How to invest when there is too much choice
A very good friend of mine, millennial and loyal reader, delivered a particularly harsh reality at...
The challenges faced during the Covid pandemic underlined the importance of investment diversification – particularly for income investors. Dividends were cut or cancelled, bond yields were already low and interest rates on cash almost non-existent.
As the hunt for income became harder, investors had to scour the investment universe for ideas. And one area that proved fruitful was the world of ‘alternatives’.
To answer this question, it’s easier to start with what an alternative investment is not: namely the conventional investments of equities, bonds and cash. Alternative investments are financial assets in all other areas, the most common being property and commodities.
Other alternatives include private equity; venture capital; hedge funds, art and antiques, and fine wines. And there are an increasing number of newer categories from which to choose: renewables, infrastructure and music royalties, for example.
Here, Momentum Global Investment Managers reveal three alternatives held in the VT Momentum Diversified Income 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,” comments Steve Hunter. “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.
“The advantage here are the multiple sources of income within the investment – both from the operator themselves effectively hiring the storage of the energy to the major grid energy companies paying for the energy on demand when required. With obvious green credentials this extension to the alternative energy market is predicted to expand rapidly over the next few years with clear advantages for early investors.”
“Cordiant is investing in a portfolio of critical infrastructure that effectively provides the backbone to the internet and data communication,” continued Steve. “It’s 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.”
“The rapid increase in digital music usage and the continued expansion of the streaming market across the globe has seen increased investor interest,” said Steve. “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 income revenue streams along the way.
“Having been an early investor in Hipgnosis, the team took the step to diversify the portfolio across both funds last year. The diversification is at both the genre and vintage level with Hipgnosis having more modern tracks from Beyonce and Justin Bieber to name just two and Round Hill having more evergreen tracks from artists as diverse as the Beatles to Phil Collins. Even at its most conservative levels of expansion the Momentum team feel this offers a good prospect of returns both in income and capital terms for investors.”
BMO MM Navigator Distribution is a multi-manager, multi-asset portfolio, which generally contains between 25 and 35 individual funds, balancing diversification and risk. The managers are targeting a yield that puts the fund in the top 10% of income generators in its sector. Approximately 25% of the fund is currently invested in specialist and non-correlated assets*.
Close Managed Income invests in both actively-managed funds and exchange traded funds. It sits on the conservative side of the risk spectrum, with preservation of capital a strong focus alongside income generation. It has the ability to diversify across numerous asset classes and geographies, and currently has 14.5% invested in alternatives*.
TB Wise Multi-Asset Growth invests in around 30-60 underlying funds and investment trusts, with a preference for out-of-favour areas. It’s not targeting an income like the others mentioned in this article, but it does make full use of all the asset classes at its disposal to build a diversified portfolio. It currently has 27.6% invested in alternatives*, with the managers recently increasing the allocation to private equity.
*Source: fund factsheets, 30 June 2021