A five-minute guide to specialist assets

Combining specialist assets − physical assets such as property, infrastructure, private equity funds and specialist financial assets including mortgages and music royalties – alongside more traditional investments such as equities and bonds has several attractions for investors.

They can provide good investment yields with reduced volatility and are not usually linked to the stock market or economy. So, adding specialist assets to an investment portfolio makes sense. They can provide strong returns and a haven at a time of growing geo-political uncertainty.

While investing in these specialist areas can be rewarding, it is not without risk.

Here, the team behind the VT Momentum Diversified Income fund, gives us a brief guide to specialist assets.

What are specialist assets?

At Momentum, we use specialist assets to gain exposure to investments that cannot be found within open-ended funds due to their lack of liquidity.

They also generally exhibit a moderate-to-low correlation with shares and financial assets, meaning they can often provide strong diversification benefits when included within a wider portfolio.

Another attribute is the dependable level of income they can produce that also has some degree of progression. Typical income returns can vary between circa 4% and 8% and may be higher. Some are inflation linked and, although not without risk, can generate reliable income streams, not linked to economic cycles as part of a wider portfolio.

These assets also provide exposure to tangible assets that have a residual or alternative use value (especially within real estate investment trusts (REITs)).

The final attribute we would highlight is the exposure to the specialist skills of experienced asset managers.

Specialist Asset Categories

Specialist assets can be split into a number of sub-categories:

1. Property (REITs)

Listed on stock exchanges, Real Estate Investment Trusts (REITs) are property companies that must distribute 90% of their income (from rent) via dividends. REITs involve investment in real property assets that typically produce reliable income streams in the mid-high single digits.

At Momentum, we prefer smaller, niche, property investment portfolios that have potential for growth, and where our investment managers can build strong relationships with the REIT management teams.

When investing in a REIT, we focus on the nature of the lease profile. Do the leases justify the rent charged to tenants? Our opinion is that some of the best returns in REITs may come from out-of-town retail centres. These are increasing as high street shops struggle, and retail warehouses grow due to e-commerce expansion.

One of a REIT’s main investment risks is that property is an illiquid asset; combining a number of approaches alongside a diverse range of other assets can help minimise this risk.

2. Infrastructure

This is a broad investment category, ranging from sewers to wind farms. Infrastructure investments are a form of “real assets,” which contain physical assets we see in everyday life like bridges, roads, highways, sewage systems, or energy. Such assets are crucial in a country’s development. Often, investors invest in infrastructure, as it is non-cyclical, and it offers stable and predictable free cash flows.

3. Specialist financials

This includes a range of opportunities from music royalties to secured asset lending and aircraft leasing.

We have been invested in music royalties for a number of years and have participated in both the Hipgnosis and Round Hill Initial Public Offering (IPOs).

Initially, music royalties were a daunting and complex market but when you spend some time looking at the industry and the cash flows this is a very investable asset class with promising risk/reward characteristics.

The industry is deep into a transitional phase which we think will result in higher and more stable returns.

4. Private equity

Private equity consists of capital that is not listed on a public exchange. Private equity is comprised of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.

Private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods. In most cases, considerably long holding periods are often required for private equity investments to ensure a turnaround for distressed companies or to enable liquidity events such as an IPO or a sale to a public company.

Rewards… but not without risk

Investing in these specialist areas can be rewarding but it is not without risk. The term “risk” has mixed connotations for different people. However, we primarily regard it as the risk of a permanent loss of capital. Others view volatility as risk, whereas we consider that to be exactly what it is – volatility; unless it is volatile on a downwards path towards a permanent loss of capital (the worst outcome!).

Consequently, we appraise investments with a view to whether – share price volatility aside – there is a risk of a permanent loss of capital and/or the income stream that is expected to be earned whilst the investment is held.

We have almost two decades of experience investing in these areas and combining these non-traditional investments with more traditional investments such as equities and bonds.

We believe our edge is in research and expertise, both of which are crucial when exploring the specialist assets arena.

Important notes – Whilst Momentum Global Investment Management Limited (MGIM) has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This communication provides information and should not be relied upon by retail investors as the sole basis for investment. The information in this document does not constitute advice or a personal recommendation and you should not make any investment decisions on the basis of it. It does not take into account the particular investment objectives, financial situations or needs of investors. MGIM (Company Registration No. 3733094) has its registered office at The Rex Building, 62 Queen Street, London EC4R 1EB. MGIM is authorised and regulated by the Financial Conduct Authority in the United Kingdom (registration no.232357). ©MGIM 2022.

Photo by James Wainscoat on Unsplash

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.