Three attractive trusts for the brave

People bowling © iStock
Bowling alleys could be among AEW’s investments

The contrarian in me is always worried when we see a frenzy of fundraising by investment trusts. The history of many a financial crisis can be told by the ups and downs of alternative investment trusts looking for non-mainstream returns. The current frenzy is probably being driven by a fear that interest rates are on their way up, at least in the US, with the idea being to get those alternative income ideas in now before corporate bonds return to more normal yields of 5%-plus after a round of interest-rate rises.

Personally, I’ve long articulated the view that interest rates will stay below 2.5% for the next few decades. So I see a structural reason behind this fundraising trend. Investment trusts have tended to be invested in equities and not bonds. These new funds are simply giving income investors the same choice that’s been available to equity investors for decades. My guess is that we’ll see even more issuance over the next six months – and then a potential wobble as the market basically says “enough is enough”. In the meantime, there are some opportunities worth looking at.

Take Sequoia Economic Infrastructure Income (LSE: SEQI), which has just tapped the stockmarket for an additional £160m at 105.5p. This was “very significantly oversubscribed”, and the fund is now worth £825m. This fund invests in debt within the infrastructure space, with borrowers mainly in the US and the UK. The fund targets net asset value growth of about 1% to 2% per year, and the overall portfolio’s yield-to-maturity is running at 8%, with a weighted average life of 4.5 years on the loans. This is a bit too specialist for most mainstream investors, but the fund is interesting for adventurous, income-savvy investors.

Property assets are also in vogue at the moment, especially if they yield above 4.5%. The AEW UK Long Lease Reit (LSE: AEWL) is currently being marketed through some retail platforms, and
also looks interesting for adventurous readers. It is seeking to raise up to £150m for a fund that invests in alternative and specialist real-estate sectors in the UK, including leisure, healthcare, education, hotels, student accommodation and supported living facilities. In practical terms, that might mean anything from a bowling alley to a supermarket. The key is that the leases are long – typically in excess of 18 years – and there’s strong inflation protection, with at least 85% of the assets offering income that’s linked in some way to the retail price index.

Finally, there’s the PRS Reit (LSE: PRSR), which has just raised gross proceeds of £250m in an oversubscribed launch. Again, the dividend yield is around that magic 6% level, this time from investing in private rented-sector housing. I’m less cynical than Max King (see MoneyWeek 845) about the prospects for large-scale institutionally managed private renting.

In continental Europe, huge institutional portfolios are standard, and the assets are attractive, if boring. If we’re to have a proper functioning housing market in the UK, we need outfits like PRS, and its manager Sigma is regarded as something of an expert in the field. My only worry is the deployment of £250m at what may be the top of the current residential property cycle. Still, the rented property fund sector is worth watching closely – even in the US there are many highly successful Reits investing in flats that have been a brilliant investment.

Activist Watch

Activist investor LIM Advisors is pushing for a wind-up of Phaunos Timber over concerns about poor returns from the timber investment company and the “persistent discount on its shares”, says Michelle McGagh on The Hong Kong-based activist fund, which holds an 11% stake in Phaunos, voted in favour of a continuation of the fund in June 2016.

Just one year later it has written to shareholders urging them to vote against a resolution at next week’s AGM to extend the fund’s life by five years, recommending instead that the company be closed down and proceeds returned to shareholders. Phaunos has warned that winding up could take years and impose “significant” losses on investors.

In the news this week…

• Technology company Calastone says it has successfully used blockchain to buy and sell funds under test conditions, says Attracta Mooney in the Financial Times. In the “largest-scale test of blockchain in the fund industry to date”, Calastone said the technology appears able to process transactions “equivalent to a full day’s trades sourced from across its client base” (of 1,200 fund distribution and fund manager clients across 34 countries).

Calastone is one of many financial services companies that are racing to see how blockchain, the “digital ledger” that underpins bitcoin transactions, can be applied to the global financial market, with the belief that it will make business more efficient and thus cheaper. American bank Northern Trust has already launched blockchain technology for the private equity market in January, while Calastone’s next step will be to test clients’ trades in real life. 

• A record number of investors think equities are currently overvalued, according to Bank of America Merrill Lynch’s latest fund manager survey. Some 44% of investors expressed this point of view, up from 37% last month. Three quarters of investors believe internet stocks are either expensive or “bubble-like”. The US equities market was seen as the most overvalued sector, while European equities and emerging-market equities were seen as undervalued.