The success of the alternative income sector has been powering the investment companies universe, with a host of new launches and cash calls pulling in a whopping £2.6 billion this year alone. |
But premiums are getting high, returns are narrowing and some of the biggest IPOs from last year have been slow to get invested.
Interest rates are also only ever going to move in one direction from the current historic low, but despite this, more new launches are continuing to come to the market.
Threadneedle is the latest investment house hoping to clinch a share of the demand for yield, with Henry Cooke, head of its European asset backed desk, expected to take charge of Threadneedle's impending Asset Backed Income launch, which is looking to raise £250 million.
It follows hot on the heels of a £150 million launch by specialist bonds boutique TwentyFour Income
Similar to Threadneedle's proposals, TwentyFour's investment trust is focused on the European asset backed securities market, which is thought to have assets in the region of 8 trillion (£6.7 trillion) globally.
Time to turn bearish? Thumbing through the prospectuses of alternative income funds, it is easy to see why investors are being drawn in, with base rate at a meagre 0.5%, while in the closed-end trust sector, total annual returns of upwards of 6% are up for grabs.
However, as noted by alternatives house Dexion Capital, while issuance activity has been strong year-to-date, the steady flow of capital has not been matched by robust returns.
"Funds with exposure to structured European credit have performed strongly, most notably Volta (its net asset value was up 11.6% in H1) and Real Estate Credit Investments (up 10.1%)," Dexion's team said.
'By contrast, returns from Starwood European and ICG-Longbow Senior Debt, both real estate lending funds, have been minimal as they have been slow to deploy capital.'
Nick Greenwood, who manages Miton Worldwide Growth, a fund of investment trusts, said that he has adopted a bearish stance on fixed income because at some stage rates will normalise and this demand will taper off.
But for discretionary asset managers, Greenwood also stressed the difficulties of shunning this end of the market. He said even though wealth managers understand the challenges of fixed interest, they are faced with clients whose need for income has to be met.
Greenwood said: 'Every wealth manager is being hassled for income it has been said that what gets between managers and decent performance is the clients.
'I have the luxury of running a growth fund, but if you are a wealth manager you have clients who want 5% yield when interest rates are 0.5%. [Staying invested in this environment] is a dangerous situation that involves successful market timing.'
While Hawksmoor's Richard Scott echoed many of Greenwood's views, he also said he would consider buying into the C share issue announced at the end of August by NB Global Floating Rate Income.
It will be the £821 million trust's second capital raising within six months, though Scott, Hawksmoor's chief investment officer, argued that the managers at the helm of the vehicle have a strong track record that also pre-dates the launch of the closed-end fund in April 2011.
'It is incredible the way that trust has grown and I think their next C share will be successful,' Scott said.
But he also acknowledged trouble could be brewing, with the typical premium of debt trusts at 1.2% and asset backed and secured loan trusts trading on an average premium of 1.3%.
'I think there's reason to be concerned. It is stating the obvious but income investors need income and the market is coming up with products to meet demand,' Scott said. 'Quite a few are good, and quite a few we hold like TwentyFour Income, but inevitably as time goes on and as more and more [products] come to the market I think the quality may deteriorate.'
An alternative would be to look at the global equity income sector, which Scott said he has been eying.
'We have quite a few funds in regions like Asia and Europe. They offer a yield of around 4% and we think these will deliver capital growth as well,' Scott said.
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