In the back
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[ WHAT I BOUGHT LAST ]
The asset class has proven its value
over time by providing reliable
long-term total returns, inflation
protection and the ability to offset
the volatility of equity and fixed
income investments
Waverton’s Luke Hyde-Smith says this trust offers diversification
away from equity and bonds, with an attractive yield, too
SDCL Energy Efficiency
Income Trust
H
ow should
investors
approach
the question of what
to do with the 40 per
cent of their portfolio
not invested in the
equity market? Our
contention is that an
allocation to real assets
can help investors
meet the challenge of
the low interest rate
environment while also
offering diversification
benefits. The asset class
has proven its value
over time by providing
reliable long-term
total returns, inflation
protection and the ability
to offset the volatility of
equity and fixed income
investments.
Real assets cover
a broad and diverse
TRUSTNET
universe of investment
opportunities, with a
return sensitivity to
either inflation and/or
economic growth that
differs from traditional
financial instruments.
We have split the real
asset universe into
five asset classes:
property, infrastructure,
commodity, asset
finance and specialist
lending.
Positive energy
Our most recent
purchase, in December
2019, was the SDCL
Energy Efficiency
Income Trust, where we
took the opportunity
to increase our holding
in the capital raise
undertaken by the
company. The trust
listed in December 2018
with £100m and has
grown to £342m through
further capital raises.
Its permanent capital,
closed-ended structure
is suited to the illiquid
underlying assets and
long-term nature of
the cash flows, thus
providing investors a
good means to access the
opportunity set.
SDCL Energy Efficiency
Income Trust seeks to
provide a greener
and cheaper solution
to energy provision
and help provide
the infrastructure
required for smaller
scale, and thus more
energy-efficient, power
production. We see this
opportunity growing
significantly, particularly
given the current focus
on sustainability,
emissions management
under the Paris
Agreement and the
growth in renewables
as a percentage of the
energy supply.
Off-grid
Importantly, this
company seeks to
mitigate the government
and subsidy risk that
underpins many existing
infrastructure and
renewable investment
opportunities, thus
providing useful
diversification away
from traditional “core”
infrastructure names.
Meanwhile, non-
reliance on power prices
differentiates it from
renewables. Taking a
step back from the detail,
such solutions provide
a major challenge to
the established utilities
such as traditional grid
operators and may
also help facilitate the
ongoing electrification of
the economy.
Steady as she goes
The company is seeking
to deliver a 7 to 8 per
cent per annum total
return with an initial 5
per cent yield, growing
to 5.5 per cent once fully
invested from year two
onwards. The contracts
on the underlying
investments offer
predictable and steady
cash-flow streams, often
supported by regulated
or contractual revenues,
and attractive operating
margins. There is also
the potential for capital
appreciation and
inflation protection,
which taken together
makes the trust an
appealing prospect
in today’s investment
environment.
Luke Hyde-Smith is
a portfolio manager at
Waverton Investment
Management
trustnet.com