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23 May 2020

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Alternative investments to slake the dividend drought

As economies around the world plummet, dividends are cut or suspended. It remains unclear when dividend levels will be restored. Plus, interest rates stand at a record low. In this reality, income-seeking investors are forced to look at alternatives. Here are some alternative investments to slake the dividend drought.

It is almost easier to explain what alternative investments are not, rather than what they are. They are not mainstream traditional investments, such as cash, stocks and bonds. Instead, alternative investments tend to be higher risk, illiquid and less regulated than conventional investments, with income streams correlating weakly to the wider stock market.

Venture capital, real estate, private-public partnerships and hedge funds are all alternative investments. They are usually found in the portfolios of high net-worth individuals or institutional investors…  ie those who can afford to take a hit if investments do not perform as expected.

Time to look at alternatives?

The investment landscape, however, has changed, and perhaps it is time for the canny investor to look at alternative investments. As Ewan Lovett-Turner, Director of Investment Companies Research at Numis Securities, said, ‘Investment companies investing in less liquid assets typically have a closer link between cash flows and dividend payouts, meaning they may have less flexibility to use reserves compared to equity investment companies. As a result, we believe investment companies that can demonstrate a security of income in these uncertain times will be highly valued by investors and attract a premium rating.’

Lovett-Turner, Alan Brierley, Director of Investment Companies Research at Investee, Monica Tepes, Head of Investment Companies Research at finnCap, and Conor Finn, Investment Fund Analyst at Liberum, shared with the Association of Investment Companies (AIC) their best recommendations for alternative investments.

The four analysts lean strongly towards infrastructure and social housing. Tepes explains why. ‘If you are looking for as much certainty as possible that your dividends are not going to be cut, I think you need to look at sectors where either the local or state government is your counterparty.’

Lovett-Turner agrees, adding, ‘Infrastructure funds look to be trading on attractive yields given their long-term, government-backed income streams and with a high degree of inflation linkage.’ Finn points to social housing Real Estate Investment Trusts (REITs) as the best option as they offer long-term uninterrupted income. ‘There is an acute shortage of supported housing in the UK and the demand is projected to rise.’

Different risks

There are risks, however. Annabel Brodie-Smith, Communications Director of AIC, makes clear that ‘investing in alternative assets does come with different risks to investing in mainstream equities, so it’s important that investors do their research.’ As always, diversification is encouraged.

Lovett-Turner recommends International Public Partnerships because it has over 100 projects in the UK, Europe, North America and Australia, and includes schools, transmission cables and the Thames Tideway Project (which is right in front of our office!). Since the majority of its revenues have a high level of predictability under availability-based payment structures, or senior debt investments, risk is mitigated.

Similarly, Lovett-Turner also recommends TwentyFour Income because it offers exposure to corporate loans and mortgages across Europe, although it could also be exposed if default levels in European loans and mortgages are higher than expected. Brierley lists HICL Infrastructure, The Renewables Infrastructure Group, Greencoat UK Wind and Sequoia Economic Infrastructure Incomes as companies with diversified exposure to social, economic and renewable infrastructure, as well as infrastructure debt.

Social housing

Tepes warns that the biggest risk to investment in infrastructure when the government is a counterparty is the government breaking, or renegotiating or nationalising the assets, although those are unlikely scenarios in the UK or Europe. What is more likely is that the operators of the assets discover that the costs to run their assets have increased, reducing net cash flows. ‘I think the providers of care are likely to face increased financial pressures on rents when negotiating new leases, such as increased staffing costs and PPE,’ says Tepes.

While Tepes recommends Civitas Social Housing and Triple Point Social Housing REIT, she points out the increased costs for the housing investment companies result in their assets being ‘no longer fit for purpose,’ and as such, can no longer operate as supported housing and charge higher rents.

Finn points out the Civitas Social Housing has been working with housing associations to improve the professionalism and the long-term sustainability of the sector. Civitas has also increased the amount of the portfolio supported by 25-year back-to-back provider leases to 30%. Because rental payments from housing associations are funded through benefits, rent collection in this sector has remained unchanged due to COVID-19, unlike other real estate sectors.

Brodie-Smith makes the persuasive argument during this time of uncertainty that the closed-ended structure of alternative investments means that ‘managers can focus purely on performance and there is no risk of fire sales and suspensions.’ In this arid economic climate, that alternative looks freshly attractive.

To find out more about the different types of funds, click here.


 

 

2020-05-22T16:14:32+01:00

About the Author:

Bella has 20 years’ experience in the research and analysis of the investment industry. She set up Fundscape (comparetheplatform's owner) in 2010. Before Fundscape, she worked for Thomson Reuters as Global Head of Research and Publications (Lipper) and was the author of numerous publications and reports. Bella has a master’s degree in International Business and is fluent in four languages. She is particularly fussy about grammar and punctuation, and loves going to the theatre, disco dancing and pub quizzes. @bella_caridade @fundscapeuk

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