This week I’m returning to the topic of how to build a portfolio that produces a reliable, robust income, using specialist dividend-orientated investment trusts backed by solid assets and underlying balance sheets.
A few weeks ago I outlined a fairly simple ‘mini-portfolio’ of infrastructure and real-estate investment trusts, aiming for an income of 4%-5% a year. This time, I want to get more adventurous. I’m looking at an eclectic range of closed funds and investment trusts that let you access several themes, including asset-backed loans, peer-to-peer (P2P) lending, aeroplane leasing and litigation finance.
The idea is to put together a diversified mini-portfolio of funds whose managers are trying to generate income from unusual underlying assets. I want to see a solid bedrock of underlying investments backing up this income, with dividend cheques paid quarterly where possible. In a few cases (such as the commodity sector, or utility stocks) this might mean investing in actual company shares. But in most cases I want either debt (as senior notes, for instance), loans (from P2P businesses), or structured finance (aircraft leasing and litigation finance) – in other words, I want to see some assets backing the fund.
In simple terms, I’m looking to invest 50% in specialist funds that deal in equity or asset finance of some sort, and another 50% in debt-based structures (loans or bonds). I’m after no more than ten funds with a wide mix of managers, all of whom should be well respected in their field. I’d also like a combination of risk exposures. That’s a technical way of saying that I’d like some funds that might give me some risky capital upside (commodity income funds), along with some slightly more sedate bond or loan structures where the chance of a big jump in price isn’t great. On a more technical basis, I’m also after funds that are big enough to be viable (with gross assets of £100m or more) and bid-offer spreads (the gap between the buying and selling price) that aren’t ridiculous (3% at the very most).
Some caveats before we get down to it. Some of these funds are very specialised, and I’d probably hesitate to recommend most of them individually. The aforementioned bid-offer spreads are pretty big (using figures from analysts at Numis, I reckon the average is about 1%). They also charge a fair old whack for their management skills, and frequently trade at a premium to underlying assets (in other words, the shares are worth more than the underlying portfolio – the average is about 6%, according to Numis). So bargains these ain’t. But I do think this mini-portfolio is fairly diversified, and should produce a well-backed income averaging around 4.6% a year. I’m also hoping that these funds should be less volatile than straightforward equities (barring those dividend-orientated commodity businesses I mentioned), although the proof will be in the pudding during the next big global downturn.
For simplicity, I’ve assumed that most of you would put 10% of your total funds invested into each of the ten funds. But here are the three categories I’d break the funds down into. First, there’s a motley collection of risky, equity-style funds. These include infrastructure investor Utilico Emerging Markets (which I own in my Sipp) and BlackRock Commodities Income (which invests in big mining and energy firms). I think these are less risky than they first appear. Both managers are respected and have a disciplined approach to selecting reliable businesses with sound balance sheets.
A more conservative category includes NB Global Floating Rate Income and TwentyFour Income (both expert fixed-income managers), Burford Capital (litigation funding) and aircraft-leasing group Doric Nimrod Air Two, as well as – on the riskier side – two funds investing in commercial-real-estate-backed debt, ICG-Longbow UK Property Debt and Starwood European Real Estate Finance. Finally, a more adventurous group (which I still think has a fair bit to prove) includes CATCo, which invests in catastrophe reinsurance (a sector not without its risks), and P2P Global Investments (mentioned last week in my article on alternative finance).
Ideally I’d like to buy these assets on a discount. I’ll be looking to pop a few into my own portfolio after a sell off at some point in the next six to 12 months – I’m expecting a 10%-15% reversal in the stockmarket at some point in the next year. An outbreak of equity-market fear will probably hurt some of the stocks in this list, largely because they’re more specialised, and slightly less liquid. But if you’re income-orientated and willing to ride out the ups and downs of the global markets, this diverse bunch of funds should produce a well-backed income.
| Sector specialist (50%) | Price (at 23/6/14) |
Premium/ discount to net asset value |
Gross assets | Bid-offer spread | Yield | Income frequency | Total expense ratio | |
|---|---|---|---|---|---|---|---|---|
| (exc. perf. fee) |
(inc. perf. fee) |
|||||||
| Doric Nimrod Air Two (DNA2) | 236.25p | 25.3% | £909m | 0.2% | 7.6% | Qtly | 1.14% | 1.14% |
| Burford Capital (BUR) | 118.5p | 18.6% | £204m | 2.5% | 2.6% | Annual | n/a | 10.57% |
| BlackRock Commod. Inc. (BRCI) | 114.375p | 0.2% | £121m | 2.0% | 5.2% | Qtly | 1.40% | 1.40% |
| CATCo Reinsurance Opps (CAT) | $1.09 | 0.0% | £194m | 1.8% | 5.3% | Annual | 1.90% | 1.90% |
| Utilico Emerging M’kets (UEM) | 187p | -4.7% | £440m | 0.4% | 3.3% | 3 a year | 0.86% | 3.34% |
| Debt (50%) | ||||||||
| NB Glob. Float. Rate Inc. (NBLS) | 98.95p | -1.1% | £1,245m | 0.5% | 4.1% | Qtly | 1.07% | 1.07% |
| TwentyFour Income (TFIF) | 125p | 3.8% | £321m | 0.4% | 4.0% | Qtly | n/a | n/a |
| P2P Global Investments (P2P) | 1,065.5p | 8.2% | £197m | – | 6.0% | Qtly | n/a | n/a |
| ICG-Longbow Senior Secured UK Prop. Debt (LBOW) | 101.75p | 4.1% | £105m | 0.7% | 4.4% | Qtly | 1.50% | 1.50% |
| Starwood Europeab Real Estate Finance (SWEF) | 103p | 4.4% | £235m | 0.7% | 3.1% | Qtly | 0.76% | 0.76% |
| Average | 5.9% | £397.3m | 1.0% | 4.6% | 2.71% | |||