their production, 3% of global supply, latterly followed by Cameco which has mothballed McArthur River, equivalent to 5% of global supply. Cuts by Rio Tinto at their Rossing and Ranger mines and a general lack of investment in the sector is leading to further decline on existing assets. As a result market conditions are tightening appreciably and the prospect of deficits emerging should lead to an improvement in the uranium price.”
Robin Hallam, Chairman of Amedeo Air Four Plus said: “Amedeo Air Four Plus (AA4) owns high quality assets namely wide body aircraft and leases them to internationally recognised ‘flag carriers’ on leases where all operational, insurance and maintenance risk is passed to the lessee. We finance these transactions with structured, currency matched, partly amortising debt. The leases have fixed terms, typically 12 years, with no early termination option and either fixed or hedged floating rate lease rental. The rent that the airlines pay goes to service the debt (both the interest cost and paying off senior principal) and also enables Amedeo Air Four Plus to deliver a high level of income – approximately 7.8% annually based on the current share price and target dividend distribution of 8.25p paid quarterly.”
Andrew Hampson, Fund Manager of Tufton Oceanic Assets said: “We believe there is currently an attractive opportunity in shipping to buy assets at a significant discount to their depreciated replacement cost and lock in long-term employment producing mid-teen cash yields. This is a strategy we've been following with success for the last couple of years and see limited competition due to the lack of capital currently being invested in shipping. At the end of Q1,Tufton Oceanic Assets had invested approximately half of its IPO proceeds.”
What do they offer to investors?
Jeremiah Silkowski, CEO of SQN Capital Management, the Manager of the SQN Asset Finance Income Fund said: “The SQN Asset Finance Income Fund pays a monthly dividend to investors at a rate of 7.25% annually, at par value. The portfolio performance is designed not to be correlated with equity, debt, or real estate markets. This is achieved through direct non-tradable investments that are subject to non-cancellable contracts spread across an array of industries and asset classes.”
Robin Hallam, Chairman of Amedeo Air Four Plus said: “The portfolio currently consists of 14 aircraft diversified both across three model types (Airbus A380, A350 and Boeing 777) and airline (Emirates, Etihad and Thai Airways). Amadeo Air Four Plus has a market capitalisation of some £675 million and also offers the possibility of a future capital gain at the end of the leases once junior debt is repaid. This long-term stream of high income combined with an easily understood structure has proven popular with investors and the vehicle has increased its size more than three-fold since IPO in May 2015. For investors seeking a high level of income backed by real assets in a transparent structure the aircraft investment vehicles have proven interesting.”
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- 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 349 members and the industry has total assets of approximately £174 billion.
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