This makes it easier to diversify a portfolio, in particular when it comes to finding sources of income.
The bond market still seems fraught with risks, making it prudent to look for alternatives or supplements.
Here are three specialist trusts generating a decent yield from unorthodox asset classes.
Alcentra European Floating Rate Income
One area that it is difficult to invest heavily in through open-ended funds is the loan market. This involves buying the debt of companies directly.
Alcentra European Floating Rate Income buys the loans of private equity-backed companies, investing in senior secured debt with inflation-linked coupons. The trust is yielding 5 per cent on a 2.5 per cent premium.
The trust has made 7.55 per cent in share price terms over the last three years, according to data from FE Analytics.
Performance of trust vs sector over 3yrs
Source: FE Analytics
Manager Graham Rainbow explains that the asset class has had just one negative month over that time.
The fund has had absolutely no defaults on its loans, Rainbow says, and is scrupulous in attempting to avoid this in future, even though recovery rates for defaults are around 70 to 80 per cent.
“We don’t chase better yields for more risk, unlike distressed debt funds,” he said.
The trust focuses on northern Europe and defensive sectors, and won’t be changing this to chase market momentum. FE Trustnet recently looked at the Henderson Diversified Income Trust, which has roughly 50 per cent in loans and also buys traditional bonds.
It has ongoing charges of 1.42 per cent.
BlackRock World Mining
FE Alpha Manager Evy Hambro is generating a yield of 4.5 per cent on his £821m BlackRock World Mining Trust.
Hambro has achieved this by investing in the royalties of mines rather than in mining companies that hold the rights, and says this is likely to become a larger part of his portfolio in the future, up from its current 9 per cent.
It helps him avoid political risk and taxation risk, he explains.
“They capture the upside and you get higher levels of revenue,” he said.
Thanks to its yield, the discount on the trust has narrowed to 4.8 per cent, despite commodities and mining being out of favour.
The trust has lost 35.53 per cent in share price terms, compared with 47.91 per cent for the sector.
Performance of trust vs sector over 3yrs
Source: FE Analytics
However, Winterflood analysts say that investors are being paid to wait for any recovery in the sector, and it is their recommended fund in the area.
Ongoing charges on the trust are also 1.42 per cent.
Later in the week, FE Trustnet will reveal the signs that Hambro believes point to a turning point in the commodities cycle.
NB Private Equity Partners
Private equity funds aren’t usually thought of as a source of yield, but NB Private Equity Partners, listed in London but not a member of the AIC, is currently paying out 4.5 per cent in annualised terms.
Unlike most listed private equity vehicles, this fund invests heavily in the debt of private companies, which allows it to generate this income.
Manager Peter Von Lehe explains that his fund can get yields of 11 to 14 per cent from private equity-backed companies, more than double the 6 per cent typically available from the high yield market.
The companies are often too small to be able to issue high yield debt, which makes raising money in this manner preferable.
Default rates on this debt are lower in times of stress than on those of publicly listed companies, he explains.
This is because private management is typically better at aggressively changing things when companies run into trouble and have deeper pockets, meaning that they are able to contribute additional capital.
One of the drawbacks is that companies are able to retire the debt early, meaning that investors lose the coupon and interest they would have accumulated.
However, Von Lehe says that he is happy to trade credit risk for reinvestment risk, and finds plenty of opportunities to replace retired debt with new issues.
The bulk of the portfolio is in orthodox private equity, either in funds or direct equity co-investments. A 2011 deal involved investing in RAC along with the Carlyle Group, which bought out the company and attempted to unlock value as other private equity players had managed to do with the ASA.
A recent debt investment was in Archroma, a speciality chemicals producer, which is paying libor plus 825 basis points (8.25 per cent).
The yield is so high because the company had no audited financial statements when the debt was issued.
NB Private Equity Partners received full information through its private equity backers, which gave it the confidence to invest.
“We think it’s much easier to make money when you have more money than other people,” Von Lehe said.
The company has been trading on a substantial discount for some time, and it has been slower to narrow than the discounts on other trusts in the same area.
The main reason for this was that the fund used to be majority owned by Lehman Brothers, and the estate only exited entirely in 2013. Analysts at Winterflood say this could spark a re-rating, and have put the trust on their buy list.
The discount is currently at 18.7 times compared with a one-year high of 24.7, and Winterflood say this could narrow, boosting shareholder returns.
The inevitable corollary would be a reduction in the yield, however. In NAV terms the yield is 3.3 per cent, meaning that if it came in as far as par it would still be yielding this amount.
