James Carthew in The Investment Trusts Handbook 2024:
James Carthew reviews a tough year for the alternative asset trusts
In the years following the global financial crisis, the investment companies industry boomed as investors in search of income poured money into alternative assets. Not everything worked. Aircraft leasing and reinsurance funds proved to be notable problem areas, for example. However, the sector had a hugely positive impact in other areas such as infrastructure and renewable energy.
The investment company structure provides access to a wide range of asset classes for all types of investors and is ideally suited to these kinds of investments. Most alternative assets cannot be turned into cash in a hurry. Redemptions from openended funds holding these assets would no doubt have been suspended long ago. Holders of investment companies can, with a few unfortunate exceptions (discussed later), always cash in their investment. However, the price for liquidity is often accepting that you may have to sell at a discount to the underlying net asset value.
It is clear now that higher interest rates were needed to choke off inflation and, for the first time in a very long time, investors can now earn meaningful income from cash deposits and bond funds. With these other options now available, they have been selling alternative income investments to fund these purchases.
As a result, share price discounts to NAV have been widening across the investment companies sector. As the following chart shows, while discounts on funds investing in equities have generally held up fairly well, alternative income funds have been hit much harder. The universe of alternative income funds shown in the chart encompasses debt, infrastructure, insurance, leasing, property, renewable energy and royalties.
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