2 high-yielding investment trusts for income investors
Jack Tang | Saturday, 23rd September, 2017 | More on: BSIF HONY
Stubbornly low interest rates have made income tough to come by in recent years. With stock markets trading near record levels and cash savings producing meagre returns, frustrated income investors are increasingly turning to alternative asset classes in order to earn better returns.
As such, I'm considering these two high-yielding investment trusts to add yield to my portfolio.
Investing in consumer loans is one answer to beating low interest rates and one easy way to get access to the growing consumer loan market is simply to invest in a fund such as the Honeycomb Investment Trust (LSE: HONY).
The £300m fund targets annual returns on loan investments in excess of 10% — and that's after allowing for loan losses. With such attractive potential returns, it is backed by leading investors, which include Invesco Perpetual's Mark Barnett and Woodford Investment Management's Neil Woodford.
Honeycomb has only been operating since December 2015, but in that short time period it has delivered significantly higher returns than its better-known peer P2P Global Investments. Since its inception, Honeycomb has delivered total NAV returns of 15%, while P2P returned just 7% over the same period.
The gap in the performance of the two alternative credit investment trusts is explained by P2P's global diversification, which has exposed it to rising default rates in the US and increasing currency hedging costs. Meanwhile, Honeycomb has benefitted more from favourable market conditions in the UK, because unlike its larger globally diversified peer, the fund is primarily UK-focused.
On the downside, shares in the Honeycomb trust trade at 15% premium to its net asset value, while most of its peers trade at a modest discount. Nevertheless, at today's share price, Honeycomb still yields an impressive 7.7%.
The fund has a management fee of 1% and there is also a 10% performance fee subject to a 5% preferred return hurdle and high watermark.
Infrastructure is another popular alternative asset class for investors looking to generate income. Their popularity with pension and sovereign wealth funds is well-known, but it's not just big institutions that can invest in them. There are a number of infrastructure investment trusts on the market today, including a few invested in renewable energy assets.
The Bluefield Solar Income Fund (LSE: BSIF) is one of the biggest solar investment trusts, with a total net asset value of roughly £400m. It invests primarily in large ground-based solar energy assets in the UK, and has a total generating capacity of 441.5 megawatts.
With physically-backed assets and revenues largely uncorrelated to traditional markets, investing in renewable energy projects can offer investors stable, long-term returns. At today's share price, the fund has a current dividend yield of 6.4%, with Bluefield Solar Income Fund now trading at a premium to its net asset value of 4%.
But although its income prospects are certainly tempting, investors should not expect too much on the capital growth front. The fund pays out nearly all of its earnings as dividends, meaning new investments are primarily funded by raising fresh equity and borrowings.
Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
See all posts by Jack Tang