Alternatives have become a core part of an investor's arsenal in recent years but not all are created equal.
Gold, the most common alternative option for many and a safe haven during times of market stress, made strong gains in 2020 as investors ploughed money into the metal to combat the uncertainty of the pandemic.
However, it has fallen 5.7% so far this year as the recovery trade has kicked in and people have begun to price in the end of the Covid-19 nightmare.
It is this inconsistency of returns that has meant Paul O’Connor, manager of the Janus Henderson multi-asset range of funds, has not held gold this year in any of his funds.
Total return of gold spot in 2021
Source: FE Analytics
“I don’t like gold. I just feel in an environment of rising yields it will struggle and we do feel that real yields have been compressed by QE and that the taper will unlock, which will be problematic,” said O’Connor.
However, the £1.9bn portfolio manager said that alternatives had become increasing crucial to his funds.
“Alternatives is an interesting area and one where we have put increasing focus on as a team. We have increased allocations across all of our funds. This has happened gradually but has ramped up over the past year or two and has become an emerging core in the funds,” he said.
The four funds in the Janus Henderson Core Income fund range, for example, currently have about 20% of assets invested in alternatives, up from a high single-digit figure just a few years ago.
Now is a particularly important time to own alternatives, as returns from fixed income are paltry by historic standards.
“Government bond yields are very low – it offers insurance but it is expensive insurance – and with credit spreads very low our appetite for corporate debt has also diminished over the past few months,” O’Connor said.
“In that environment, alternatives can offer a nice blend of income, some inflation protection and diversification. In most of the main funds we run we have a sleeve that we will blend together. We are into the high-teens in most of our strategies at a time when we don’t own any gold at all.”
The manager uses investment trusts to gain exposure to some nicher asset classes not traditionally available to fund managers.
Although bonds offer little by way of yield, some more specialist lenders have enticing payouts. BioPharma Credit Plc is one such trust included in his range.
The $1.4bn (£1bn) trust offers exposure to the life sciences and pharmaceuticals sector, through a diversified portfolio of secured loans and other similar investments.
“The trust pays a fully covered dividend, that is expected to exceed 7% this year,” he said, making it a strong option for investors in need of income.
Since its launch in 2017, the trust has made investors 16.6%, lower than the wider IT Debt – Direct Lending sector, although it has been the least volatile.
There is also a lot of interest in infrastructure, where O’Connor has two prominent picks. First is HICL Infrastructure trust, which provides long-term, sustainable income from a portfolio of investments in UK social infrastructure assets, such as hospitals, public sector projects, utilities and transport infrastructure.
“This has been a steady performer, delivering returns of nearly 10% a year over the past decade and has a prospective yield of 4.7%,” he said.
Total return of HICL vs IT Infrastructure sector average over 10yrs
Source: FE Analytics
Meanwhile, renewable energy, which has been a hot topic in recent years, also gets a nod in his portfolios through the Renewables Infrastructure Group.
The investment trust owns a range of assets that generate electricity from renewable sources, focusing on wind farms & solar parks. It has been another steady performer for O'Connor's funds, delivering returns of 105% since its launch in 2013. At present it has a prospective yield of 5%.
Tritax Eurobox Plc is another niche trust worthy of inclusion, according to O’Connor. The pan-European listed investment company focused on acquiring, actively managing and developing high-quality, large scale logistics assets.
“It has been a strong performer during the pandemic, as home shopping benefitted tenants such as Amazon and Mango,” O’Connor said, although it remains below its IT Property – Europe sector average.
Indeed, since its launch in 2018, the trust has returned 26.9%, although this is below the average IT Property – Europe trust’s 41.5% gain.
Finally, O’Connor said he has been a long term holder of BH Macro, an investment trust giving access to a hedge fund with a highly impressive track record, often delivering strong returns when traditional assets have struggled. The fund delivered around 35% in 2020 alone, the second-best performer in the IT Hedge funds sector.
| Fund | Sector | Fund size | Yield | OCF | Net gearing | Premium/Discount |
| BH Macro | IT Hedge Funds | £606.0m | 0.0% | 1.1% | 5.3% | 8.3% |
| HICL Infrastructure PLC | IT Infrastructure | £3385.6m | 4.8% | 1.1% | 0.0% | 14.0% |
| The Renewables Infrastructure Group | IT Renewable Energy Infrastructure | £2318.3m | 5.2% | 0.9% | 0.0% | 13.9% |
| Biopharma Credit Plc | IT Debt - Direct Lending | £1000.9m | 7.1% | 1.2% | 0.0% | -2.4% |
| Tritax Eurobox Plc | IT Property - Europe | £392.3m | 3.6% | 2.2% | 12.2% | 13.2% |