The 60/40 portfolio, where 60% of an investor’s money goes into riskier assets such as shares and the other 40% into less risky assets, such as government bonds, is a traditional way to balance your investments. We believe alternative investments, such as tangible assets, are a good way to diversify the 40% while meeting the challenge of the low interest-rate environment. Here we highlight three separate investment opportunities held within the Waverton Real Assets Fund.
Optimising energy provision
SDCL Energy Efficiency Income Trust (LSE: SEIT) listed in December 2018 with £100m, but its market capitalisation has now grown to £1bn. It seeks to offer a greener and cheaper solution to energy provision and helps provide the infrastructure required for smaller-scale (and thus more energy-efficient) power production. It also aims to reduce the need for subsidies, providing useful diversification from core infrastructure names and renewables.
The trust is aiming to deliver an annual return of 7%-8%, with an initial yield of 5% growing to 5.5% once fully invested from year two onwards. The contracts on the underlying investments offer steady cash-flow streams, often supported by regulated or contractual revenues and attractive operating margins, with potential for capital appreciation and inflation protection.
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Laying the groundwork
Supermarket Income Reit (LSE: SUPR) listed in 2017 with a strategy of acquiring large supermarkets let to several big UK grocery chains (Tesco, Asda, Sainsbury’s, and Waitrose). These assets are on long leases, with built-in income escalators linked to the retail price index (RPI). The management targets properties in areas with growing demographics, while selecting properties that also fulfil online orders.
The attractiveness of the sector becomes clearer when we change the investment lens from “supermarket retail” to “grocery logistics”. The efficient in-store fulfilment model (or ship-from-store) is the one enabling the shift to online grocery shopping. This involves supermarkets (and other online retailers) leasing stores in key “last-mile” sites on the outskirts of large towns that operate as normal stores, but also as logistics hubs fulfilling online orders and as centres for click-and-collect orders.
Mining for copper
After the commodity sector recovered from its March 2020 lows, it underwent a period of consolidation in the second half of 2021. This provides an attractive entry point for certain commodities, such as copper.
There are several growth sectors for copper consumption, but the most promising by far is transportation. Electric vehicles (EVs) use up to seven times more copper per car. A wholesale switch from internal combustion engines to EVs would require the copper supply nearly to double, which would underpin the long-term demand for copper.
First Quantum Minerals (TSX: FM) is a high-quality copper miner making progress towards its debt-reduction goals. It has also outlined how it will increase dividends next year while still allowing for growth opportunities. The company’s near-term copper production growth outlook remains positive, deleveraging remains on track, and it has a very attractive free cash flow-to-enterprise value of 17%.
Luke Hyde-Smith is the co-manager of the Waverton Real Assets Fund
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