Diversification can be more than just investing in different countries. Here are some options that investors have in the form of Investment Trusts.
Diversifying your portfolio using Investment Trusts
Diversification is often referred to as the only free lunch in investing. By investing in assets that respond differently to the same events in the market cycle, investors can ensure that their portfolios aren’t entirely exposed to a single risk - like Brexit, for (a very well known) example.
Of course, diversification can mean many things to many people. You can diversify your portfolio with as little effort as purchasing equities from different regions - Europe, the US and Japan, for example. You can also add diversification through fixed income products, such as government bonds.
But for institutions - that is large pension funds and insurance companies, alongside others - diversification has involved much more than these mainstream assets, with correspondingly positive results. These investors use assets like private equity, transportation and commercial real estate to spread their risk and access alternative sources of income.
Traditionally these assets have not been accessible to ordinary investors because of the relatively limited and slow moving market for buying and selling. However, the investment trust structure, which maintains a fixed pool of capital, means that investors can tap into these assets’ diversification benefits without worrying about liquidity and being unable to sell their investments.
Below, I’ve profiled three trusts offering just such a portfolio to their investors.
JPMorgan Global Core Real Assets Limited (JARA) is a new investment trust launching for applications this week (applications close 16 September). It will aim to generate an attractive income and total return by investing in a diverse range of real asset sectors which are usually only available to institutional investors.
The aim is to provide a core real assets portfolio spread globally, with the scope for further diversification should opportunities arise. The three areas of concentration will be Global Infrastructure, US and Asia-Pacific Real Estate, and Global Transportation. The expectation is for the trust to be 80% invested within six months and 100% invested in six to twelve months, with the lag due to the investor queues each of the underlying investment structures currently has.
The c. 80% allocated to private real assets should provide attractive diversification benefits to equity and bond investors. Over the past 20 years, according to JPMAM calculations, the correlation and beta to major equity markets of the real asset universe would have both been around 0.3. The underlying investments will be managed by experienced real asset managers in the J.P. Morgan Global Alternatives Group.
ICG Enterprise Trust (ICGT) invests in profitable, cash generative unquoted companies primarily in Europe and the US.
Private equity should offer investors portfolio diversification opportunities. Interestingly, the net asset value of private equity has grown >7x since 2002 whilst, over a similar time period, the number of public companies in the US and Europe has declined. Private markets have outperformed public equities across multiple cycles and, as a result, allocations are increasing. For retail investors, private equity investment trusts offer the only exposure to this growing asset class.
Private equity managers are able to take very long-term views, which enables them to prioritise fundamental value creation over short-term profit targets. They undertake a significant amount of due diligence work to ensure that they fully understand how their companies operate and they maintain alignment with shareholders through incentive schemes. They are able to enact real change within businesses to drive strategic value enhancements through operational improvements.
Greencoat UK Wind (UKW) is now the largest listed renewable infrastructure fund, with net assets of in excess of £1.7bn. UKW’s aim is to provide investors with an annual dividend that increases in line with RPI inflation (target of 6.94p for 2019, a yield of 5.1%) while preserving the real value of the NAV in the long term through reinvestment of excess cashflow and the use of portfolio gearing. So far it has delivered on all of its promises since launch in 2013.
As of February, the portfolio constituted investments (in whole or in part) in 34 operating UK wind farms around the country. These assets represent a net generating capacity of 950MW, enough to power c.900,000 homes. As such, the portfolio has geographic diversification around the UK, not to mention diversification by turbine manufacturer and by units – the company will own (or has interests in) a total of 715 turbines by the end of March. UKW buys only operating wind farms in the UK. Wind farms are clearly uncorrelated to equities, and as such offer the diversification benefits that we have discussed here. However, the trust is currently on a premium.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees