Three recent launches capitalise on the thirst for yield in very different ways. Cherry Reynard outlines their approaches.
A near-decade of zero-bound interest rates has taken its toll for income-seekers. Almost any income asset class worth the name has seen payouts fall, leaving investors taking more risk to achieve a decent income. This is starting to reverse as global growth and higher inflation have prompted central banks to push rates in the opposite direction, but it is a slow process.
Nevertheless, some favoured income investment trusts are starting to look interesting again. The infrastructure trusts, also hit by the woes over Carillion and nationalisation threats from the Labour party, have seen premiums turn to discounts and income yields become more attractive. GCP Infrastructure Investments, for example, now sits on a yield of 6.5 per cent and just a small premium to net asset value. John Laing Infrastructure and HICL sit on discounts of 8.8 per cent and 10.6 per cent respectively. A year ago these three investment companies were trading at premiums in the mid to high teens.
The UK equity income sector has particularly suffered, with some high-profile names – such as Mark Barnett at Invesco Perpetual and Neil Woodford at Woodford Investment Management – having a poor run of performance. It has also suffered from the general indifference towards UK assets. However, this poor sentiment has left discounts wider – 11 per cent in the case of the Edinburgh Investment Trust that Barnett manages – and potentially attractive to contrarians.
However, even if opportunities are appearing among some of the more conventional sources of income, investment companies remain a fertile spot for diversifying income sources. With that in mind, we take a look at three that are capitalising on unusual income opportunities.
Aberdeen Standard European Logistics Income
Today, Amazon’s Prime Now customers can receive groceries within two hours of ordering. New benchmarks are being set for speed of delivery, but the mechanics that facilitate such super-quick timing are complex and have prompted a whole new wave of behind-the-scenes logistics. These so-called ‘last mile’ delivery services are cropping up on the edge of Europe’s major cities to allow consumers to receive their goods in double-quick time.
While logistics are already well-established in the major e-commerce centres such as the UK, US and China, they remain nascent in Europe. They therefore have the potential for more rapid growth, while pricing is more competitive. As it stands, e-commerce across all of Europe is worth around €600 billion, approximately the same as in the UK. In areas with rapid adoption, competition for land is intensifying.
For investors, these assets have some natural advantages. They tend to have long, inflation-adjusted leases, which should provide a reliable, inflation-protected income stream with some potential for capital growth. The Aberdeen Standard European Logistics Income trust aims to capitalise on the growth in e-commerce by investing in this type of edge-of-town warehousing across Europe. In doing so, it is tuned into both the growth in e-commerce generally and the development of faster transaction times.
At the start, the team will be focusing on the Nordic and Benelux countries and Germany, focusing on those regions where it has people on the ground and where prospects for e-commerce adoption are strongest. Andrew Allen, global head of real estate investment research, says: ‘We’re not trying to buy the market. We’re trying to select the right building in the right location, which is suitable for the right tenant and good for prospective future tenants as well.’
It is not just the location that is important; the group is also looking at warehouses with innovative models. More sophisticated warehouses will embrace robotics. Allen says: ‘Previously, warehouses would often only have single racks on the ground. Clothing would be stored in plastic wrappers and need to be hand-selected. Now there are floor to ceiling racking systems, with items selected by machines.’ The discerning e-commerce retailer has very specific needs. The floors need to be absolutely level, for example, to support the automated systems and bear additional weight. ‘It needs to be the right location and the right configuration,’ he adds.
‘Last mile’ deliveries will be a focus for them: ‘Whereas five years ago, customers were happy to get their delivery in a week, now they want it within 24 hours. This helps focus logistics to where there is the greatest demand.’ He says competition for this land has increased and in the UK now looks relatively unattractive, but they can still find opportunities across Europe.
The fund is still new, having launched late last year, and is not yet fully invested. Its first investments have included a modern multi-let facility near Frankfurt airport. It comprises five units, with a mix of tenants and is typical of the type of building that will be in the portfolio. The group is targeting an income of 5.5 per cent, although this won’t be paid in the first year.
More info: eurologisticsincome.co.uk
Aberforth Split Level Income
Split capital investment trusts understandably developed a poor reputation during the split capital crisis of the early 2000s. However, the split cap structure itself was sound and had been around for more than a century. Split trusts simply issue two classes of share: income shares where the shareholder gets the income generated from the company’s investments during its lifetime and capital shares where the shareholder gets part of the lump sum when the assets are sold off at the end. The right option depends on investors’ tax position or investment needs as to whether capital growth or income is appropriate.
Most went the way of the dodo, but a few survived and have managed to thrive. The Aberforth Split Level Income trust is one of these. It was launched as a rollover option for investors in the Geared Income trust from the end of June last year, investing in a portfolio of small UK-quoted companies.
Simon Elliott, head of research at Winterflood Investment Trusts, says: ‘It has many of the same attributes as Aberforth Smaller Companies trust, with the key difference being its structural gearing via zero dividend preference shares. Split capital investment trusts are increasingly rare in the investment trust universe. The fact that Aberforth has been able to successfully manage successive split capital funds invested solely in UK smaller companies over the years in differing market conditions is testament to its consistent value approach, which we believe suits the structure well.’
Aberforth is a long-established smaller companies specialist. The sister trust – Aberforth Smaller Companies – celebrated its 25th anniversary in 2015. Its focus on value has seen it underperform the wider smaller companies sector over the past few years, though its long-term track record is sound and it remains a well-respected management group with a stable team.
The group believes in buying companies selling at below their intrinsic value. A company may fall below its intrinsic value for a number of reasons, such as weak macroeconomic conditions temporarily hurting trading, poor execution undermining an attractive business model or peripheral activities obscuring a strong core business. Within its portfolio today are companies such as recruitment firm Robert Walters, housebuilder Bovis Homes and stockbroker Brewin Dolphin.
As the trust has only been going since June of last year, performance figures aren’t particularly informative. Its stated aim, however, is to provide ordinary income shareholders with a high level of income, with the potential for income and capital growth. The current yield on the ordinary income shares, trading on a small discount, is 4.1 per cent.
As the trust has a fixed life, there is a pre-determined final capital entitlement on the 1 July 2024 wind-up date of 127.25p for holders of the zero dividend preference shares – a 3.5 per cent average yield over the term. However, the zeros have proved popular and are currently trading on a near 6 per cent premium, which reduces the current redemption yield to 2.7 per cent.
More info: aberforth.co.uk/investment-trusts/
RM Secured Direct Lending
At some point in the wake of the global financial crisis and in response to tighter regulation, banks decided that lending to smaller companies was too risky a business and backed – or even sprinted – away from the sector. However, the demand side hadn’t changed. Smaller businesses still needed flexible capital to grow, and the banks’ abrupt withdrawal left many businesses in limbo.
Enter RM Secured Direct Lending: the team at RM Funds recognised that there was a hole in the market, somewhere between the smallest businesses, which were well-served by peer-to-peer lending, and the larger businesses, which could look to corporate bond markets. The trust raised money from investors to lend to small and medium-sized enterprises and launched in December 2016.
Part of its appeal is in being more nuanced than the banks could be in the way that they lend. James Robson, chief investment officer, says: ‘It shouldn’t be as difficult as it is to go through Know-Your-Customer rules with a bank. We aim to understand what a borrower wants, working with them – do they need the money to buy equipment, for example?’ This will influence when and how the trust provides capital.
Businesses come to it through various channels. It may be referred by accountancy firms, for example, or from the ‘challenger’ banks. The trust managers will take ‘first secured’ security over an asset and in turn, the borrower should get a solution that works for them.
Robson says that the group has had zero defaults to date, though he admits it makes him nervous to say it. Nevertheless, he adds: ‘We aim to make sensible credit decisions. Our focus is always on protecting the downside. We have no upside because we are only lending money, so we need to make sure that our downside and income are secure.’
There are currently 26 investments in the portfolio and the average loan size is £3 million. The trust turns down far more businesses than it lends to, and the investments are diversified across a range of areas, including healthcare, infrastructure and children’s nurseries. There are also a number of areas it won’t touch – weapons, tobacco and adult material.
The team don’t see the banks coming back to the sector, given the complexity of regulation today. Instead, says Robson, they believe the UK may become more like the US, which has more of this type of lending, while the banks focus on larger clients.
RM Secured Direct Lending currently has a yield of 4.1 per cent and trades on a small premium to net asset value of 3.8 per cent. It has proved largely uncorrelated with equity markets, which means the share price hasn’t done much, but for income investors, that’s not the point.
More info: rmdl.co.uk
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