Trustnet Magazine 58 January 2020 | Page 62

In the back 62 / 63 [ 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