Alternative investments have become notably more popular in recent months. Following this years’ volatility caused by China’s growth slowdown, the collapse in commodity prices and the impending rate hike from the Federal Reserve among other headwinds, many investors have opted to increase the diversification of their portfolios. 
Alternative investments provide a range of assets aside from the traditional portfolio combination of stocks, bonds and cash. According to a recent Natixis survey, 77 per cent of financial advisers questioned believe that traditional stock and bond portfolios are no longer efficient in providing returns and managing risk. This was a 27 percentage point increase from their survey last year.
Mark McKenzie (pictured), portfolio manager at Thomas Miller, conducts research and analysis across a range of asset classes with a focus on alternative investments, and he believes that closed-ended investment vehicles are the most efficient way to access this area of the market.
“One thing that a lot of our retail investors as well as our institutional side want is liquidity from alternatives, and this is something that trusts can provide,” he said.
“There are two sides to the coin, though. The fact that [trusts] can move out to premiums and that they can move out to discounts means that, at certain points in the cycle, assets can be expensive. Also if something is trading at a premium there is the additional risk that it could revert back to net asset value at some point.”
“On the flipside of that, trusts also provide opportunities if assets are trading at a large discount. I think if you’re able to follow the market closely, trusts can provide some opportunities to add more value over open-ended funds.”
As such, McKenzie provides a list of three investment trusts in different areas of the alternative asset space that he thinks can offer investors attractive risk-adjusted returns and genuine diversification.
Managed by Andrew Charlesworth and David Marshall since its launch in 2010, this £950m trust is one of Europe’s largest infrastructure investment vehicles. It partners with public sector counterparties to develop both local and national projects which, in turn, provide government-backed and inflation-linked revenue streams.
“We like that government backed cash-flow they provide within the social infrastructure space,” McKenzie said.
“It’s fair to say it’s not cheap at the moment, a lot of these trusts are trading at premiums, but this trust is delivering a good dividend yield, the potential for further capital growth, and some potential NAV growth in the portfolio. Perhaps not as much as we’ve seen historically, but we still think they deliver attractive returns.”
“The advantage that John Laing Infrastructure’s parent company has is this pipeline of projects coming through, which means that they don’t have to go into the open market for infrastructure projects. This gives them an advantage, particularly as more private money is coming into the infrastructure space, as there has been some pricing pressure on projects.”
He adds that the fact John Laing has the first right of refusal to any of these projects gives the trust a further competitive advantage compared to many of its peers.
Since launch, the trust has returned 48.46 per cent, outperforming the IT Infrastructure sector average by 1.65 percentage points.
Performance of trust vs sector and benchmark
Source: FE Analytics
It is also currently yielding 5.7 per cent, with a 2 per cent average dividend growth per annum.
John Laing Infrastructure is trading on a 10.2 per cent premium and has an ongoing charge of 1.43 per cent.
Launched just five months ago, this trust has an AUM of £97.6m and is managed by Laura Elkin, Rachel Mclsaac, Alex Short, Richard Tanner and Robert Wikinson.
It specialises in smaller UK properties spanning across the whole commercial property sector and will invest in anything from office properties and retail houses to industrial properties and warehouses.
The management team aims to find value opportunities offered by pricing inefficiencies in the smaller commercial property space that are let on shorter, occupational leases. The trust also aims to invest up to a maximum of 10 per cent of its NAV in the AEW UK Core Property fund, which invests across all property sectors.
“The London prime market has seen excellent yield compression recently. Yields are getting down to quite extreme levels, not quite 2007 levels but getting towards that. I think there’s probably an opportunity for more regional property - non-South-East [property] has started to provide good yield pick-up over the yield you can achieve from an equivalent London property,” McKenzie explained.
“I think that additional yield provides slightly more protection on one side, so if there was to be a reversal in sentiment in property you would start to see yields push out, so yield pick-up there should add a bit of protection. Also, the yield gap means there is greater potential for growth, so we’ve gradually started to move our allocation to more regional property plays.”
“AEW UK REIT is a relatively new listing we’ve added to, which is a regionally-focused and looks at smaller lots. I think it has the potential to add value over our core London allocation.”
Since its launch in April, the trust has returned 0.99 per cent, outperforming its peer group composite by 83 basis points.
Performance of trust vs sector since launch
Source: FE Analytics
AEW UK REIT is trading on a 4.8 per cent premium, yields 2.4 per cent and has a monthly management fee that amounts to 0.9 per cent of NAV per annum.
CATCo Reinsurance Opportunities Fund
Domiciled in Bermuda, the $442m CATCo Reinsurance Opportunities Fund makes investments that are linked to catastrophe reinsurance risks through a range of insurance-based investments.
“We’ve had meetings over the couple of days with companies that operate in the insurance linked securities space, one of which we’re invested in and one of which we’re not,” McKenzie continued.
“CATCo, which we decided to buy, adopts a strategy whereby it insures against low frequency but high severity catastrophe events, so natural catastrophes such as hurricanes, earthquakes or tornados. Their strategy is essentially taking in a premium to insure against those risks.”
“It’s a truly uncorrelated strategy in terms of its correlation to traditional markets because it’s very much reliant on whether a hurricane hits New York and they’ll have to pay out, for example. If there is no natural disaster, they can keep that premium.”
“We like that area [of the market], although there’s been mixed press on it because there has been lots of capital flowing into insurance-linked securities and that’s brought the prices up.”
Because of its lack of relationship with general market performance, the portfolio manager believes the trust, which is a fund of funds, has the potential to provide strong and diversified risk-adjusted returns to a portfolio.
The trust also aims to buy into well-diversified holdings and invests in several non-related risk categories in order to limit its exposure to any one area within the insurance area.
Since its launch, CATCo Reinsurance Opportunities Fund has returned 46.41 per cent, comfortably doubling its peer average in the IT Insurance and Reinsurance Strategies sector.
Performance of trust vs sector since launch
Source: FE Analytics
The trust is trading on a 5.1 per cent discount, yields 4.9 per cent and has an ongoing charge including performance fee of 3.48 per cent.
