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Overpaying for safety: The expensive alternatives funds investors are buying

21 January 2016

Ian Barrass, co-manager of the Henderson Alternative Strategies Trust, tells FE Trustnet which areas of the alternatives and specialist markets are fully-valued at the moment, and which sectors he has bought into recently to navigate today’s choppy market.

By Lauren Mason,

Reporter, FE Trustnet

First-tier property and some infrastructure funds are areas of the market that cautious investors are paying too much for, according to Ian Barrass (pictured).

The manager, who runs the £94m Henderson Alternative Strategies Trust (HAST) alongside James de Bunsen, has been restructuring the investment vehicle over the last 22 months after Henderson gained control of the underperforming trust from SVM Asset Management.

Over this time frame, both managers have significantly altered the trust’s portfolio as part of a three-year restructuring plan, in an attempt to turn around its poor performance.

“During this time of restructuring we have underperformed the benchmark but hopefully we’re coming through the other side of that now,” he said.

“I think some of the fund selection prior to us taking over was not as good as it should have been and we inherited a number of positions which proved quite illiquid and we were unable to move them out of the portfolio.”

“Value diminished and so did the overall quality from the managers and the assets, and I think it’s fair to say we’ve significantly upgraded this over the last two years. We’re not interested in buying things at huge discounts to NAV, and we’re not interested in buying things that look cheap but aren’t really because they’re not of good-enough quality.”

As such, Barrass says he is willing to pay a fair price for assets run by good managers, and he says that the heightening of the trust’s quality threshold is one of the major changes that has been made to its portfolio.

The alternatives and specialist space has increased in popularity recently in general, following the converging performance of bonds and equities leading investors to seek portfolio diversification elsewhere.

Performance of sectors over 10yrs

Source: FE Analytics

However, some areas of the alternatives space have been criticised for illiquidity, short track records and high costs.

While Barrass isn’t a value-orientated investor and prefers to buy into quality assets as part of a concentrated portfolio, he says there are expensive sectors that investors should watch out for.

“Quite a few things have come off over the last few months so there is more value in a number of areas than there has been,” he pointed out.

“A good example of a fully-valued area of the market, though, is the funds that invest in the larger first-tier cities and the higher end of the property market, particularly in Europe.”


“We think that property, residential and particularly commercial property, at the prime end of the market has become pretty fully-valued over the last few years.”

HAST is allowed to hold up to 20 per cent of its portfolio in property, and currently, this weighting stands at 8.4 per cent and consists of property funds and REITS that specialise in second-tier property, such as Ediston Real Estate.

“It invests in regional property where valuations are more attractive and we can still see quite a significant degree of NAV growth and rental growth in those parts of the market,” Barrass explained.

“We steer clear of prime-end property and lean more towards regional second-tier property for value reasons.”

Another area of the alternatives market that the manager believes investors should be careful investing in is infrastructure.

Infrastructure has been a highly popular area of the market over recent years in particular, due to its defensive characteristics and its potential to produce high yields.

Performance of sector vs indices over 3yrs

Source: FE Analytics

This has led to an increase in price within the market area though, with the average trust in the IT Infrastructure sector currently trading on a 10.3 per cent premium.

“Some people argue that the infrastructure funds such as HICL [Infrastructure] and JLIF [John Laing Infrastructure fund], those listed funds that invest in tier-five PFI [Private Finance Initiative] and PPP [Public Private Partnerships] projects, provide very good long-term stable cash flows,” Barrass continued.

“However, they’ve tended to trade at quite high premiums over the course of the last 10 years. We’ve steered clear of those, although they’ve started to become more interesting now as their premiums have come in a little bit.”

While HICL and JLIF are currently trading on premiums of 9.1 and 10.8 per cent respectively, the manager says that there are cheaper investment vehicles in the sector available that have been hit by recent market conditions, and as such could provide good buying opportunities.


For investors who want to invest in a defensive area of the alternatives market that that is more attractively-valued though, he suggests that the renewable energy sector, which is averaging a 2.9 per cent discount, is a good place to look.

Performance of sectors over 1yr

Source: FE Analytics

“There has been a little bit of weakness in terms of the share prices of the listed renewable funds partly because of concerns regarding long-term power prices, but overall we think the underlying assets such as wind farms and solar projects are good quality and often have government-subsidised cash flows, which is attractive,” Barrass explained.

Another area that the manager likes is the long/short hedge fund space, as he believes that many of them are well-equipped to cope with volatility in the market and deliver absolute returns, providing the right managers are found.

HAST’s largest weighting at 7.1 per cent is currently BlackRock European Hedge Fund, which is managed by Alister Hibbert and is domiciled in the Caymen Islands.

The long/short fund invests in European public equity markets, and invests in companies across all market capitalisations and from a diversified range of sectors.

“It’s got a fantastic track record,” Barrass said. “During 2015 it delivered a return of around 35 per cent for us, and the reason it’s such a big position is partly because it’s gone up so much.”

“Our opening positions tend to be around 3 to 4 per cent. We’ve really seen that position improve. It’s based on the quality of the fund manager and the excellent execution of the strategy for that fund.”

“That fund was only briefly open for investors around a year ago when we bought into it so, from a HAST perspective, we were pleased to be able to get access to that fund for our investors.”

Over Barrass’s tenure, HAST has provided a loss of 14.59 per cent, underperforming its peer average and benchmark by 32.46 and 31.14 percentage points respectively.

Performance of trust vs sector and benchmark under Barrass

Source: FE Analytics

However, it must be noted that the trust is still undergoing extensive structural changes given that many of the non-listed assets Barrass inherited saw their values written down. Also, many of the trust’s previous holdings are having to be sold gradually due to issues surrounding liquidity.

HAST is currently trading on a 21.4 per cent discount, yields 1.6 per cent and has an ongoing charge of 0.93 per cent.

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