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Fastest growing trust launches dominated by alternative assets

Investors hunting for reliable income streams are helping drive the value of investment trusts up to new heights, some up almost ten-fold over past five years.

Research by the Association of Investment Companies has reveals how the net asset value of dividend-paying investment trusts has soared, pushing many to hefty premiums.

Some 77 investment companies were launched in the five years to June, with 70% of these focused on alternative assets such as infrastructure or renewable energy.

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Big box, big growth

Tritax Big Box (BBOX), which owns logistics facilities and distribution centres used by the likes of Amazon and Tesco (TSCO), is the fastest grower of the lot. It launched in December 2013 with assets of just £200m.

It now manages some 19.5m square feet of space including a 653,000 square foot Argos warehouse in Staffordshire and an 880,000 square foot B&Q distribution centre in Nottingham, which is leased  until 2031.

By the end of June this year the trust’s assets had grown an incredible 979% to more than £2.1bn. The shares yield 4.4% and are trading at a chunky 11.8% premium.

That investors are willing to back a trust at such a toppy premium to its value shows how popular alternative assets have become.

Alex Scott, deputy chief investment officer at Seven Investment Management, says: ‘There is a clear appeal for investors in the long-term, highly predictable cash flow which infrastructure assets offer, along with a degree of inflation-linking.’

Student accommodation specialists are also among the fastest-growing trusts of recent years. Empiric Student Property (ESP) has seen its assets grow from £85m when it launched in June 2014 to £637.3m just three years later – a rise of 650% - while GCP Student Living (DIGS) has seen the value of its assets climb 631% to £680m, from just £93m when it launched in May 2013.

The two trusts own and operate student accommodation across the UK. Empiric has sites spanning Aberdeen, Cardiff and Bath; its portfolio ranges from an 84-bedroom building in Bristol to a 561-bed unit in Manchester. The trust yields a meaty 5.5% and is trading at a 4.8% premium.

GCP’s portfolio includes a 220-unit of en-suite studios in Surrey and 541-room building in London’s Shoreditch which also includes 50,000 square feet of commercial space.  The trust, at a premium of 6.2%, yields 4%.

Scott adds: ‘The obvious concern with this asset class is that the trusts tend to trade at quite high premiums to their net asset value and they have done so for almost all of the sector’s decade-long history.

‘That is off-putting in a world where we are used to seeing investment trusts at a discount but, even taking the effect of the premium on returns into account, these investments can still seem very appealing compared to other assets.’

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Premium valuations

Of the top 20 fastest growing trusts, according to data compiled by Morningstar for the AIC, just four are trading at a discount.

These include the Blue Capital Alternative Income (BCAI) trust – which invests in the catastrophe reinsurance market – trading at a 5.3% discount, and P2P Global Investments (P2P) – which invests in peer-to-peer loans – at an 11.6% discount.

The stellar performance of many of these trusts is being driven by investors’ hunger for income. Investments which pay a reliable, growing dividend have become harder to find in recent years as interest rates remain at record lows and many alternative assets have long-term tenants and lease agreements in place which offer a much-needed certainty of income, which often rises in line with inflation.

The total assets under management of investment companies reached a record £168bn in May this year.

Annabel Brodie-Smith, communications director at the AIC, says: ‘It is significant that all the fastest growing launches over the past five years are in higher yielding alternative assets where there has been strong investor demand.

‘The closed-end structure of investment companies is particularly suited to illiquid alternative assets.  This has been emphasised by the problems suffered by open-ended property funds after the Brexit vote.’

Indeed, many companies have been keen to capitalise on the rising popularity of trusts. Already this year, 13 new investment companies have been launched and at least four more are slated for the coming months.

Bubble risks

But some experts say parts of the alternatives market may be entering bubble territory, after a prolonged period of fast growth.

Nick Edwardson, senior multi-asset investment specialist at Kames Capital, says: ‘Parts of the markets do look more fully valued in terms of their premium to net asset value – the average renewable energy investment trust, for example, is trading at a premium of 12%.’

The reliance of many of these trusts – particularly those focused on infrastructure and renewable energy – on Government policy leaves them vulnerable to regulation changes, a risk which has heightened with so much ongoing uncertainty around Brexit. Their appeal could also fade if interest rates rise and investors can get less risky income elsewhere.

But Edwardson says the fact these trusts are growing their dividends and have little correlation with the stock market could mean their climb continues for some time to come. (HB)

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