Three solid assets to buy in a low-rate world
The 60/40 portfolio, where 60% of an investor’s money is invested in riskier assets such as stocks and the remaining 40% in less risky assets, such as government bonds, is one way traditional method of balancing your investments. We believe that alternative investments, such as tangible assets, are a good way to diversify the 40% while meeting the challenge of the low rate environment. Here we highlight three distinct investment opportunities held within the Waverton Real Assets Fund.
Optimization of energy supply
SDCL Energy Efficiency Income Trust (LSE: SEIT) listed in December 2018 with £100m, but its market capitalization has now risen to £1bn. It seeks to offer a greener and cheaper solution to energy supply and helps provide the infrastructure needed for smaller-scale (and therefore more energy-efficient) electricity generation. It also aims to reduce the need for subsidies, providing a useful diversification of the names of basic infrastructure and renewable energies.
The trust aims to provide an annual return of 7% to 8%, with an initial return of 5% increasing to 5.5% once fully invested from the second year. The contracts on the underlying investments offer stable cash flows, often supported by regulated or contractual income and attractive operating margins, with the potential for capital appreciation and inflation protection.
Lay the foundation
Supermarket Income Reit (LSE: SUPR) listed in 2017 with a strategy of acquiring large supermarkets leased to several major UK grocery chains (Tesco, Asda, Sainsbury’s and Waitrose). These assets are subject to emphyteutic leases, with integrated income indexation linked to the retail price index (RPI). Management is targeting properties in areas with growing demographics, while selecting properties that also respond to online orders.
The attractiveness of the sector becomes clearer when we change the investment focus from ‘retail’ to ‘grocery logistics’. The efficient fulfill-in-store (or ship-from-store) model is one that enables the shift to online grocery shopping. This involves supermarkets (and other online retailers) renting stores in key ‘last mile’ locations on the outskirts of major cities that operate as normal stores, but also as logistics hubs processing online orders and as centers for click-and-collect orders.
After the commodities sector recovered from its March 2020 lows, it experienced a period of consolidation in the second half of 2021. This provides an attractive entry point for certain commodities, such as copper.
There are several growth sectors for copper consumption, but transportation is by far the most promising. Electric vehicles (EVs) use up to seven times more copper per car. A wholesale shift from internal combustion engines to electric vehicles would require nearly double the supply of copper, supporting copper demand in the long term.
First Quantum Minerals (TSX:FM) is a high quality copper miner making progress towards its debt reduction goals. He also explained how he will increase dividends next year while allowing for growth opportunities. The company’s near-term growth outlook for copper production remains positive, deleveraging remains on track and the company’s free cash flow value is a very attractive 17%.