High-yielding trusts lead asset growth among new launches

Tritax Big Box Reit's (BBOX) assets increased 979 per cent from £200m at launch in 2013 to more than £2bn at the end of June this year. During the same period its share price returned 64.4 per cent. This property trust invests in logistics facilities in the UK. 

Empiric Student Property (ESP), GCP Student Living (DIGS) and Target Healthcare REIT (THRL), which launched during 2013 and 2014, grew their assets by 650, 631 and 522 per cent, respectively. 

Infrastructure and renewable energy trusts also experienced large increases in their assets. NextEnergy Solar's (NESF) assets grew by 599 per cent and its share price has returned 32.9 per cent since its launch in 2014. Sequoia Economic Infrastructure Income (SEQI), which launched in 2015, saw a 404 per cent increase in its assets and a 16.2 per cent share price return. Bluefield Solar Income Fund (BSIF), Greencoat UK Wind (UKW) and Renewables Infrastructure Group (TRIG), which launched in 2013, grew their assets by 333, 252 and 217 per cent, respectively. 

When investment trusts grow their assets it can result in reduced costs and increased liquidity. But investors also need to monitor them to see if their increased size means they change their investment style or focus.

"HICL Infrastructure (HICL), for example, has assets of around £2.7bn and in common with lots of infrastructure funds has seen significant growth," says Simon Elliott, head of research at Winterflood Securities. "Whereas previously it invested in public private partnership (PPP) projects in the UK, it has now acquired a regulated utility for the first time, Affinity Water. As these funds have got to a certain size they are now having to consider different types of investment."

All but one of the 20 trust launches within the last five years that grew their assets the most, yield at least 4 per cent.

"The rapid growth of these companies in higher-yielding alternative assets has mainly been driven by long-term demand for income in a low interest rate environment," explained Annabel Brodie-Smith, communications director at the AIC.

The low interest rate environment has also enabled these trusts to borrow at low interest rates.

But David Liddell, chief executive of IpsoFacto Investor, added: "We've had a Goldilocks scenario when interest rates have been very low, but economic growth has been okay. But if we go into another recession, or inflation and interest rates go up, it would test these trusts – both in terms of investor demand and the performance of their underlying assets."

Infrastructure and renewable energy trusts have been trading on high premia to net asset value (NAV), due to their high yields and in some cases inflation-linked revenues. But if interest rates rise their premia to NAV could decrease.

"It's been a no brainer to buy higher-yielding assets when gilts have been returning so little," said Mr Liddell. "But if a 10-year gilt would also pay me say, 4 per cent, I would be most likely to buy that."

However, interest rates are likely to continue to be low, meaning that alternative asset trusts will continue to attract investors.

"We noticed in late 2016 that there was quite a high correlation between gilt yields and the premia on the private finance initiative (PFI) infrastructure funds," said Iain Scouller, managing director of investment funds research at broker Stifel. "This relationship has become noticeable again recently, with the sector derating against a background of rising gilt yields. Given the significant 'cushion' built into valuations from risk premiums of  around 6 per cent, we think gilt yields could rise to 3.5 per cent before there is a significant impact on NAVs. However, premia to NAV are likely to continue to be sensitive to developments in the gilt market."

Performance of top 20 trusts