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James Burns: my top picks for esoteric trust yield
by James Burns on Aug 09, 2013 at 13:23
One of the advantages that investment trusts have over open-ended funds is their managers are able to invest in a portfolio of assets without the worry of inflows and outflows affecting performance. This means the trust structure is ideal for less liquid asset classes.
In recent years we have seen a large number of launches with an income focus from more alternative asset classes.
One of the reasons for this has been the bank deleveraging story, where one avenue of financing for such deals has disappeared only for specialist investment vehicles to pick up some of the slack. The result has been that many investors are now able to access these asset classes that were previously beyond their reach.
In a world where there is little value in government bonds and concerns have arisen over the valuation of corporate bonds, these alternative classes could well be worth a look at and in recent months we have been building up this allocation in our portfolios.
Doric Nimrod Air 3 is an aircraft leasing vehicle that, once fully invested, will lease four Airbus A380s to the Emirates airline.
The aircraft are bought with roughly two thirds debt and one third equity. This is fully amortised over the life of the lease, which matches the life of the trust. The initial investment of 100p is returned so long as each aircraft can be sold for about 45%-50% of its initial value.
The managers believe the re-sale value will in fact be higher than this and so there is scope for a capital gain to be made. In the meantime, shareholders receive a very attractive dividend yield of 8.25%, which is paid in sterling and set in stone as part of the lease.
The prime risk here is the event that Emirates goes bust. In this scenario, the mangers will have to look for alternative companies to lease the planes out to, with the risk being a different income rate might have to be negotiated as well as the time spent to negotiate a new lease.
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