Answering the income dilemma

“Investors are likely to find the search for sustainable income even more challenging in a post-Covid, low-yielding landscape.” That was the rather sobering response from Steve Hunter, head of business development at Momentum Global Investment Management, when we asked him about the outlook for income investors, recently.

While the past ten years haven’t been easy for income investors, it has still been possible to achieve reasonable – and in some cases strong – income returns from simple equity and bond asset allocated portfolios. 

But the pandemic has turned that solution on its head. Dividends have been slashed and, coupled with rising inflation and continued low interest rates, it’s a perfect storm of challenge.

So, what could provide some relief for income needs?

Many investors are today looking wider than traditional assets for income. But caution still needs to prevail, as expertise is required to balance more diversified portfolios for risk and return in this investment approach. 

Here, the managers of VT Momentum Diversified Income, give us three examples of alternative assets that they are investing in for income: energy storage, digital infrastructure and music royalties. 

Gore Street Energy Storage Fund

“The increasing contribution to power generation from renewable sources such as solar and wind is great for the environment but creates more variability in the supply of power compared to fossil and nuclear powerplants. Gore Street facilitates the increasing use of renewable energy by providing battery storage systems that maintain the stability of the grid. Excess energy can be stored at times of overproduction and released when grid capacity is constrained.

“This has only recently become commercially viable with the reduction in the cost of mining and extracting lithium, a key component in the battery creation.

“The advantages here are the multiple sources of income within the investment both from the operator themselves effectively hiring the storage of the energy, and the major grid energy companies paying for the energy on demand when required. With obvious green credentials, this extension to the alternatives market is predicted to expand rapidly over the next few years with clear advantages for early investors.”

Cordiant Digital Infrastructure 

“Cordiant are investing in a portfolio of critical infrastructure that effectively provides the backbone to the internet and data communication. Their targeted assets span across mobile towers; fibreoptic networks and, perhaps most notable, Cloud & data centres. 

“The Covid-19 pandemic and roll-out of 5G mobile communications has highlighted an exponential need for more resilient digital infrastructure assets as we all use more and more data in our everyday lives from Zoom calls to Facebook and WhatsApp postings. The need for Cloud data is growing at an increasing rate touching many parts of all our lives and it is the rental of effective ‘data space’ at these centres by the large data suppliers that drives the opportunity.

“The quality and experience of the management team at Cordiant made this an attractive consideration and the strategy of buy and build utilises both existing assets and clear plans for future expansion.”

Hipgnosis Songs Fund and Round Hill Music Royalty Fund

“The rapid increase in digital music usage and the continued expansion of the streaming market across the globe has seen increased investor interest. 

“In essence, both funds are purchasing writer royalties based on historic values with a view that future values, for the reasons above, will be much higher in capital terms and have the potential to generate strong revenue streams along the way. Even at its most conservative levels of expansion this offers a good prospect of returns both in income and capital terms for investors.

“Investing in alternatives can be highly rewarding but not without research capability and expertise which is where asset managers like Momentum really come into their own. These and other alternatives, alongside more traditional assets form the approach taken by the Momentum Diversified Income fund.”

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