Three alternative assets with attractive yields

published 1 June 2018

A professional investor tells us where he'd put his money. This week: Nick Watson of Janus Henderson selects three investments for a diverse portfolio.

As fund manager on the Janus Henderson Core Multi Asset Income funds, I aim to deliver a stable and regular natural income for my clients while also growing their capital over the long term. I have the flexibility to actively asset allocate across equities and bonds, but also to make use of the growing universe of alternative asset classes. These alternatives offer diversification in terms of total returns and also diversify our clients' income streams.

The real-estate investment trust PRS REIT (LSE: PRSR) is a great example of this sort of alternative asset class. The UK has poor levels of housing affordability and the private rental sector generally comprises small landlords of varying quality. The PRS REIT was launched to meet this demand for high-quality, professionally managed housing in convenient and attractive locations. PRS is in a strong position, having built excellent relationships in both the private and public sectors. This gives the company access to large land-banks, construction expertise and economies of scale. For investors this translates into a stable, long-term income-generating asset, with an expected yield of around 6%, arising from a portfolio of regionally diversified property developments. Even although PRS trades at a modest 2% premium to the underlying portfolio value, such a yield generated in a sector with significant government support makes the trust a compelling income play.

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Infrastructure also offers the promise of diversification and income, but of course investing in this area is not without risk. Political uncertainty around Labour's plans for private-finance-initiative (PFI) project renationalisation, plus the collapse of construction and support-services group Carillion, has hit sentiment toward these previously popular investments. The sector was historically highly rated, as investors sought out income-generating investments with inflation protection in their revenue streams. The recent disruption has seen discounts open out to levels that are unjustified by the fundamental investment case, which remains strong. Infrastructure fund HICL Infrastructure (LSE: HICL) offers a yield of 5.7% from a portfolio of more than 100 investments covering education, health and transport both here in the UK and internationally.

Finally, the stockmarket in the UK is universally disliked. Economic fundamentals, concerns about the direction of travel for the Labour party, and uncertainty over Brexit, have all negatively affected investor sentiment. Where investors have allocated capital to the UK, they have preferred to invest in mid-cap growth stocks rather than big dividend payers, which have lagged meaningfully over the past three years. The SPDR S&P UK Dividend Aristocrats ETF (LSE: UKDV) focuses on UK companies which have offered a stable or growing dividend over the past ten years. This means it has a tilt towards high-quality companies with visible earnings streams. The fund has lagged the FTSE All Share by about 20% since May 2015, yet it offers a near-5% yield, generated by large, global companies trading on attractive valuations.