Investment trusts that invest in alternative asset classes and pay a decent yield could be due for a resurgence. With interest rates and bond yields coming down, these trusts are becoming more appealing to income-seeking investors.
Trusts are also pulling self-help levers to narrow their discounts, from winding down and selling off their assets to merging with other trusts in an attempt to create larger, more liquid, more cost-effective companies.
Juliet Schooling Latter, research director at FundCalibre, said: “Beaten-down alternative sectors, particularly REITs and infrastructure, typically face headwinds in a rising rate environment, as higher borrowing costs reduce purchasing power and push investors toward assets like bonds and cash.”
The latest rate hiking cycle has led to “historically wide discounts across the alternative investment trust sector”, but interest rate cuts will provide “much-needed momentum for the sector's recovery”, she added.
Cost disclosure is another headwind-turned-tailwind. Trusts that invest in alternative asset classes often pay higher fees to their investment advisers than more vanilla equity trusts so were impacted to a greater extent by European Rules requiring them to publish ongoing charges figures.
The Financial Conduct Authority’s recent decision to exempt investment trusts from EU cost disclosure rules is therefore a significant tailwind for alternative investment companies.
Schooling Latter highlighted two REITs and a renewable energy trust that she believes are worthy of investors’ attention at this juncture: TR Property, Cohen & Steers Global Real Estate Securities and VT Gravis Clean Energy Income.
Cohen & Steers Global Real Estate Securities and TR Property are both “reliable one-stop-shops for exposure to the REITs recovery,” she said.
TR Property has a mandate to seek out discounted opportunities in the REIT space and is itself trading at a 7.6% discount – meaning that shareholders benefit from a “double discount effect”.
Cohen & Steers is “a safe pair of hands” with a large and experienced team. Analysts look at stocks from both an equity and property perspective, considering multiple angles and timeframes “to get the fullest picture possible to create a diversified, all-weather portfolio”, she explained.
Finally, VT Gravis Clean Energy Income is in pole position to benefit from the mass adoption of renewable energy. The fund invests in renewable energy and energy-efficiency related projects while “providing an anchor to portfolios through defensiveness and steady income,” she said.
“Gravis' long-standing expertise in this field instils confidence in the fund's long-term ability to deliver consistent, uncorrelated returns.”
Charlotte Cuthbertson, co-manager of MIGO Opportunities, is another proponent of alternative income trusts and has increased her exposure significantly this year.
Corporate activity, including wind-downs and asset sales, is a huge trend in this space. For instance, MIGO holds Aquila European Renewables, whose shareholders voted for discontinuation on 30 September.
It also owns Atrato Onsite Energy, which announced plans on 3 October to sell its entire portfolio of solar assets to a joint venture owned by Brookfield and RAIM Apollo for £218.7m. The deal, which shareholders still need to approve, represents a discount to the portfolio’s NAV of £224.1m but a 25% premium to the share price on 2 October.
Another trust in MIGO’s stable, abrdn Property Income, agreed on 27 September to sell its entire portfolio to GoldenTree Asset Management for £351m: a 6.7% premium to the trust’s share price on 26 September but a much larger 20.1% premium to its share price on 28 May 2024 when shareholders approved a wind-down.
Cuthbertson aims to spot trusts that might wind down ahead of time to profit from asset sales at premiums such as this. Investing in trusts on wide discounts bakes in a margin of safety and she looks for portfolios whose assets should fetch a good price.
“If you can't find buyers for the underlying trust, there will be buyers in the real world that will come and take the assets,” she said. “It can be a very profitable trade for investors that have bought these trusts on big discounts [when] these trusts go to wind up and hand back cash much closer to their net asset value.”
Sometimes the underlying portfolio is performing well and in a growing area, but there is a lack of demand for the investment trust structure itself. She believes this to be the case for PRS REIT, which focuses on new-build family homes for the private rental market.
Other alternative income trusts within the portfolio include leasing trust Tufton Oceanic, Ecofin Global Utilities and Infrastructure and VH Global Sustainable Energy Opportunities.
MIGO is 6% geared, a much higher level than usual, reflecting the “amazing opportunities” in the investment trust sector. “Either we'll see a resurgence of investment trust buyers, or we'll see continuing wind-ups and both of those are catalysts for discount narrowing,” Cuthbertson said.