Interest rates are at ultra-low levels – though they might start to increase, most agree any hikes will be incremental – bond yields have once again fallen and at the same time the population is getting older.
Though investors are increasingly turning to dividends from equities as an alternative source of income, F&C’s Rob Burdett points out that investors do need to start looking into even more unconventional areas for yield.
“The go-to income sectors no longer offer the yield they once did and investors need to look further afield, letting go of the bias towards the traditional sectors,” Burdett (pictured) said.
“Since 2010, the change in yield of the IMA UK Equity Income sector is negative 8 per cent and the IMA Sterling Corporate Bond sector is not fairing any better, down by 22 per cent.” With that in mind, FE Trustnet looks at three portfolios which generate their income from parts of the market that most investors, rightly or wrongly, tend to ignore.
KMG Montreux Care Home
The KMG Montreux Care Home fund is arguably one of the most niche vehicles available to investors.
The fund, which is domiciled in Luxembourg, attempts to capitalise on rising age demographics in the UK by investing in bricks and mortar care homes and their operating businesses. While that may sound too niche for certain investors, it does throw off a yield of around 7 per cent.
It has also performed well since launch in July 2011 as it has returned 35.19 per cent. As a point of comparison, an equally weighted portfolio of direct property funds within the IMA Property sector has returned 17.4 per cent over that time.
Performance of fund versus composite portfolio since Jul 2011
Source: FE Analytics
Oliver Harris, director at Montreux Capital Management, says there were a number of reasons behind launching the portfolio.
Firstly, he says it is a part of the market that can generate a high, and sustainable, level of income which is relatively under-researched. Also, not only is the UK population getting older, but there is a huge supply/demand imbalance within care homes, guaranteeing high occupancy rates.
The fund currently only invests within the south-east of England, though Harris says he and the team are starting to find more opportunities in other regions of the UK.
KMG Montreux Care Home is available on a number of wrap platforms and has an annual management charge of 1.5 per cent, though it has a performance fee. It also has exit penalties for investors over the first five years of investment.
GCP Student Living
Sticking on the property theme, investors could turn to the GCP Student Living investment trust; which is the only publically traded REIT (real estate investment trust) focused on modern purpose student accommodation facilities in and around London.
The trust yields close to 6 per cent and owns three student accommodations: one in Shoreditch, one in Greenwich and another a little further out in Egham.
The closed-ended fund had its initial public offering in May last year and investors who took part have since been well-rewarded. According to FE Analytics, shares in the trust have returned 14.68 per cent over that time. As a point of comparison, the FTSE All Share has gained 4.7 per cent over the period.
Performance of trust versus index since May 2013
Source: FE Analytics
Tom Ward, who heads up the portfolio, says the rationale behind the fund was to tap into the growing number of UK university students, especially those coming from abroad, high occupancy rates and the poor supply of higher quality digs.
According to data from UCAS, the number of UK student applicants was its highest ever this year – 580,000 – despite a decrease in the 18-year-old population.
Investors have to pay a 9 per cent premium at the moment, however, though it has consistently traded on wide premium since its launch due to its high yield and the stability of its dividend.
The trust has ongoing charges of 1.6 per cent.
Freehold Income
Another option could be the five crown-rated Freehold Income Trust, which is headed-up by Nigel Ashfield.
The Freehold Income Trust attempts to provide a secure and stable return primarily through acquiring freehold ground rents which offer both an income stream and capital growth prospects.
It currently has a target yield of 4.25 per cent after charges, but the yield is slightly lower than this at present.
The portfolio has an unbroken track record of positive returns over 20 calendar years and has consistently outperformed cash, gilts and inflation over these periods. It has also outperformed the UK equity market over that time.
Performance of fund versus indices over 20yrs
Source: FE Analytics
The £215m portfolio, which has the best risk-adjusted return record of any fund across the entire IMA unit trust and OEIC universe over 10 years, had been an unregulated collective investment scheme (UCIS), which meant that it was out of reach for most.
However, it is once again open to investors through an adviser.
The fund invests across the UK’s residential property market and has a total expense ratio of 1.45 per cent.
