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Considerations on real assets and alternatives in client portfolios

Considerations on real assets and alternatives in client portfolios

Research in Q3 2019 highlighted that advisers believe real assets and alternatives are an important consideration in client portfolios.

 

  • Nearly all advisers (96%) surveyed believe alternatives are an important consideration in a client’s overall asset allocation
  • However, perceptions around inaccessibility and costs persist

 

Alternatives have long been in vogue with institutional investors seeking to diversify sources of return but are now rapidly moving into the mainstream retail investment market (industry data shows that ordinary investors are expected to increase their alternatives allocation from 3 to 25 percent) in the future.[1]

For good reason too, as research[2] commissioned by Multi-Asset Value Investment specialists Seneca Investment Managers (Seneca IM), finds that over nearly all (96%) advisers surveyed believe alternative assets are important to consider in overall client asset allocation.

Advisers cited a range of reasons for the positive momentum of alternatives in portfolios, including the fact many felt the asset class was a clear diversification benefit (58%) and the ability to generate Income and Alpha (52%).

 

So how can advisers access this growing asset class with an increased level of confidence?

 

Seneca IM’s approach to alternatives is combining them with more traditional asset classes such as equities and bonds to create a true multi-asset approach

Our selection decisions in alternatives are based on fundamental analysis. One key aim of our alternatives, or as we call it specialist assets exposure, is to make investments in income generating assets that have an opportunity of producing a good level of total return and for this we have found selecting from the listed investment trust market a great place to find some of the best opportunities.

Given the broad nature of this asset class we believe it is important to be in close contact with management teams of these assets to give us the best insight into the attractiveness of their particular niche and this combined with investment trust valuation analysis allows us to determine how much of the portfolio we should be investing in each of four sub asset sectors we research: Property, Private Equity, Specialist Financial, and Infrastructure. Examples include investments in music royalties (Hipgnosis Songs Fund), wind farms (Greencoat UK Wind plc), and primary care medical facilities (Assura plc). We believe we own some of the highest quality managers and assets in each niche and in the current environment, we have seen evidence of that quality.

 

What about income?

Of the Specialist Assets positions we hold which have paid a dividend over the last 12 months, 60% have been able to maintain or increase their dividend, which is almost double the proportion observed across the aggregate of FTSE All Share* constituents, of which over half cut their dividend to zero. Despite volatility of share prices, the critical nature of many of the assets we hold in this part of the portfolio means they should still be able to generate sufficient income for investors, even in the most challenging of periods for most businesses.

 

Don’t believe the Market hype – the investor psychology!

 

The recent market volatility can easily become more than just a topic of conversation. Without protecting the mind from being overwhelmed by the daily gyrations of the stock market, an investor can lose focus of the fact that a listed equity represents an investment in the collective actions of a group of people with the shared goal of wealth creation. Staring at a screen of equity prices, flashing green and red, gives the investor an endorphin flooded experience like the browsing of a social media feed or a night at the casino. With 24-hour connectivity and a non-stop stream of news flow, an investor can become disconnected from reality, forgetting that beyond the screen, a business operates without being transfixed by its day-to-day stock price movements.

Whilst the share price of a business is an expression of what buyers and sellers believe that business is worth at any given moment, that view can become far out of touch with reality.

Within our Specialist Assets selection, AEW UK REIT announced the sale of its largest holding. The asset, a 35-acre site that was acquired for £12.4m in 2018 and was producing a net income yield of 10%, was sold for £18.8m. Prior to the announcement, the REIT was trading on over a 30% discount to the last reported net asset value.

These sorts of events show that beyond the stock market, the assets of a business are being managed by a separate group of stakeholders, industry operators with an often more detailed and longer-term view than the stock market. We place a much larger weight on this kind of news, over the latest headlines describing why markets have risen or fallen on any given day.

Alternative investments have become more common in investor portfolios but the challenge of accessibility relative to more traditional assets remains. Investment Managers with a long track-record and intrinsic and disciplined approach to real assets and alternatives selection such as Seneca IM can provide investors access in an efficient way that can support their overall investment and potential income objectives.

 

*FTSE All Share excluding investment trusts and REITs

FTSE Russell is a trading name of certain LSE Group companies. “FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group companies under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution on of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

 

The views expressed are those of Steve Hunter at the time of writing and are subject to change without notice and do not constitute investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This communication is for information purposes only and should not be read as an offer or recommendation to buy or sell any securities. If you are unsure of any investment decision you should seek a professional financial advisor. Seneca Investment Managers Limited (0151 906 2450) is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. All calls are recorded. Your capital is at risk. FP20 158.

 

[1] Alternative Investments are on the Rise, John Manning, International Banker, 09.09.2019 [https://internationalbanker.com/brokerage/alternative-investments-are-on-the-rise/]

[2] Research commissioned by Seneca Investment Managers was conducted by Censuswide amongst 202 advisers between 18.09.2019 – 25.09.2019

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