Unwanted alternative trusts are on sale; should you purchase one?

The prices of alternative trusts, such as real estate and infrastructure funds, are extremely low

According to James Mackreides, investors ought to seize the opportunity.

Among the many qualities that attract investors to investment trusts, their closed-ended structure is among the most advantageous. Trusts have a set number of shares in circulation and are set up like corporations. They don't have to buy and sell assets like open-ended funds do because money comes in and goes out of the fund based on changes in investor demand. This implies that they can adopt a longer-term strategy and retain assets that are hard to sell or lack liquidity.

This benefit has contributed to the growth of the market's alternatives segment. Private investors can easily access a variety of investments through alternative funds, such as infrastructure, hedge funds, private equity, and specialty debt.

But a lot of these funds have been neglected over the last five years. Valuations have plummeted due to a combination of issues with cost-disclosure regulations, the move away from smaller trusts, and a general lack of interest in the UK market.

Data from broker Panmure Liberum shows that infrastructure trusts are currently trading at an average discount of 24 points, despite offering a market-beating average yield of 4 points, 6 percent. The yield is 8.6 percent, and the discount is even greater among renewable infrastructure trusts at 34.5 percent.

While the average discount in the private equity funds-of-funds segment is 34.5 percent, infrastructure-debt funds have an average discount of 22.5 percent and yield of 9.2 percent.

At the end of May, broker Winterflood reported that the average investment trust was trading at a 15.2 percent discount (not including 3i, which is very large and trades at a huge structural premium). Since the average global equity investment trust trades at a 7.1 percent discount, the alternatives trusts themselves distorted that average.

Verifying NAVs.

The majority of alternatives have a comparatively stable net asset value (NAV), in contrast to equity-focused trusts, whose NAV will change in tandem with stock markets. Whether these reported NAVs are realistic is the question.

In terms of confirming NAVs, a few recent transactions in the industry are promising. A final dividend was included in the offer price of 147p, which was 3p4 higher than BBGI Global Infrastructure's estimated NAV of 142p7p on December 31.

Even more obvious is the value in real estate. A number of transactions have been announced in the industry this year, and the most recent twoAssura/PHP and Unite/Empiric Studentillustrate the wide discrepancy between the price at which funds have been trading and, in certain situations, what strategic buyers are prepared to pay.

Unite has provided the equivalent of 107p to Empiric Students. While still well below the most recent reported NAV of 120.7p, this represents a premium to the sub-100p price prior to the offer. PHP and the massive private equity firm KKR have been engaged in a bidding war for Assura at about NAV. At about 70% of NAV, Assura was trading before rumors of an offer surfaced.

It is unlikely to endure.

The market is gradually realizing this. Reits, or UK real estate investment trusts, have shown some of the best returns of any investment trust vehicle over the last 12 months. However, the majority of Reits offer a high single-digit yield, and they are still typically discounted by double digits to NAV.

It appears that more value will soon be realized in the sector as the number of deals is increasing. Investors can also purchase trusts that seem to be significantly undervalued and offer alluring yields during a period when interest rates are declining, but it is never a wise decision to buy solely in the hopes of a takeover.

The duration of this opportunity may be limited as more alternative funds are removed. Low-cost trusts will either be acquired or begin trading at higher values. However, it's worthwhile to increase portfolio exposure while the opportunity is still present.