Over the long term, investment trusts tend to produce superior performance to their open-ended fund counterparts, but investors who seek an income still need to make sure their portfolios are sufficiently diverse.
Trusts that hold alternative assets provide a good source of diversification. In many cases they satisfy investor demand for income, while having relatively little correlation to equity and bond markets.
For most investors, it is sensible to hold a range of different asset classes, including some which are relatively immune to market movements. The trusts below have been chosen by investment experts and invest in areas such as property, specialist property, infrastructure, and specialist debt.
1. Amedeo Air Four Plus
Oliver Smith, portfolio manager at IG, recommends Amedeo Air Four Plus, which specialises in buying aircraft and leasing them to commercial airlines. He says: ‘It currently has a portfolio of seven Airbus A380s and two Boeing 777s, which it leases to Emirates and Etihad. Investors face potential credit risk should the airlines default, and key to the long-term returns for shareholders is the price at which Amedeo can sell on the planes at the end of their lease.’ The dividend is paid quarterly and it yields 8 per cent.
2. Tritax Big Box REIT
With the huge expansion of online shopping, this trust taps into a big growth area. Big Box is a real estate investment trust (Reit) that invests in warehouses (typically greater than 500,000 square feet), which it then leases on long-term contracts. Tenants include Amazon, Tesco, DHL, B&Q and Argos. Smith says: ‘It aims to grow its yield in line with inflation, and is currently looking to raise an additional £200 million from institutional investors.’ The dividend is paid quarterly and it yields 4.4 per cent.
3. Real Estate Credit Investments
Smith also recommends this investment trust, which invests primarily in debt secured on commercial and residential properties in Western Europe and the UK. ‘It has a concentrated portfolio of investments, and is managed by Cheyne Capital a leading real estate investor and the dividend is paid quarterly.’ The trust yields 7.1 per cent.
4. International Public Partnerships
International Public Partnerships invests in infrastructure investments, typically projects undertaken by public bodies under the Private Finance Initiative (PFI) and Public/Private Partnership (PPP). This includes school buildings, health, transport and more recently the London super-sewer project, the Thames Tideway Tunnel. ‘The company aims to generate capital growth as well as a growing dividend by investing in inflation-linked projects and the dividend is paid half-yearly,’ says Smith. The trust yields 4.3 per cent.
5. P2P Global Investments
‘Peer to peer lending has had a difficult few months with much of the listed sector disappointing. However, in a richly valued market P2P offers some value on a discount to NAV of around -15 per cent and exposure to a diversified portfolio of consumer loan across Europe and the US,’ says Smith. The dividend is paid quarterly and it yields 5.2 per cent.
6. CATCo Reinsurance Opportunities Fund – CAT (5.6 per cent yield)
‘Reinsurance funds give investors the opportunity to receive insurance premiums from investments linked to catastrophe events such as hurricanes, earthquakes and flooding,’ says Smith. ‘While premiums have fallen in recent years, the sector still offers high potential yields and capital growth. CATCo targets a return of 12-15 per cent above Libor on an annual basis. Investors in CATCo are exposed to fluctuations in the dollar.’ The trust yields 5.6 per cent.
7. Target Healthcare REIT
David Hambidge, director of multi-asset funds at Premier Asset Management picks this trust because it provides a healthy quarterly dividend stream that he says is likely to grow over time. ‘It also provides something genuinely useful to society – a point that is sadly lacking in the ongoing debate of whether active or passive investing is best.’ The trust’s portfolio is made up of a diverse collection of quality care homes, each enjoying modern en suite facilities and run by highly regarded operators; it currently pays a dividend of around 5.5 per cent.’
8. TwentyFour Income
Gavin Haynes, managing director at Whitechurch, says this is a specialist fixed income trust, suitable for investors seeking a high income but prepared to take accept the risks associated of investing in higher-yielding asset-backed securities. ‘These are effectively securities of packaged loans issued by financial institutions. This is an area that was tarnished in the global financial crisis, but is now under much greater scrutiny and the securities are more conservatively structured. TwentyFour is a specialist fixed income boutique and the management team are experienced in this area.’ The trust currently yields 6 per cent.
9. Ecofin Global Utilities & Infrastructure Trust
Another trust Haynes recommends for income diversification is this trust, which focuses on investing in large cap utilities and infrastructure companies, with a globally diversified portfolio. ‘The trust currently provides an attractive dividend yield of 5.3 per cent and the yield on its portfolio will be enhanced by gearing and revenue reserves where necessary. This trust can be purchased on a 12 per cent discount.’
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