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Seneca: How to find good value and income opportunities

Peter Elston, chief investment officer at multi-asset specialist Seneca Investment Managers, lists the sectors where the firm is looking for income.

Rob Langston

By Rob Langston, News editor, FE Trustnet
Wednesday February 08, 2017

The low-yield environment had made it increasingly difficult for some investors to find income opportunities, but affordable options can be found outside of the more expensive areas of the market, according to Peter Elston of Seneca Investment Managers.

The chief investment officer of the multi-asset specialist says there are a number of sectors where both value and income can be found.

Elston said: “There is quite a lot of talk about how hard it is to find value and income. A lot of that is because bond yields are so low. Safe haven bonds are yielding next to nothing.

“We have a different view: we think there are plenty of opportunities to find value.”

In the UK equity space, Elston says interesting opportunities can be found outside of the large-caps, which tends to be the preferred hunting ground for some of the larger fund managers.

He said: “Large-cap valuations are arguably a little bit stretched. Payout ratios are very high, there isn’t really much scope for large companies to grow dividends at the moment.”

Indeed, since the UK referendum on EU membership last year the blue chip FTSE 100 index has soared as investors have fled from domestic-focused smaller companies.

More money has been channelled into FTSE 100 companies with income streams from international earnings, given the weakness of the pound.

Performance of indices over 1yr

Source: FE Analytics

Elston says it looks instead at the mid cap space where companies have greater scope to grow dividends and tend to generate better returns over the long term.

While some bonds are currently offering lower yields, the fixed income space is not completely devoid of opportunities, says Elston.

He says the high yield space and emerging market debt are looking attractive, but often on a case-by-case basis.

However, the chief investment officer says he is comfortable avoiding certain areas of the market that do not offer good value.

He said: “You’re never going to be able to produce good performance if you're offering a more passive product investing in everything.

“We’re very happy not to invest in investment grade bonds, there’s very little value at the moment.”

Elsewhere, Elston highlights the specialist investment trust area for its income-generating abilities.

He says there are a number of different vehicles focused on alternative sources of income, such as Reits and investment trusts investing in renewable energy and asset leasing, providing high yield and sustainable income streams.

Elston says within the Reit space, trusts invested in social housing or healthcare tend to provide more stable income streams that are also inflation-linked.

Another attractive characteristic of Reits is that they tend to have lower volatility and a lower correlation to broad equities, says Elston.

Performance of index over 3yrs


Source: FE Analytics

“You have Reits that are mainstream, such as Land Securities or British Land. They invest in commercial retail have huge portfolio of national assets in the south-east of England,” he says.

The chief investment officer says such mainstream Reits are not of interest, instead preferring to look at opportunities in more niche areas where larger managers are not able to invest in.

He says real estate companies looking at more specialist areas of the market such as AEW, which focuses on smaller properties and require a bit more refurbishment, provide attractive income of 8 per cent.

Other examples include Civitas Housing, which invests in social housing, and Primary Healthcare Properties, which concentrates on medical centres and GP surgeries.

He said: “A lot of talk about hard to find value coming from large competitors. They are not able to look at some of the opportunities because they are bit on the small side.

“But we’re able to take advantage because we’re fairly nimble. That area is one that gives us a real edge.”

Ultimately, Elston says while the search for income has grown more difficult for investors looking in traditional areas, there are rewards for those willing to invest in non-traditional assets.

He said: “At the end of the day we are trying to identify the equities that are going to perform better and identify those have value-oriented framework.”

Performance of funds over 3yrs

Source: FE Analytics

“For a comfortable retirement need to take some very unpalatable investment decisions. Such as not holding government bonds, looking outside large-cap equities and trying to find value in mid-caps,” he concluded.

“There are two options: whether to accept going to have less to spend in retirement or do something to try to give you higher income in retirement. That means being very active and that what we’re trying to do.”

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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