8th April 2022
If the share prices of many of the alternative investment trusts we own and monitor are anything to go by, the past few weeks have seen a surging interest in assets that have the potential to protect investors from the impact of inflation. Trusts investing in ‘real assets’ like property and infrastructure have enjoyed significant re-ratings, particularly those with contracts or leases that enjoy explicit indexation. This interest is perhaps not surprising given stubbornly high inflation prints and increasingly hawkish posturing from the Federal Reserve and other central banks, which tend to be very bad news for nominal bond markets and which can also act as a headwind to equities.
We have long been cautious on large parts of these traditional asset classes owing to expensive valuations, and our Funds have relatively low, and very targeted exposure as a result. In contrast, our Funds have significant allocations to real assets, not necessarily because of their inflation hedging qualities (we are not macro investors), but principally because of the attractive levels of absolute return they offer. The fact that other investors are taking an interest in the investment trusts through which we access these alternatives is, of course, a positive and has helped underpin our Fund’s strong unit price performance so far this year.
Increased demand has however resulted in expanding premia on which many of these trusts trade, posing questions for valuation conscious investors such as ourselves. One valuation sense check in this regard is to consider dividend yield and on this, ensure our property and infrastructure trusts continue to stack up well. Impact Healthcare REIT is up 13% or so over the past month, for example, but still yields 5.3% with future dividend growth underpinned by the long, index-linked nature of the trust’s leases and fact that a good portion of the underlying cash flows are government backed. With scope for asset management and yield compression we can expect some capital growth on top, resulting in a likely total return that compares very favourably with those available from mainstream bond markets (20-year index-linked gilt has a real yield of -2.1% for reference) and even long run average equity market returns of c.7-9% whilst taking less risk.
In thinking about premiums, it’s also important to remember that alternative investment trusts accessing less liquid assets only tend to release updated valuations on a quarterly or sometimes even semi-annual basis. On-screen premia, based on stale net asset values (NAVs) can therefore be misleading. When assessing whether a share price rating has become too rich or not, we try and adjust and roll forward the latest NAV release to take account of subsequent market dynamics. Gresham House Energy Storage is a cracking example of this, a position we continue to hold despite trading on an optically stretched premium, given our expectations (and their recent guidance) of significant NAV upside in the year or so ahead.
Active management is also important when managing our investment trust exposure, with the waxing and waning of discounts and premiums and the inefficiencies of the sector offering plentiful trading opportunities. Many of the alternative investment trusts we own are still in growth mode, coming back to the market regularly to raise new capital to fund pipeline assets and to drive liquidity and cost benefits that additional scale bring. We are laser focussed when it comes to ensuring that trusts are issuing new shares at a price that is not dilutive to existing shareholders, although that’s probably a subject for another time. The point here is that a close eye on deployment and past behaviour makes it possible to have a sense of when a trust might be coming back to the market. Selling at elevated premiums and buying back at lower placing prices helps manage risk and can really add value to our Fund’s performance over time.
Ultimately, we own real assets and other alternatives because of the attractive, often uncorrelated returns generated by the underlying portfolios whether that be care homes, battery storage, supermarkets or logistics units. Over the long term, assessing the sustainability of the underlying NAV returns from these sorts of assets is key, but – reflecting the importance of valuation – so too is ensuring that we pay an appropriate price for these returns. As such, analysing and actively managing premiums and investment trust valuation risk will always be a central part of what we do.
Ben Mackie – Fund Manager
This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC198