To anyone under the age of thirty, thoughts of receiving an interest rate greater than the rate of inflation is almost an alien concept. In response to Bank of England policy, the Investment Trust sector (funds listed on the stock market) has developed a broad range of specialist income vehicles for long-term investors.
Six of the best alternative income ideas
Looking at the ten years to the end of May 2017, inflation as measured by the Retail Price Index (RPI) rose 31.8%, while anyone receiving the Bank of England (BoE) base rate would have made a total return of 13.2%. In other words, cash in a bank account has lost 18.6% of its real value over ten years. But it wasn’t always this way — savers in the decade before the 2008 global recession used to consistently receive a rate of interest which was in excess of the RPI, effectively generating a risk-free real return.
To meet the demand for income, the investment industry has had to evolve, and the one area that has done this better than most is the Investment Trust sector.
Investment Trusts are funds which are structured as companies and trade on the stock market. This means that they have shareholders, a stable pool of capital, and the ability to use borrowing to invest in illiquid assets, which a traditional unit trust cannot.
One well known example of an illiquid asset that sits better in an Investment Trust is physical property. In times of market stress, unit trust investors can be subject to dealing suspensions until the underlying holdings are sold. Investment Trusts meanwhile, due to supply and demand, will see the share price fall to below published Net Asset Value (NAV), allowing sellers to get out, while value-hunting buyers are able to buy in on a discount.
Over several years, the Investment Trust sector has seen huge growth in alternative income products, and here we list six products from sectors that investors may want to consider for inclusion in their investment allocations.
All investments involve risk, and you may not get back the full amount you invest.
|1.||Aircraft leasing||Amadeo Air Four Plus||AA4||£630||7.9%|
|2.||Commercial real estate||Tritax Big Box REIT||BBOX||£1.97bn||5.3%|
|3.||Real estate debt||Real Estate Credit Investments||RECI||£173||6.6%|
|4.||Infrastructure||International Public Partnerships||INPP||£2.16bn||4.2%|
|5.||Peer-to-peer landing||P2P Global Investments||P2P||£707m||5%|
|6.||Reinsurance contracts||CATCo Reinsurance Opportunities Fund||CAT||$391.7m||5.3%|
Source: Bloomberg, 14 July 2017
1 – Amedeo Air Four Plus – LON:AA4 (7.9% yield, £630 million market cap)
Amedeo Air Four Plus specialises in buying aircraft and leasing them to commercial airliners. It currently has a portfolio of 11 aircraft, including Airbus A380s and Boeing 777s, which it leases to Middle East airlines Emirates and Etihad. Investors face potential credit risk should the airlines default, but the key to long-term returns for shareholders is the price at which Amedeo can sell the planes at the end of their lease. The dividend is paid quarterly.
2 – Tritax Big Box REIT – LON:BBOX (5.3% yield, £1.97 billion market cap)
Big Box is a real estate investment trust 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. It aims to grow its yield in line with inflation. The dividend is paid quarterly.
3 – Real Estate Credit Investments – LON:RECI (6.6% yield, £173 million market cap)
This investment trust invests primarily in debt secured by 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. The dividend is paid quarterly.
4 – International Public Partnerships – LON:INPP (4.2% yield, £2.16 billion market cap)
International Public Partnerships invests in infrastructure investments, typically projects undertaken by public bodies under 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 growing dividends by investing in inflation-linked projects. The dividend is paid half yearly.
5 – P2P Global Investments – LON:P2P (5.0% yield, £707 million market cap)
Peer-to-peer (P2P) lending has had a difficult time with much of the listed sector disappointing, due to higher than expected default rates on US platforms. However in a richly valued market P2P offers some value on a discount to NAV of around 12% and exposure to a diversified portfolio of consumer loan across Europe and the US. The dividend is paid quarterly.
6 – CATCo Reinsurance Opportunities Fund – LON:CAT (5.3% yield, $391.7 million market cap)
Reinsurance funds give investors the opportunity to receive insurance premiums from investments linked to catastrophe events such as hurricanes, earthquakes and flooding. While premiums have fallen in recent years, the sector still offers high potential yields and capital growth. CATCo targets a return of 12%-15% above LIBOR on an annual basis. Investors in CATCo need to be aware that they are exposed to fluctuations in the dollar.
How can I find out more?
Investment Trusts tend to have much less coverage than Unit Trusts as they have a fixed pool of capital and therefore do not usually benefit from the largesse of asset manager marketing budgets.
You can buy Investment Trusts on IG’s Share Dealing platform from just £5.