Join our community of smart investors

Top 100 Funds 2020: Alternative assets

Our suggestions for investing in alternative assets
Top 100 Funds 2020: Alternative assets

It is important to diversify your portfolio so that if one area goes down, hopefully other parts won’t. Funds focused on alternative assets can also boost your returns. Private equity investments, for example, offer the prospect of high growth and diversification away from equities because they are unlisted. Private investors generally can’t access this asset class directly, but there are a number of investment trusts focused on this area. However, they are high-risk, so they should only account for a small portion of larger portfolios.  Infrastructure, by contrast, is a lower-risk and high-yielding way to get exposure to alternative investments.

 

NEW ENTRANT: HGCapital Trust (HGT)

Fund-of-fund portfolios are a great source of diversified private equity exposure, but trusts that invest directly can be a more targeted play if you have specific preferences. They are also less at risk of racking up hefty overall charges, and can be easier to assess and monitor than a fund of funds.

We have added HGCapital Trust, a private equity trust that invests directly, predominantly because of its specialist focus on software and service businesses. Companies were increasingly in need of software and related services even before the Covid-19 outbreak accelerated the take-up of digital approaches to work, and this trust focuses on an industry that looks set for future growth. As with other parts of the tech space, a private equity approach should allow investors to tap into high-growth companies that could shun public markets for some time.

Although HGCapital Trust is focused on one particular trend it is diversified in other respects. Its investments are spread across the UK, Scandinavia, North America, Germany and other parts of Europe. The trust’s holdings also serve businesses in a variety of different areas including tax and accountancy, legal and regulatory compliance, healthcare IT, and areas of finance. DB

 

NEW ENTRANT: SRI OPTION: Aquila European Renewables Income Fund (AERS)

Aquila European Renewables Income Fund aims to provide stable returns by investing in renewable energy infrastructure. The trust only launched in June last year, but is run by Aquila Capital, which was founded in 2001 and has assets under management of about €11.2bn (£10bn). 

As of 30 June 2020, the trust had invested over 80 per cent of its capital, with about 89 per cent in wind energy and 11 per cent in hydro power. This was via six investments located in Denmark, Norway, Finland and Portugal. Its managers are aiming for an allocation of about 40 per cent in each of wind and solar, and 20 per cent in hydropower. They want to diversify it because the seasonal production of these assets balances its cash flow, while geographic diversification reduces exposure to any one energy market. The trust had a pipeline of 11 potential new investments at the end of June.

Its managers also try to strike a balance between government supported revenues, fixed-price power purchase agreements (PPA) and market power price risk. And the trust cannot invest more than 30 per cent of its gross assets in projects under development or more than 25 per cent in one asset. The trust will invest in renewable energy technologies across continental Europe and the Republic of Ireland, so it could be a good diversifier if you already hold an infrastructure fund focused on the UK.

Aquila European Renewables Income Fund’s managers look to invest in assets that are expected to generate renewable energy output for at least 25 years from their commissioning date, and take environmental, social and governance (ESG) considerations into account.

The trust is targeting an internal rate of return of 6 to 7.5 per cent net per year. It aims to pay a dividend of €0.04 per share this year and €0.05 per share in the years after.

“The current portfolio has a high level of income visibility over the next five years with 71 per cent secured under government subsidy or fixed price PPA, and 60 per cent over the next 10 years on a present value basis, giving some comfort around the target dividend,” comment analysts at Numis Securities. 

The trust has exposure to assets under construction and fluctuations in the power price, so is not low risk. Its investors also take on currency risk as its functional currency is the euro, in which its dividends are denominated, although shareholders can elect to receive them in Sterling.

 

Pantheon International (PIN)

Pantheon International continues to stand out as a way for investors to get diversified private equity exposure, mitigating the risks associated with a sector than can prove volatile in the short term but provides strong returns over time. The trust predominantly invests via other private equity funds, giving investors exposure to a good number of underlying holdings and management styles. Some 36 per cent of Pantheon’s assets were in secondary investments (existing private equity funds acquired from other investors) at the end of May 2020, with 29 per cent in primary investments (newly launched private equity funds). 

The balance of assets was in co-investments, where the trust invests directly in a company alongside other private equity specialists. 

The trust has around half its assets in the US, and a decent level of exposure to sectors that should prove resilient in the wake of the pandemic. It has around a quarter of its assets in information technology and a fifth in healthcare.

As with other fund-of-fund portfolios, Pantheon can rack up high fees via its underlying fund holdings and this can drag on NAV returns. But in return the trust provides exposure to a specialist asset class, diversification and a record of strong performance. DB

 

HarbourVest Global Private Equity (HVPE)

HarbourVest, like Pantheon, tends to mainly invest in other private equity funds, with strong results. It also has a global focus with a notable skew towards the US, and exposure to growth sectors that may thrive in the wake of the pandemic. Some 27 per cent of the trust’s assets were in tech and software at the end of July.

HarbourVest Global Private Equity’s share price total returns have been slightly stronger thanPantheon’s over the decade to 24 August, and the former may offer investors higher levels of risk and reward. This is partly because HarbourVest can sometimes have a heavier focus on venture capital, which can be riskier but potentially more lucrative than some other parts of the private equity space. The trust had around a third of assets in venture and growth equity at the end of July, with 55 per cent in buyouts. Pantheon had 67 per cent of assets in buyouts at the end of May.

Like Pantheon, HarbourVest also holds some direct investments, and these accounted for a fifth of its assets at the end of July. DB

 

HICL Infrastructure (HICL)

HICL Infrastructure is designed to deliver sustainable income by investing directly in projects and essential real assets that facilitate the delivery of public services. It was set up in March 2006 and had net assets of £2.89bn on 31 March 2020. 

Private public partnership (PPP) projects accounted for 71 per cent of its assets at the end of March 2020, demand-based assets such as toll roads accounted for 21 per cent, and regulated assets such as electricity transmission and water utilities accounted for 8 per cent.

The health sector and transport sector each represent 30 per cent of the trust’s assets, with a further 14 per cent in education and 11 per cent in accommodation. 76 per cent of its assets are in the UK, 17 per cent in Europe and 7 per cent in the US. 

HICL Infrastructure aims to pay a stable dividend and preserve the capital value of its investments. Analysts at Investec say that the PPP assets have not been impacted by Covid-19 this year owing to long-term availability-based projects and regulated assets continuing to operate without material disruption. 

Analysts at Investec say that the greatest effect from Covid-19 is on the trust’s gross domestic product (GDP) correlated demand-based assets which comprise 18 per cent of the portfolio. These continue to be impacted by systemic reductions in demand due to restrictions on the movement of people and goods. 

The fund had a cash flow longevity of 28.5 years, calculated by weighted average asset life as at 30 September 2019. This means it should be able to provide a resilient source of income over the long term. The trust has increased its dividend by 35 per cent over the past 13 years. MM

 

SRI OPTION: Renewables Infrastructure Group (TRIG)

Unlike some renewable energy infrastructure funds, Renewables Infrastructure Group doesn’t just focus on one sub-sector of this area, but invests across a variety of sectors. This means that it does not rely on the fortunes of one particular type of energy, which increases diversity and spreads risk. It had 74 investments at the end of June, with 65 per cent of its assets in onshore wind, 21 per cent in offshore wind and 13 per cent in solar. 

These are mainly in the UK where it had over half its assets at the end of June, as well as Germany, France, Sweden and Ireland. 

Its projects pay long-term project revenues with inflation linkage via regulated incentives and exposure to energy prices. Most of them are operational as the trust cannot invest more than 15 per cent of its assets in construction projects, which also reduces risk. 

Renewables Infrastructure Group aims to provide sustainable, attractive, long-term income-based returns with a positive correlation to inflation. It has proved to be defensive, with positive NAV and share price returns in every full calendar year since launch in 2013, including in 2018 when the FTSE World and FTSE All-Share indices made negative returns. 

It targets a progressive dividend and aims to pay out 6.76p per share this year, up from 6.64p in 2019. At the end of August its shares traded on an attractive yield of 4.9 per cent. 

The trust has environmental, social and governance (ESG) objectives. These are to mitigate climate change, preserve the natural environment, positively impact the communities in which the trust works, and maintain ethics and integrity in governance.

A downside to the trust is that it sometimes trades at a very high premium to NAV. At the end of August it was at one of its highest levels since launch at 23.7 per cent. If you want to invest new money in it you could look out for when it is on a lower rating – as long as this is not because there is something wrong with the trust. Or drip-feed in a set amount of money on a regular basis so that you buy more of its shares when it is cheap and fewer when it is expensive. LW

 

Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)Ongoing charge plus any performance fee (%)
HICL Infrastructure share price3.3 19.7 45.2 1.09*
Aquila European Renewables Income Fund share price**2.4 NANANA
Renewables Infrastructure Group share price4.2 34.8 52.6 0.97*
HarbourVest Global Private Equity share price(4.7)32.4 88.7 0.55*
Pantheon International share price(7.6)18.3 70.3 1.23*
HgCapital Trust share price(1.0)36.7 109.9 1.6*
MSCI AC World index624.686.8  
FTSE All Share index(12.6)(8.2)17.3  

Source: Morningstar, *AIC.                    

Performance data as at 31 August 2020.                    

**Data shown is for a different share class to the one indicated in the text

 

For all our selections across various sectors, see below:

Bonds (12 funds)

Wealth preservation (7 funds)

Global equity income (4 funds)

Overseas equity income (6 funds)

UK equity income (8 funds)

Global growth (9 funds)

UK equity growth (8 funds)

North America (4 funds)

Europe (6 funds)

Japan (5 funds)

Asia ex-Japan (6 funds)

Emerging markets (6 funds)

Specialist equity funds (9 funds)

Alternative assets (6 funds)

Property (4 funds)