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Five hidden UK income gems

Seneca Investment Managers fund manager Richard Parfect looks beyond the traditional hunting grounds for income.  

Untapped income sources

'With valuations and demographics causing a rising demand for investments that generate income, it is becoming increasingly necessary to look beyond the “traditional” sources of income within equities and fixed interest.

'Specialist income investments have been around for a number of years but they have become more prevalent in recent times.

'We are even seeing the real estate investment trust (REIT) market becoming more focused on specific sub-sectors of the property market that are designed to deliver a relatively high level of income. Here are some examples of where we are currently investing away from the crowd to generate reliable income streams.'

Richard Parfect (pictured) is a fund manager at Seneca Investment Managers where he provides input for the Seneca Diversified Income fund. In the three years to the end of July the fund has returned 25.7%, beating the peer group average of 21.1%.

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Untapped income sources

'With valuations and demographics causing a rising demand for investments that generate income, it is becoming increasingly necessary to look beyond the “traditional” sources of income within equities and fixed interest.

'Specialist income investments have been around for a number of years but they have become more prevalent in recent times.

'We are even seeing the real estate investment trust (REIT) market becoming more focused on specific sub-sectors of the property market that are designed to deliver a relatively high level of income. Here are some examples of where we are currently investing away from the crowd to generate reliable income streams.'

Richard Parfect (pictured) is a fund manager at Seneca Investment Managers where he provides input for the Seneca Diversified Income fund. In the three years to the end of July the fund has returned 25.7%, beating the peer group average of 21.1%.

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Private Rented Sector Reit

'This Reit, which has a targeted yield of 5%, rising to 6% after two years, owns newly built family homes on developments in cities and towns across England.

'The rationale is that housing is unaffordable to own for large sections of society. There is a significant undersupply of (new) housing and expected growth of 10% in the population over the next 15 years makes this hard to solve.

'The private rented market, dominated by small scale private landlords, whose portfolios can be hard to manage, is typically focussed on apartments and is also now facing a tighter regulatory backdrop.'

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Funding Circle SME Income Fund

'This vehicle raises capital for loans to be deployed via Funding Circle’s own marketplace into small and medium-sized enterprises (SMEs), predominantly in the UK.

'Crucially, only SMEs with a trading history of at least two years qualify to participate. Loans are backed by personal guarantees from individuals in those businesses or in some cases, such as property lending, the loans are secured. Fees are taken at the market place stage with no additional fees at the vehicle level.

'Blending this “alternative finance” activity with established UK businesses is an attractive format with a targeted yield of 6-7% based on the 100p initial public offering price.'

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Sequoia Economic Infrastructure

'Investing predominantly in the senior secured debt of operational infrastructure assets around the world, this vehicle offers a high level of security to underpin its 6p dividend. Due to amortisation of capital across the portfolio, the average life is 4.8 years.

'Taking into account coupon payments, the modified duration is lower still at 2.6 years. As 44% of the portfolio is floating rate debt, there is relatively little interest rate risk. Meanwhile, with 88% of the net asset value consisting of either sterling assets or hedged into sterling, currency risk is low too.'

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Doric Nimrod Air 2

'This fund has consistently paid a fixed income of 18p per year since 2012 via quarterly dividends, equating to a yield of over 8%.

'It does this by leasing seven A380s to Emirates for terms of 12 years. While Airbus has struggled to attract new orders over the last few years due to “Super Jumbos” not being appropriate for all airlines, it has proved very popular with travellers and is crucial to airlines like Emirates.

'Investing in long-term leasing assets requires comfort over the quality of the lessee to ensure the financial and practical obligations of the lease will be adhered to.'

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International Public Partnerships

'With a successful track record of more than 10 years investing in infrastructure projects and assets around the world (but with a UK emphasis) the opportunity set for the management team is set to grow as governments address their historic under-investment.

'The forecast yield on this fund is 4.3% and it has consistently grown by 2.5% per annum. The portfolio already has a high level of inflation protection as 89% of its projects’ revenues are directly inflation linked.

'The manager, Amber Infrastructure, has a proven record of originating consortiums to bid for high quality assets such as the Bazalgette Consortium that is financing the construction of the Thames Tideway Tunnel or “Super Sewer”.'

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