Adventurous investing: Spice up your Isa with exotic investments

Investment Isas are technically known as stock and shares Isas, but this name doesn’t convey the wide range of assets you can buy. Most investors know you can hold UK and international shares, government and corporate bonds, funds, exchange-traded funds (ETFs), investments trusts and real-estate investment trusts (Reits) in an Isa. This last can be particularly attractive, as Reits – unlike regular UK shares – pay dividends net of 20% tax, which can be reclaimed by the Isa manager.

However, you can access a number of other asset classes, including some you might never have thought of as investments. The way to invest in most of these is via specialist investment trusts – the closed-end structure of these funds makes them suited to unconventional, illiquid assets. Here we’ll look at some of the more unusual London-listed funds you might want to consider.

A wide range of options

The two alternative assets that most investors will be familiar with are private equity and hedge funds. There are more than 20 private equity funds in the closed-end fund market, including HgCapital (LSE: HGT), which has one of the best long-term records in the sector. Listed hedge funds are a newer type of investment and few have a long-term record, but you can chose from a range of strategies such as the ‘event-driven’ Third Point Offshore Investors (LSE: TPOG) and the ‘trend-following’ BlueCrest BlueTrend (LSE: BBTS).

Funds that invest in debt are another well-established sector, covering a number of different niches including distressed debt and convertible bonds. One potentially interesting one in the current environment is NB Global Floating Rate Income (LSE: NBLS); this invests in bonds where the interest rate varies according to benchmark interest rates, and so should, in theory, benefit when central banks start to raise rates.

Infrastructure funds have grown in

popularity as yield-hungry investors chase their stable, long-term cash flows. Infrastructure is a broad area, ranging from relatively low-risk ‘social infrastructure’ – schools and hospitals – through fairly stable projects such as utilities, to more economically-sensitive transport and communications. The funds available reflect this, from the relatively conservative HICL Infrastructure (LSE: HICL) to the riskier 3i Infrastructure (LSE: 3IN).

Among the more esoteric market niches are a number of reinsurance funds. These essentially insure insurance companies against uncommon but severe events. The fund gets premiums from the insurer but has to pay out of its capital if the insured risk – for example an earthquake – happens. Investors earn a steady income if nothing happens, but are exposed to large potential losses if a series of natural disasters occurs. The best-known UK-listed fund in this niche is CATCo Reinsurance Opportunities (LSE: CATC).

Elsewhere, the three Doric Nimrod funds (LSE: DNA, DNA2, DN3) are a very specific asset-based investment. They buy aircraft that are leased to Emirates, meaning their main risk is the airline’s solvency. Burford Capital (LSE: BUR) and Juridica Investments (LSE: JIL) fund corporate legal cases in return for a share of any awards. And the somewhat uninformatively named Alternative Asset Opportunities (LSE: TLI) invests in US traded life interests – in other words, it buys life insurance policies from the original policyholder, continues paying the premiums and receives the insured sum when the policyholder dies.

Not for novices

The main attraction of these more unusual funds is that they should – in theory – not be strongly linked to traditional investments, which could make them useful as a way to diversify a portfolio. But analysing funds like these typically requires fairly specialist knowledge: so if you’re tempted to buy, be ready to do a lot of research and accept that you may still end up exposed to risks you don’t fully understand.


Merryn

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