While the vast majority of portfolios are built around the mainstream asset classes of stocks, bonds and cash, many investors turn to alternative assets to diversify their holdings and add additional sources of returns. 
Mindful of the important role that alternatives can play, we have reviewed the investment trust sectors that are home to portfolios focusing on assets such as property, private equity and commodities to see which have consistently outperformed over the long run.
In this research, we have looked at how often trusts were in the top quartile in 54 rolling 10-year periods (calculated on a quarterly basis) going back to 1995. The first period spans 1 April 1995 to 31 March 2005 then we move forward in three-month increments until we reach the period covering 1 July 2008 to 30 June 2018.
We start with trusts in the IT Property Direct – UK sector, as this is often the area that investors often first turn to when they are looking for something to sit alongside equities and bonds.
Rolling 10-year total return of trust vs sector
Source: FE Analytics
F&C Commercial Property, whose 10-year total return is shown in the chart above, comes in first place. It has 14 quarterly 10-year periods in its history and it has been in the peer group’s top quartile of 13 of them, or 93 per cent of the time; the remaining period – which is the most recent one – was spent in the second quartile.
Managed by BMO Global Asset Management’s Richard Kirby since launch in 2005, the £1.2bn trust aims for an attractive level of income together with the potential for capital and income growth.
While issues such as Brexit have muted the outlook for UK commercial property, Kirby remains sanguine. In the most recent annual report, he said: “Despite forecasting more modest performance in the short term, UK commercial property continues to offer investors attractive long-term income returns and the company’s portfolio is well positioned whilst we navigate this period of political uncertainty.”
F&C Commercial Property has ongoing charges of 1.22 per cent, is trading on a 1.8 per cent premium to net asset value (NAV) and yields 4.2 per cent, according to Association of Investment Companies (AIC) figures. It is 20 per cent geared.
We turn to the IT Infrastructure sector next, where 3i Infrastructure is ranked top after sitting in the peer group’s top quartile for all six of the 10-year periods in its history.
The £1.9bn trust has a global remit to invest in owning infrastructure businesses and assets, but tends to have a focus on Europe, North America and Asia.
In the most recent annual report, managing partner Phil White said: “Our investment focus remains on areas of the infrastructure market which offer more attractive risk-adjusted returns, in mid-market economic infrastructure businesses and greenfield projects.
Rolling 10-year total return of trust vs sector
Source: FE Analytics
“We continue to see a good flow of new investment opportunities, but we remain disciplined to invest selectively and focused on maintaining a balanced and attractive portfolio for shareholders.”
3i Infrastructure has ongoing charges of 1.75 per cent, but this rises to 6.64 per cent when its most recent performance fee is included. It is trading on an 18 per cent premium to NAV and yielding 3.5 per cent.
Moving on to the IT Private Equity sector and at the top of the list is HgCapital Trust, which spent 89 per cent of the rolling 10-year periods we examined in the top quartile; the remaining 11 per cent of periods were second-quartile. (Disclosure: HgCapital Trust recently announced an investment in FE, the owner of FE Trustnet).
The £712.9m trust specialises in technology and technology-enabled service companies, with a bias towards northern Europe. It uses a ‘deep sector’ approach that entails channelling its “rigorous, in-house research-based investment process” into the technology, services and industrial technology sub-sectors.
Rolling 10-year total return of trust vs sector and index
Source: FE Analytics
Numis Securities recently recommended the trust for those seeking alternative assets, labelling it as a core long-term holding thanks to its exposure to high-quality growth businesses.
The broker said: “HgCapital Trust is a unique vehicle, differentiated from other listed private equity funds through its clearly defined investment approach focused on technology and technology-enabled services. We believe that it is well positioned to continue deliver double-digit NAV growth over the long term.”
AIC figures show the trust has ongoing charges of 0.42 per cent, is trading on a 7.6 per cent discount to NAV and is yielding 2.4 per cent.
Next up is the IT Commodities & Natural Resources sector, where the best performer in this research has been Evy Hambro and Olivia Markham's £795.8m BlackRock World Mining investment trust. This five FE Crown-rated portfolio was in the peer group’s first quartile in 37 – or 69 per cent – of the rolling decade-long periods we examined.
The team behind the trust runs a number of other products focused on commodities and natural resources. It has a long-term track record in this space and is among the largest specialist metals and mining investors globally.
Rolling 10-year total return of trust vs sector and index
Source: FE Analytics
Mining stocks were out of favour for much of the past decade but enjoyed a strong 2016 and 2017. In a recent factsheet, the managers touched on this: “After two strong years, investors that have not been exposed to mining may now be questioning if they have missed the opportunity. We are, however, still a long way below the peak in 2011 and the sector continues to trade at a valuation discount to broader equity markets.”
BlackRock World Mining has ongoing charges of 0.98 per cent, is trading on a 13.9 per cent discount and is yielding 4.5 per cent. It is 17 per cent geared.
The final sector we looked at is IT Hedge Funds. BH Macro was in top place; it only has six rolling 10-year periods for us to examine and it was in the first quartile for half of them. It was in the second quartile for the other three periods.
BH Macro, which is run by Brevan Howard Capital Management, invests 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.
Rolling 10-year total return of trust vs sector
Source: FE Analytics
Numis has the trust on its recommended list because of its discount and its role as a portfolio diversifier. “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.”
BH Macro has ongoing charges of 2.72 per cent and is trading on a 7.4 per cent discount, according to the AIC.