The big innovation of the last few years within the investment trust sector has been the rise of alternative funds, and especially specialist funds targetting an income return from some form of lending. We’ve seen dozens of new outfits, lending to every kind of niche imaginable. Generally, I’ve been quite a big fan of these funds. I liked the first wave of infrastructure funds and I’ve long thought that the rise of shadow banking would provide a hugely greater choice for the informed, adventurous investor.
The problem, of course, is that there’s now too much choice. There are dozens of either mid-market direct lending or p2p lending funds out there and the choice is dazzling. In the last year or so we’ve also seen an explosion of equipment/asset-backed lending funds, of hugely variable quality. I’m frequently asked to shortlist my favourite funds, and so with this in mind I’ve built a mini portfolio of six of my favourite listed lenders. Overall I reckon that gaggle of exotic funds should give the investor a blended yield of about 6.5%, which isn’t bad considering how low interest rates are at the moment. My big nervousness is that many of the funds in the table below trade at a chunky premium. I’m invested in Biopharma for instance – technically a drug royalties business though many of its assets, for instance, seem to be loans based on my cursory inspection. More to the point even I think its current 9% premium is a bit on the high side. I also like the debt based Sequoia fund which invests in infrastructure loans – a 9% premium also looks more than a bit excessive. A few of the funds below trade at a more reasonable price by contrast. I’m a director of SQN Secured Income fund so you can make what you want of that but I think its shares are undervalued at a 7% discount – especially when compared to its much bigger sister fund SQN Asset finance which are now trading at around par. The yield of 7.6% also looks more than decent and has recently increased! I also think the aircraft leasing fund Amedeo (AA4) looks very reasonable – it also yields around 7.6%. I’ve included one CLO fund, Fair Oaks which I think is probably the best of a volatile bunch. I also quite like real estate debt and I think that the Real Estate Credit fund has done an excellent job in recent years although its premium of just under 7% looks excessive.
All in all, I reckon this mini portfolio of six funds will give a blended yield of between 6.5 and 7% going forward, although I worry that in a market sell-off, some of the premiums on offer might start to vanish. If that was the case, a capital loss of say 5 to 10% in a bad year might be quite possible. We shall see! My aim is to monitor this portfolio over the next few years and report back on progress. Next week I’ll turn my attention to a mini Asia portfolio.
|SQN Secured Income||SSIF||-7%||.90||7.6%|
|Fair Oaks Income||FAIR||+1.2%||0.93||14%|
|Sequoia economic Infrastructure||SEQI||+9.4%||110||5.4%|
|Real Estate Credit||RECI||+6.7%||173.8||6.9%|