Hedge funds, real estate and infrastructure are three areas that might be overlooked by cautious investors, according to Anthony Leatham, head of investment companies research at Peel Hunt. 
Investors have been increasingly concerned about the valuations of both bonds and equities in recent years and as such have been looking further afield for diversification.
One such area is alternatives, which by definition tends to be a more niche sector, often with less liquidity and potentially more volatile.
Therefore, accessing these strategies through an investment trust vehicle makes more sense, as the portfolio is not beholden to inflows and outflows of investors.
Below, Peel Hunt’s Leatham (pictured) outlines three alternatives trusts that are in niche asset classes that may provide diversification and suit an investor with a cautious mindset.
First up is the $303m listed hedge fund Highbridge Multi-Strategy run by Highbridge Capital’s chief investment officer Mark Vanacore.
Highbridge took on the trust from BlueCrest in March 2016, since when it has produced annualised net asset value (NAV) return of 5 per cent with annualised volatility of 2 per cent.
Meanwhile, the trust’s NAV has a very strong Sharpe ratio – which measures risk-adjusted returns – of 2.4 along with close to zero beta to both equity and bond markets.
“When we assess the efficacy of an ‘absolute return’ strategy we look at a number of factors including performance, risk and performance behaviour in relation to other asset classes,” Leatham said.
“Our analysis also confirms that during periods of equity risk aversion, i.e. months that experienced a fall in the MSCI World index, the underlying multi-strategy portfolio protected capital.
“Similarly, Highbridge Multi-Strategy has shown notable resilience to falls in the sovereign bond market.”
Source: Peel Hunt
The trust is split into a number of sub-categories: fundamental, event-driven and quantitative equity allocations, capital structure arbitrage, convertible and volatility arbitrage, fundamental credit and macro themes.
Capital preservation and risk management are at the heart of the selection process, which aims to take advantage of mispricing in markets both from a long and short position.
“With a number of geopolitical risks escalating, and interest rates being nudged upwards, we anticipate a higher volatility environment leading to a more fruitful opportunity set for Highbridge Multi-Strategy,” Leatham said.
The trust has no gearing and its shares trade at roughly par to the NAV, according to data from the Association of Investment Companies (AIC). It has charges of 0.31 per cent.
Up next is the largest investment trust of those selected by Leatham, £1.1bn John Laing Infrastructure managed by David Hardy.
“The trust is a carefully managed infrastructure investment trust that has delivered consistent NAV performance from a diversified portfolio of assets,” said the Peel Hunt investment companies research head.
“It offers a portfolio of low-risk operational infrastructure projects, which benefits from first offer agreements in place with John Laing Group as well as a highly experienced management team.”
Infrastructure was a hot topic back in 2016, when investors were concerned by a number of factors including the Brexit referendum and the election of US president Donald Trump.
These were broadly seen as negatives for equities markets at a time when bonds looked fully valued. This led investors further afield in search of diversification, with infrastructure a beneficiary thanks to an expected move from central banks to fiscal policy from monetary policy.
“The social infrastructure sector has experienced a derating on the back of anti-PFI [private finance initiative] rhetoric from the Labour party, the collapse of Carillion and, in John Laing Infrastructure’s case, the disruption caused by Catalonia’s bid for independence,” Leatham said.
However, as a result of all these factors the trust’s shares are currently trading on a 4 per cent discount to NAV despite a 6 per cent dividend yield.
Premium/discount of trust over 3yrs
Source: AIC
Additionally, the NAV volatility of 7 per cent is lower than that of equities while the asset class also offers investors inflation-linked revenue streams.
“John Laing Infrastructure is a relevant and reliable bond-like investment option in an environment of low yields and investors increasingly looking to non-equity related exposure for their diversified portfolios,” Leatham said.
The trust is not geared and has ongoing charges of 1.21 per cent, according to the AIC.
Last up is £218 property portfolio LXi REIT, which aims to deliver inflation-protected income and capital return from long-lease index-linked UK property.
Launched in February 2017, LXI recently announced its maiden full year results which reported 12 per cent NAV total return and a fully covered first year dividend which was 33 per cent higher than expectations at launch. It also said there are good prospects for dividend growth.
Performance of trust since launch
Source: FE Analytics
The portfolio of 84 properties, across nine sectors and 25 tenants has a blended net initial yield of 5.4 per cent.
It has a weighted average unexpired lease term of 24 years, around 30 per cent loan-to-value (with debt fixed at 2.9 per cent per annum for 11 years) and 91 per cent of the rental income is linked to inflation.
Leatham added: “Over the next 12 months, it is expected that 55 per cent of the portfolio will see either an inflation-linked or fixed rent review.
“In an environment where the expectation of capital performance remains subdued, income-focused strategies that are sustainable and are less volatile have come to the forefront.
“Supplemented by an attractive forward-funding advantage, LXI offers underpinned capital preservation alongside inflation-protected income and an efficient cost base.”