By Daniel Lanyon on Wednesday 19 October 2016
Data from the Association of Investment Companies show closed-ended funds investing in various forms of alternative credit are yielding nearly double the average UK equity income portfolio.
Investments trusts specialising in alternative credit have the highest current yields on average of any sector among UK-listed closed-ended funds, according to data from the Association of Investment Companies.
Alternative credit closed ended funds are a broad church ranging from those focused on the online direct lending and p2p lending market such as Ranger Direct Lending, P2P Global Investments and VPC Speciality Lending to those in distressed debt and real estate credit but generally all give exposure to yield from non-bank lending also away from the traditional bond market.
The Association of Investment Companies (AIC) compiled a list of the highest yielding investment company sectors, of those yielding over 3 per cent, at end September 2016 and found the Specialist: Debt sector is the highest yielding sector, with an average yield of 6.9 per cent.
In addition, while specialist sectors have historically traded on premiums in recent years, this sector is currently on a discount of -3.5 per cent. In contrast, the Sector Specialist: Leasing sector, the second highest yielding sector with an average dividend of 6.1 per cent, is on a premium of 17.1 per cent.
Of course investors should never assume recent trends and yields are stable. Discounts can turn to premiums and vice versa. Yields can be effected by share price moves as well as income pay out levels.
Annabel Brodie-Smith, communications director of the Association of Investment Companies AIC said: “Investor appetite for income remains strong in this low interest rate environment and this is reflected by a number of higher yielding, specialist sectors trading on premiums”.
“The problems in the open-ended property sector this summer also highlight that the investment company closed-ended structure works well for illiquid assets, which can offer a higher level of income, such as commercial property and infrastructure.”
Investors, should be aware that sentiment can change and that income from investment companies is not guaranteed, Brodie-Smith adds.
“Investors should not buy on the basis of the headline yield alone. There’s a broad spectrum of risk and reward, so it is crucial that investors do their homework, take a long-term view, and if necessary, seek financial advice.”