Access ‘hard-to-reach’ opportunities through investment trusts

Rob Morgan highlights three investment trust options for investing in specialist assets.

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  1. Rob Morgan

Investment trusts can have some important advantages over open ended funds such as unit trusts and OEICs.

Having a fixed number of shares and a set amount of assets means that there is no need for an investment trust to engage in lengthy or expensive buying and selling to meet investor demand. They can therefore explore areas that other funds simply can’t – or shouldn’t – including more esoteric, ‘illiquid’ assets that cannot be traded easily, such as commercial property, frontier markets or private companies.

It is common for institutional investors to turn to these sorts of eclectic and wide-ranging assets to achieve diversification. Being driven by factors other than economic cycles, they can offer distinct benefit such as being uncorrelated to traditional asset classes, as well as one another. These opportunities tend to be less readily available to the private investor, but investment trusts offer an important exception.

Here, we discuss three examples of trusts investing in ‘alternative assets’. They are not part of our Foundation Fundlist due to their specialist nature, but they have been reviewed in detail by the Charles Stanley Collectives Research Team. They may be of interest to more experienced investors wishing to add diversification to their portfolios. Each represents a different investment approach and type and level of risk, and they are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus.

Renewable infrastructure - Greencoat UK Wind

Greencoat UK Wind is the largest listed renewable infrastructure fund in the UK, with net assets in excess of £1.7bn invested in 34 operating wind farms across the UK. With the demand for renewable energy being driven relentlessly by government policy and social pressure, the tailwinds for the sector are strong.

The trust aims to pay quarterly dividends in line with RPI (Retail Prices Index) inflation. The present yield is 5% (variable, not guaranteed) and it also offers the potential a small amount of capital growth through the reinvestment of undistributed income.

The high level of income on offer from the shares has made them popular with investors – and thus quite expensive. The trust’s shares have been trading at a premium to net asset value almost continuously for the last five years. There are also some other important risks to be aware of.

As with many renewables investments, returns are heavily dependent on wholesale power prices and forecasts. In the short to medium term, a large proportion of these trusts’ returns are derived from inflation-linked subsidies but going forward, exposure to wholesale power prices increases and so could the volatility of revenues.

Nonetheless, we believe this to be a solid proposition for income-seeking investors seeking diversification, and to benefit from the UK’s increased focus on renewable power generation.

The Key Information Document for this Trust can be found here.

Private equity – Princess Private Equity

Private equity generally involves investing in businesses that do not have a stock market listing – ownership is in private rather than public hands. Although sometimes private equity investors look to take a company public in order to maximise value or to sell their stake.

Princess Private Equity is an investment trust offering a diversified approach to the asset class with an emphasis on small and medium-sized companies across a range of sectors. It is managed by Partners Group, a private equity specialist. They benefit from an impressive global presence and have a wealth of experience with dedicated teams for sourcing new ideas and for driving valuation creation in the businesses they have stakes in.

Presently, the investment focus is on transformative trends impacting corporates, such as specialisation,

digitalisation, outsourcing and private education. A global fund but has a European focus, it is intended returns from the Trust are in the form of income as well as capital growth. It has a dividend policy of 5-8% a year based on net asset value. Presently, the yield based on the current share price is 6% - variable not guaranteed.

We believe Princess Private Equity is an interesting, specialist proposition for higher risk, income-seeking investors, albeit its charges have historically been very high due to the performance fee structure. The promotion of the Trust to the FTSE All Share in December 2017 led to a squeeze on the shares as a result of buying by index trackers, and the fund briefly traded on a premium. However, this has now subsided and it is trading on a discount of 17% presently.

The Key Information Document for this Trust can be found here.

Commercial property – BMO Commercial Property Trust

The nature of bricks and mortar makes the asset class a challenge for open-ended funds such as unit trusts and OEICs. However, with an investment trust the fixed pool of capital allows managers to take a long-term view and buy and sell without the distraction of investor flows. With no need to hold significant cash to fund potential investor redemptions, they can also be more fully invested and thus pay a higher income to investors. Borrowing to invest (also known as gearing) can also allow investment trusts to provide a superior income, although it increases risk.

Presently, shares in UK commercial property investment trusts are languishing owing to political uncertainties as well as the cloudy outlook for retail assets. In many high streets and shopping centres rents are falling as increased internet shopping reduces footfall, and demand for outlet space has tailed off.

One Trust trading  on a particularly large discount to its net asset value (of around 20% presently) is BMO Commercial Property, despite having a wide spread of primarily high quality assets, including offices, shops and warehouses to generate rental income and potentially some long term growth. It is among the largest closed-ended property trusts listed in the UK and a constituent of the FTSE 250 Index.

Although all UK commercial property trusts have suffered weakening share prices related to Brexit worries that have increased their discounts, there are a number of reasons why this Trust has been particularly affected. There is a skew towards London, which many see as being severely impacted in the event of a ‘no deal’ Brexit, plus there is reliance on one key retail asset, St Christopher’s Place in the West End. This represents around one fifth of the portfolio. Additionally, a small number of retail tenants in the regions have got into financial difficulties and this has resulted in rent reductions.

In the shorter term, challenges in the sector and pressure on rental income could continue as Brexit unfolds. However, for longer term investors willing to take an overall positive view of the asset class this Trust has an experienced and settled management team, as well as a scale that helps drive down costs. The annual yield (5% a year at present, variable, not guaranteed) is paid in monthly dividends. There is gearing of 20% currently, lower than a number of its investment trust peers but a factor that makes it higher risk than an equivalent open-ended fund.

The Key Information Document for this Trust can be found here.

This content is supplied by the named third party and does not represent the views of Charles Stanley. Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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