A recent report in The Times newspaper explores the kind of alternative investments that multi-asset fund managers have recently been taking exposure to in an attempt to beat the market. The kind of ‘esoteric’ investments being made reportedly include plays on businesses as diverse as aircraft leasing, ‘no win no fee’ legal cases and, perhaps somewhat worryingly against the backdrop of recent history, mortgage-backed securities.
This is a prerogative of multi-asset fund managers, who have far more freedom around the kind of investments they can take exposure to compared to other kinds of fund. The advantage is that returns are far less correlated to traditional financial markets so during times like now when the stock market or wider economies are struggling, they can still do well. The additional risk those investing online in multi-asset funds take on is also often rewarded by higher dividends.
One such fund manager, Nathan Sweeney, who oversees the Architas MA Active Growth fund explains in The Times’ report:
“People are worried about rate rises, trade wars and slowing economic growth and that makes it challenging to make money from equities. This is where alternative investments come into their own.”
Mr Sweeney’s fund is currently particularly keen on the aircraft leasing business model. His fund is an investor in the Amadeo Air Four Plus trust which buys planes and then leases them to big carriers such Emirates. It works in roughly the same way as car leasing and returns similarly strong returns to the company that puts up the original finance. Amadeo pays out a dividend of 7.8%. The risk to the business model is that the leasing company goes bankrupt. However, in the worst case scenario the same planes can then be re-leased to another or sold as parts.
Fidelity’s multi-asset investment chief Bill McQuaker is also keen on the business, with Fidelity’s multi-asset fund investing in a similar company – Doric Nimrod Air Two. It’s smaller, owns just eight planes, and pays a dividend of 8.3% to investors like Fidelity.
Mr Sweeny defends his fund’s investment in mortgage-backed securities, of the kind that brought down Lehman Brothers to spark the 2008 international financial crisis, as not as risky as it was 10 years ago. He insists that banks are much more responsible lenders these days and mortgage-backed securities are no longer as opaque as those of a decade earlier. They are no longer chopped up and repackaged so investors don’t really know what they are buying. Fund managers see exactly what mortgages are held in the derivative and how many of the home owners are paying their mortgage on time every month.
Another multi-asset fund manager interviews, David Conlon of GCP Asset Backed Fund, invests in a company that leases boilers to residential property owners. Another less than typical asset held is a natural gas service station in Liverpool.
However, multi asset funds still only usually allocate up to 5% of total funds to alternative assets. The managers also warn that even for the experts it is not easy to judge the risk to reward profile of these kinds of investments. This should count as a warning to retail investors tempted by online offers in alternative investment classes.
Rob Morgan, investment analyst at Charles Stanley Direct, finishes with:
“These are esoteric investments, they are very niche and definitely best left to the professionals. With anything like this, you need to decide whether the potential reward is really worth the risk you’re taking. And don’t invest in anything you don’t understand.”