- Many alternative asset trusts continue to offer decent yields
- Diversifying across different alternative assets helps to mitigate their risks
- With an economic downturn likely, you should be cautious about trusts which use capital to pay income
With share prices tumbling, one silver lining for many investment portfolios has come in the form of rising equity dividends (see 'Income plays from around the world' IC,11.03.22). The UK market has staged a fierce recovery in terms of its payouts while global peers are also proving to be a good source of income.
We’ve previously noted that this could all change given that payouts have, to an extent, depended on the likes of mining companies and financials. But there is still hope elsewhere: alternative assets of different stripes have paid out nicely so far this year, with trusts in the relevant sectors often continuing to offer juicy dividend yields.
As always, you should never simply chase yield as the fundamentals of the underlying investment are the most important factor. But the good dividend payers so far in 2022 may offer some food for thought – especially when it comes to diversifying an income portfolio.
Because investment trusts pay dividends at different frequencies the figures can be skewed, but a look at some of the best sources of dividends so far this year throws up some clear trends. The table shows the top alternative asset trusts by dividends paid so far this year to investors who have held them since at least late 2021, and these trusts' recent yields and share price discounts or premia to net asset value (NAV).
Old favourites and other options
Infrastructure funds have continued to reliably deliver equity-like dividends without problems. And it’s the hottest part of this sector which dominates the dividend table. Several solar trusts appear on the list alongside names like JLEN Environmental Assets (JLEN), Greencoat UK Wind (UKW) and Gresham House Energy Storage Fund (GRID). With conflict in Ukraine putting a closer focus on the need for renewables and power prices surging, these trusts have also offered strong total returns after a mixed 2021.
But infrastructure trusts tend to trade on premia to NAV, though the solar and renewable infrastructure funds more broadly have varied in terms of the premium or discount they are on (see table). Their performance has differed too, reflecting the different approaches on offer.
What may appeal is the fact that many alternative asset trusts continue to trade on decent dividend yields. As the table shows, most trusts on the list have a yield of at least 4 per cent. While not mitigating the usual risks that can come with a high premium, attractive and reliable yields can at least explain such valuations, and offer some reassurance about the level of investor sentiment on them.
As ever, it makes sense to diversify. We’ve stressed this when it comes to alternatives before, noting that idiosyncratic challenges have a tendency to crop up. Examples include the music royalty funds and Neil Young’s Spotify Technology (US:SPOT) spat earlier this year, regulatory worries hitting Civitas Social Housing (CSH) last year, and more recent concerns about problems at Amazon.com (US:AMZN) hurting the rampant demand for logistics warehouses.
A spread of different asset classes can be one way to offset such idiosyncratic risks. For those concerned about infrastructure, whether because of the high premiums or concerns that renewable energy infrastructure names could be affected by a windfall tax, there are other options though some of these are fairly niche.
|Highest yielding alternative income investment trusts so far this year|
|Trust||Dividend yield (%)||Discount/premium to NAV (%)||AIC sector|
|Honeycomb Investment Trust||8.6||-9.9||Debt - direct lending|
|CQS New City High Yield||8.3||5.6||Debt - loans and bonds|
|NextEnergy Solar||7||-4.4||Renewable energy infrastructure|
|RM Infrastructure Income||7.1||-4.3||Debt - direct lending|
|Foresight Solar||6||2||Renewable energy infrastructure|
|Bluefield Solar Income||6.3||2.9||Renewable energy infrastructure|
|JLEN Environmental Assets||5.9||4.3||Renewable energy infrastructure|
|GCP Asset Backed Income||6.4||-0.6||Debt - direct lending|
|GCP Infrastructure Investments||6.2||0.4||Infrastructure|
|US Solar||6.6||-8.9||Renewable energy infrastructure|
|Invesco Bond Income Plus||6.5||-4||Debt - loans and bonds|
|Apax Global Alpha||6.7||25.4||Private equity|
|Regional REIT||7.7||-13.8||Property - UK Commercial|
|Sequoia Economic Infrastructure Income||6.3||-0.2||Infrastructure|
|AEW UK REIT||6.6||1.9||Property - UK Commercial|
|Greencoat UK Wind||5.2||0.9||Renewable energy infrastructure|
|Gresham House Energy Storage||4.6||16.9||Renewable energy infrastructure|
|M&G Credit Income||4.1||0.9||Debt - loans and bonds|
|NB Global Monthly Income||6.5||-5.4||Debt - loans and bonds|
|Aquila European Renewables Income||5.1||0||Renewable energy infrastructure|
|Source: FE/Association of Investment Companies (AIC) as of 31/05/22|
Property trusts, a more established sector, continue to perform well in terms of income. For example, Regional REIT (RGL), which buys commercial properties in regional centres of the UK outside the M25 motorway has an extremely high 7.5 per cent yield.
But this may well reflect a weaker overall share price performance. Regional REIT made a negative share price total return of -6.3 per cent over the three years to the end of May, though modest losses sustained in the past six months look very limited compared with falls in equity markets. The trust's performance issues may relate to its focus on an unpopular sector with offices making up nearly 90 per cent of its portfolio at the end of 2021. Regional REIT's shares have been fairly resilient in the past six months, with its share price falling only slightly as equity markets tumbled.
AEW UK REIT (AEWU), meanwhile, offers a high dividend yield of 8 per cent. The trust invests in a mixture of high yielding commercial property assets and has made much better share price total returns than Regional REIT over recent years. Like some other generalist commercial property trusts, it focuses on hotter parts of the market with around half of its portfolio in industrials at the end of March and 14.3 per cent in retail warehouses. Offices, high street retail and leisure assets made up the rest.
Diversification of alternatives is important, as is managing their position sizes. One commentator in our recent Sipp special issue, for example, argued that a position size of between 3 and 5 per cent seemed appropriate for an individual alternative income fund, allowing it to contribute adequately to income and total returns without wreaking too much damage if things go wrong ('Rules for starter Sipps', IC, 27.05.22). That suggestion is probably worth bearing in mind – especially when it comes to riskier and more niche holdings.
For one, some private equity trusts have made our list with Apax Global Alpha (APAX) appearing high up. While focused on growth, some private equity trusts pay dividends out of capital as a boon to their shareholders. However, with an economic downturn likely to hurt all manner of asset classes, including private equity, you may wish to exercise caution on trusts that use capital to pay income.
Debt funds of different kinds have also made an appearance. Take Honeycomb Investment Trust (HONY), which focuses on asset-backed direct lending and targets an 8 per cent dividend when fully invested. Its shares have performed well in recent years, though changes are afoot. Earlier this year Honeycomb announced that it would acquire its investment manager, Pollen Street Capital, a move that shareholders recently approved.
At the time of the announcement, analysts at broker Liberum argued that the tie-up would improve share liquidity which they described as "the key issue that has hampered Honeycomb Investment Trust despite its excellent underlying performance". The trust's shares recently traded close to a 10 per cent discount to NAV.
Because lending funds have taken on floating rate debt, of which the interest payments move in line with central bank interest rates, they look generally well positioned for a period of tightening monetary policy. Last month Stifel analysts argued that trusts with US exposure could benefit more due to expectations of higher interest rates than elsewhere, highlighting names such as Sequoia Economic Infrastructure Income Fund (SEQI) and BioPharma Credit (BPCR).