Investment trusts that concentrate on alternative assets have faced a challenging opening half of 2018 but analysts at Numis Securities believe that a number of attractive short-term opportunities can be found in this space. 
In its half-year review, the broker pointed out that the opening quarter of 2018 proved to be a “tough period” for many alternative investment trusts, although there was an improvement in share price performance in the second quarter.
Summing up the six-month period, Numis said that the share price performance of the alternative sectors has been “mixed” – as the below chart illustrates. “For instance, within the property sector, UK commercial, UK long lease and student funds delivered healthy gains, whereas healthcare funds suffered premium erosion and some residential funds moved to discounts due to concerns over counterparty risks following the failure of a housing association,” its analysts explained.
Alternative asset investment trusts’ share price performance in 2018
Source: Numis, as at 12 Jul 2018
Against this backdrop, Numis has added three offerings to its recommended list of alternative investment trusts – categorising all three as ‘trading buys’. In the following article, we take a look at these trusts.
BH Macro
First up is the $449.6m BH Macro trust, which Numis has added because of its wide discount and its role as a portfolio diversifier. This trust has been added to the recommended list as a replacement for sister fund BH Global, which has seen its discount narrow.
BH Macro, which sits in the IT Hedge Fund sector, specialises across global equity, credit, sovereign debt, currency and commodity markets. It has a number of traders who build investment strategies focused on economic change, monetary policy and market inefficiencies.
“Returns from Brevan Howard funds have been dull for a number of years, with the low volatility environment being a headwind to macro trading returns. However, there has been a pick-up in performance in 2018. We believe the Brevan Howard funds are interesting portfolio diversifiers and expect them to be well-placed if markets see further increases in volatility,” Numis said.
“The manager sees a more attractive macro trading environment, given increasing interest rates, divergent monetary policy, and the end of forward guidance and continuous QE. This is expected to lead to increased volatility where the portfolio can benefit from an asymmetric pay-off profile, using options, and option-like positions.”
Performance of trust vs sector over 10yrs
Source: FE Analytics
The trust’s potential as a portfolio diversifier is highlighted by its low correlation to global equities and government bonds. FE Analytics shows that its correlation to the MSCI AC World over 10 years stands at just 0.08 while its correlation to the Bloomberg Barclays Global Treasury index was 0.38.
BH Macro is currently trading on a discount to net asset value (NAV) of 9.2 per cent, according to the Association of Investment Companies. It has ongoing charges of 2.72 per cent (including a performance fee) and is not geared.
Regional REIT
Next up is Regional REIT, which is a member of the IT Property Direct sector and managed by London & Scottish Investment and Toscafund Asset Management. Numis has added this £352m trust to its recommended list because of its attractive covered yield and high discount after a period of underperformance.
Performance of trust vs sector over 10yrs
Source: FE Analytics
“Regional REIT is currently trading on a discount to NAV of over 12 per cent, despite a fully covered 8.3 per cent yield,” Numis said.
“We acknowledge that the fund has a high office weighting (circa 70 per cent) compared with its more diversified UK peers and higher (but declining) gearing (loan-to-value circa 44 per cent), including £37m of ZDPs [zero dividend preference shares], which mature in early 2019. However, we believe the discount partly reflects a perceived overhang of shares from a stake owned by Conygar.”
Regional REIT acquired a portfolio from The Conygar Investment Company in March 2017, with part payment through the issue of 26.36m shares (or 8.76 per cent of share capital). Two-thirds of these shares were subject to a lock-up for 12 months to March 2018, while the remaining 33 per cent are in lock-up until September 2018.
The trust has a focus on income and invests in UK commercial property, predominantly in the office and industrial sectors in major regional centres and urban areas outside London; its top holdings at the moment include Tay House in Glasgow, Genesis Business Park in Woking and Arena Park in Leeds.
It takes a “hands-on” approach to property investing, concentrating on buying well in the first place then improving properties and exploiting development potential through active management.
Stenprop
The final addition to Numis’ recommended list is Stenprop, which is an internally-managed property business that started trading in the specialist fund segment of the London Stock Exchange on 15 June. It has been added for its attractive yield and rerating potential.
Numis’ analysts said: “The company is in the process of gradually repositioning the current portfolio from a broad range of sectors and European geographies to a more focused portfolio of UK multi-let industrial estates.
“This strategic decision capitalises on Stenprop’s 2017 purchase of the industrials.co.uk portfolio, which added 25 MLI estates and an experienced MLI management team.”
Although it has only traded on the London Stock Exchange for around one month (it is also listed in South Africa), its shares are trading on an 18 per cent discount to its latest NAV. It is also paying a prospective yield of 6 per cent.
According to Numis, this represents “an interesting investment proposition”. The broker explained that there is potential for a near-term re-rating in the Stenprop’s share as its business plan progresses and its move to multi-let portfolio with a ‘serviced industrial’ model delivers attractive returns for investors.