One of the things we’ve looked to do over the years is to find new ideas and sources of growth and income returns. This drive has seen us find numerous opportunities within specialist investment trusts.
Crucially, these trusts allow investors to diversify portfolios and reduce the risks from the wider global economy. In the days of low-interest rates, they also helped deliver reliable yields at a time when investors had been crying out for them.
Areas we looked at include the likes of investment trusts investing in renewable energies, such as wind farms or solar panels, which have been taking advantage of government subsidies and the move towards a carbon neutral economy.
These are diversifiers – but the bottom line is that you have to wear some volatility in extreme periods of uncertainty. Not only can these trusts become significantly more correlated to equities, but the level of volatility can, and has, risen markedly in the past.
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A prime example of this was the height of the Covid sell-off in February and March 2020. There were days when the market was down 4-5% and they were down 10% – effectively indicating that they were geared to the market.
It was a challenging time, but we had to ask ourselves why vehicles that were dependant on whether the sun shines or the wind blows were down some 40% in such a short space of time? It quickly went from a challenge to an opportunity when we realised there was no logic behind that – just sentiment.
This brings me to today, where the rapid increase in UK interest rates has resulted in a number of strong, specialist investment trusts falling to crazy discounts (40-50% in some cases). But sentiment is ruling the roost – because on this occasion there was not even a significant liquidity squeeze to warrant this rapid change in outlook.
Examples across various sectors
A good example is Supermarket Income REIT. It offered a good yield of 5% and investors were getting exposure to real assets – backed by the likes of Tesco and Sainsbury’s primarily. Rising rates throughout the year have hit this yield and, as a result, the share price has fallen from 130p in June 2022 to 74.6p at the time of writing. The trust has seen its share price fall over 38% in the past 12 months, while over the same period it has moved from a 6% premium to a 22% discount. The opportunity now seems simply too good to ignore.
Another which comes to mind is Target Healthcare – the UK’s first care home REIT. People live or rent these types of properties – so the case is solid for rent and potential rental growth. But despite this, the trust’s share price is down some 33% in the past 12 months and is now trading at a 32% discount (it was almost at parity 12 months ago).
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Other sectors such as renewable energy infrastructure have also been hit, with the average trust in the sector now trading at a 16% discount. The Renewables Infrastructure Group (TRIG) has seen its share price fall almost 15% in the past year. TRIG is now at a 16% discount, having also been at a premium towards the end of 2022.
Infrastructure has also been hit with companies like Sequoia Economic Infrastructure Income – which has typically traded at a premium for the past five years – now trading at a 21% discount.
Even a vehicle such as the Hipgnosis Songs trust – which is a play on exposure to songs and associated musical intellectual property has been hammered in the past 12 months – with the share price down 33% and the trust now trading at a discount of more than 50%. Sentiment has to play a role here, given streaming of music is on the rise.
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Some of these trusts are tied to key structural trends. Care homes are needed, infrastructure always need to be built and renewed.
I’m sure you’re all aware of the benefits of these closed-ended vehicles, such as the corporate structures, gearing, discounts and premiums. But it is worth reminding ourselves that these vehicles can focus purely on investments, as opposed to flows.
The closed-ended structure means inflows and outflows are of less concern and, crucially, they do not have to worry about their active positioning if the vehicle becomes too large. The other consideration is sectors like renewables are not as widely available to the market, giving access to greater opportunities.
For those who may not wish to invest directly – here are a few multi-asset funds also making use of these opportunities in the closed ended space.
TB Wise Multi-Asset Growth
Managed by Vincent Ropers, this fund invests in around 30-60 underlying funds and investment trusts, with a preference for out-of-favour areas. The team takes high conviction positions, while turnover in the fund tends to be low. The manager uses a number of investment trusts in the portfolio such as the Worldwide Healthcare Trust and International Biotechnology Trust.
VT Momentum Diversified Income
This Liverpool-based asset house adopts a strong, value-based approach to multi-asset investing. The investment team behind the fund executes its ideas via a mix of funds and direct securities. Using both alternative and traditional asset classes enables the team to achieve true diversification, while also delivering a monthly income. The team also uses a number of investment trusts in areas like infrastructure, debt, and REITs in the past.
SVS Brooks Macdonald Defensive Capital
Managed by Niall O’Connor, this portfolio holds a number of instruments, such as convertible bonds, preference shares, structured notes, bond and loan assets, and discounted assets. It aims to deliver positive absolute returns over rolling three-year periods, in a range of market conditions, with less volatility than equity funds. The fund also has access to specialist investment trusts, such as NextEnergy Solar, Riverstone Energy and Round Hill Music.
