by Nick Britton
Twenty years ago, four-fifths of investment company assets were in quoted equities, with the remaining one-fifth in alternatives such as private equity. About a decade ago, the proportion of alternative assets had risen to a quarter, and today, it’s almost half the industry, with new asset classes emerging such as specialist debt, infrastructure and leasing.
That transformation has multiple drivers, but a key one is income starvation. In an era of near-zero interest rates, there has naturally been keen interest in asset classes that can provide higher levels of income, reliable income, and/or income that comes from different sources, adding diversification to portfolios.
Many of these income-generating assets are illiquid, and thus able to produce higher yields than conventional assets for a similar level of risk. A bond yielding 6% in the current interest rate climate looks dodgy; but a portfolio of loans with the same yield may offer security and borrowers with healthy balance sheets.
Protected from the risk of untimely redemptions, investment companies have been able to cast their net wider in their search for income than their open-ended cousins. This month, we look at companies investing in assets as diverse as aircraft, shipping, uranium and ground support for airports.
If the advance of alternative-focused investment companies has expanded investors’ horizons, it has also presented new challenges when it comes to understanding these asset classes and assessing the performance of managers. Our Sector Specialist: Debt sector is a case in point, which is now the largest AIC sector by number of companies (29) and presents a range of different strategies encompassing asset-backed debt, distressed debt, peer-to-peer loans and convertibles. This month in Spotlight, several managers in the sector explain what they invest in and why.
As I write, I’m on the train to Plymouth to continue our series of workshops. It has been good to meet some of you on my travels and I am gathering useful information about your experience of using investment companies, including many positive stories – always great to hear – and a few problems I have been able to help with, which is even more satisfying.
I hope you enjoy this month’s Spotlight.
Nick Britton, Head of Training, AIC