Three investment funds that should prosper under a Corbyn government

A Corbyn government may not be welcomed by everyone, says David Stevenson, but it will bring investment opportunities. And these three funds should be able to take advantage.

947_MW_P20_Funds

Jeremy Corbyn: he could be waving from No.10 soon

If I were a Conservative Party enthusiast, I'd be hopping mad right now. Obviously, Brexit hogs the headlines. But the real cause for anger is that the current government's precarious situation makes a Labour government ever more likely. I've watched the transformation of the Labour economic agenda, and it scares the heck out of me.

Thankfully, it could also mean investment opportunities. Let's start with green power. My sense is that a Labour government could choose to focus on the "third pillar of infrastructure" (after social infrastructure and renewable energy): energy efficiency. SDCL Energy Efficiency Income (LSE: SEIT) invests in projects that have little or no subsidy or regulation risk, don't take on exposure to energy markets, and rely on so-called "contractual de-risking".

How does this work? Imagine you are Santander bank and want all your offices to have LED lighting. You talk to the people behind this fund. They set up a special purpose vehicle (SPV), which funds the capital cost upfront and signs a deal with an energy-service company to run the operations. In return, the fund gets long-term cash flow from payment for the energy, and maybe even makes extra money if they overachieve on energy-saving targets.

So far, SEIT has acquired a seed portfolio of 12 investments and commitments, with expected returns of 7% to 8% after fees/costs and the impact of gearing (debt). SEIT's shares trade on a 7% premium to net asset value (NAV), with a dividend yield of around 5%.

Another big area worth focusing on is social housing. The most vulnerable funds here are those focused on high-margin, high-cost-of-capital supported housing, like Civitas and Triple Point. I think they'll be on the receiving end of negative policy decisions, as emboldened state planners look at the existing lease model and switch back to state funding.

By contrast, classic out-of-favour private-rented sector funds, especially those with some social-housing exposure, could do well. Residential Secure Income (LSE: RESI) looks healthy, has a good pipeline of developments and is moving into shared-ownership projects. These are really interesting if priced right, and could be bullet-proof even in a Corbyn government. RESI has already amassed a significant portfolio of income-producing retirement homes and local-authority housing, working only with investment-grade counterparties. With a portfolio of £260.7m, boasting long-term inflation-linked contracts, this fund represents decent value on a discount to NAV of 16% and a yield of 5.5% per year.

Hedging your bets

Last, but by no means least, we have Target Healthcare (LSE: THRL), which focuses on purpose-built accommodation for older people. My hunch is that a Labour government would try and force through some form of back-door nationalisation of elderly care, especially for those services funded by local authorities. Target owns its properties and then leases them to well-backed operators, with long-term contracts and RPI protection.

The £477m portfolio is made up of 56 operational homes and five pre-let forward-funded developments, with a net initial yield of 6.3%, and a loan-to-value ratio of 17%. The current share price represents an 8.2% premium to NAV and a prospective yield of 5.6%.

Finally, even if we don't get a Labour government, a future Conservative government is still likely to be fairly keen on social housing, retirement homes and energy efficiency. All three funds are decent long-term income investments, and their shares are currently trading at premiums or discounts that aren't outrageous.

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021
Where to find deep value in investment trusts
Share tips

Where to find deep value in investment trusts

Professional investors Nick Greenwood and Charlotte Cuthbertson of the Miton Global Opportunities trust pick three of their favourite investment trust…
15 Feb 2021
Why investment trusts are the connoisseur’s choice of fund
Investment trusts

Why investment trusts are the connoisseur’s choice of fund

Investment trusts have justified their reputation as the best type of collective investment in 2020, says Jonathan Davis.
7 Dec 2020
Why investors should take investment trusts up on their free lunches
Investment trusts

Why investors should take investment trusts up on their free lunches

Investment trusts are brilliant, says Merryn Somerset Webb. Perhaps the most brilliant thing of all about them is the fact that investors can meet and…
16 Nov 2020

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
What does the Coinbase listing mean for bitcoin and other cryptocurrencies?
Bitcoin

What does the Coinbase listing mean for bitcoin and other cryptocurrencies?

As the bitcoin price hit new highs, the world's biggest cryptocurrency exchange, Coinbase, listed on the stockmarket. John Stepek looks at what that m…
15 Apr 2021
Properties for sale for around £400,000
Houses for sale

Properties for sale for around £400,000

From a converted church in Banffshire with views towards the Cairngorms National Park, to a period property in the Georgian market town of Beverley, e…
2 Apr 2021