Millions face British Gas price hike: Energy bills for dual fuel customers will increase by an average of 5. Would you heed a ‘wealth warning’ on fund charges? Is investing in low risk investing without industry bets the answer to beating low interest rates? Read this: Is investing in debt the answer to beating low interest rates?
Several investment trusts have launched in recent years to take advantage of the yields generated from debt such as loans and mortgages. The latest is a unique lend-to-save focused investment trust offering a yield of between 6 and 8 per cent. But much of the sector is already offering decent dividends, although many of the investment trusts have a share price that is trading at a premium to the value of the assets they hold. The investment trust debt sector is relatively small with just 19 players, many of which only formed in the past few years, coinciding with the low interest rate environment. But it is offering decent yields of up to 9 per cent, while investors can buy in at an average premium of 1.
Most of the companies invest in property loans that are packaged together, known as collateralised debt – these are the kind of mortgage bonds and commercial loans that helped cause the credit crunch after they were chased to extremely high valuations. Fast forward seven years though and some investors believe that even after recent strong gains, these still represent a value and income opportunity. The latest entrant, P2P Global Investments, is focused on accessing loans provided through peer-to-peer platforms, and is the first of its kind. Peer-to-peer, or lend-to-save, allows individuals to loan money to other people and businesses and set their own rates of interest to profit from repayments. 85,000 compensation on accounts with each individually licensed bank or building society. 197million and its share price now trades at a premium of 9 per cent to its net asset value, which while high for the sector, shows how it has been popular. 1,000 and annual charges of 1 per cent means you will most probably end up spending more than if you just put money directly onto a peer-to-peer platform, but you are theoretically further lowering the risk of default with the trust by spreading your risk across a number of loans across different platforms.
It is a good example of where the close ended structure of investment companies allows private investors to invest in illiquid assets of peer-to-peer lending. We have seen a lot of launches of debt funds but also other alternative assets with attractive incomes, which is not surprising in terms of the economic cycles. But there are risks in the sector, particularly if the economy continues doing well and pushes up returns that investors could get from shares. According to broker Oriel Securities, the debt sector has been buoyed by low interest rates and reduced lending from banks which has seen companies turn to other forms that provide commercial property finance. But if interest rates rise the yield on much of this debt may begin to look uncompetitive.
That means it is essential to drill down and find out exactly what the trust holds, how that debt is structured and secured and how the interest rates on the debt it holds are set. For example, many of the loans in these types of investment trusts are linked to the Libor rate, so the rates they are being paid should track upwards as interest rates increase – as Libor is likely to follow suit. We look at five income-paying debt investment trusts below. Investors should do their own research with plenty of due diligence if they are considering buying in. Do not simply be seduced by the high yields on offer.
Investors with Duet Real Estate Finance get access to the returns of commercial property loans lent out through Duet’s master fund. The loans are focused on Europe, with most assets in the UK, Germany and France. Half of these loans are on office buildings and a third against hotels. The rest is focused on retail and healthcare properties. It has the highest yield in the sector and also the biggest discount which reflects the risk you are taking due to a high concentration on the unpredictable property market in Europe.