Many investors may feel nervous about backing unquoted companies and other illiquid assets after the suspension of the Woodford Equity Income fund, but experts say there are a number of options for those attracted to the sector.
Morningstar analyst David Holder says: “The search for income has made illiquid alternative asset classes popular among investors, they can give you quite high levels of incomes and that has been quite a strong tailwind. They also offer uncorrelated returns – the drivers of returns are different from equities or bonds.”
A number of investment trusts focus on assets such as infrastructure, renewable energy and private equity. While these opportunities offer attractive growth potential and the chance for income, investing in esoteric areas comes with added risks, so investors should be sure to take a long-term view. We asked professional investors which investment trusts they like:
Thomas McMahon, senior analyst at Kepler Partners, likes Greencoat UK Wind (UKW). The UK’s largest renewable infrastructure fund, it owns a portfolio of wind farms across the UK and aims to deliver an income which grows in line with inflation – currently it yields just shy of 5%. Most of the assets in the portfolio are owned outright by the company, although some farms are part-owned.
While renewable energy assets don’t deliver much in the way of capital growth, the much sought-after income that the trust provides means it trades at a hefty 13.5% premium to its net asset value. Over five years the trust has produced annualised returns of 11.7%.
McMahon also rates the ICG Enterprise Trust (ICGT), which invests directly in private companies as well as accessing them through private equity funds. The four-star rated trust trades at a 16.9% discount to its net asset value. McMahon says: “The trust is run by a highly experienced management team who specialise in investing in private markets. They have run the portfolio for more than 13 years.”
Investments include UK-based Froneri, the third largest ice cream maker in the world, Norwegian accounting and payroll software firm Visma, and Roompot, a holiday park operator based in the Netherlands. Over 10 years the trust has produced annualised returned of 13.5%.
Adrian Lowcock likes the Merian Chrysalis (MERI) investment trust, a relatively new vehicle, which launched in November 2018. Manager Richard Watts focuses on companies that are in their pre-IPO phase, meaning they have proven business models but are not yet listed on the stock market. It’s a very concentrated portfolio with just 15 investments, so any rises or falls in the value of any of the holdings will affect overall performance. Its first investments included fintech business Growth Street, which lends to small businesses, and hotel website Secret Escapes.
Lowcock says: “The Merian team are excellent stock pickers and are very well connected, which should mean they get access to some attractive opportunities.” The trust trades at a meaty 7.9% premium to its net asset value.
Rob Morgan, investment analyst at Charles Stanley, likes the BlackRock Frontiers investment trust (BRFI), which invests in so-called frontier markets – those which are not yet developed enough to be classed an emerging market. It has investments in Thailand, Kuwait and Romania among other countries. Top holdings include Emaar Properties, a developer in the UAE, Nigerian financial services firm Zenith Bank, and Argentine energy company YPF. “The high level of risk is enough to put many investors off even considering illiquid frontier markets, but a relative lack of interest means shares in good companies can be overlooked,” says Morgan.
Managers Sam Vecht and Emily Fletcher spend a lot of time looking at the economic and political conditions of countries as well as the fundamentals of companies themselves. The trust, which has a Neutral rating from Morningstar analysts, has been a volatile performer – down 12.5% in 2018 but up 28.9% the year before. Over five years it has produced annualised returns of 7.3%. Last year, the board decide to widen the remit to include some emerging market countries and Morningstar analyst Lena Tsymbaluk says that creates some uncertainty around the trust.
Morgan also rates the Biotech Growth Trust (BIOG): “OrbiMed Capital, who manage the trust, are one of the leaders in the field of healthcare and biotechnology investment. The depth of resource upon which they can draw in terms of medical and investment expertise and their network of industry contacts is impressive.” The trust, which has a Silver rating from Morningstar analysts, aims to identify significant themes and invests in smaller and emerging market names. Top holdings include Vertex, which is involved in gene editing technology, and Sarepta Therapeutics, which has developed medicines for conditions such as muscular dystrophy.
The trust has produced annualised returns of 20.2% over 10 years. Morningstar analyst David Holder warns that investing in this sector comes with a wide range of risks, with the success of drugs uncertain and regulatory and political risks. He adds: “This trust remains a strong option for those investors seeking long-term and dedicated exposure to this niche areas.”
