Delivering diversification

It is a truth universally acknowledged that an investor in possession of a good fortune must be in want of diversification. Whilst formerly, a traditional allocation between bonds and equities might have served this purpose, such an approach may no longer be sufficient. At Seneca Investment Managers, we believe that following an extended period of strong returns from both of these mainstay markets, a greater degree of diversification is the order of the day.

This is an area in which investment trusts come into their own. Many options for further diversification come in the form of assets which are unsuitable for inclusion in open-ended funds. Recent history has reminded us that neither property nor private equity are well suited to open-ended structures. The illiquid, long-term nature of these assets sits ill with the daily inflows and outflows of OEICs. For these, fixed pots of capital such as investment trusts are far more suitable.

As multi-asset investors we aim to provide our clients with diversification across various asset classes. The investment trust we manage, Seneca Global Income & Growth Trust plc, has both income and growth objectives and it is therefore important that we construct a portfolio with the ability to meet our goals whilst diversifying risk and reducing volatility. In order to do this, we allocate approximately a quarter of the portfolio to closed-ended funds, principally across property, infrastructure, private equity and specialist financials. To implement this approach, we invest in a range of carefully researched trusts which we believe will offer, over the long term, lower levels of correlation with other investments we hold. Many of these trusts have interesting stories to tell.

In the field of aircraft leasing, we own Doric Nimrod Two and Doric Nimrod Three. Returns from both will principally be driven by the ability of Emirates, the airline which leases the relevant aircraft, to meet its lease obligations, whilst the residual value of the aircraft is expected to have a further positive impact on returns. Holding both products diversifies our risk across two different management teams.

For property exposure, we focus on specialist REITs such as Assura, rather than the wider property market. Assura provides modern GP surgeries on long term leases, whose rental streams are ultimately supported by the NHS. We prefer these more niche areas of property to the wider property market at this stage of the cycle.

On a more musical note, we invest in the Hipgnosis Songs Fund, a vehicle which buys catalogues of song writers’ rights, featuring work by artists such as Sister Sledge, the Kaiser Chiefs and Dave Stewart. Returns will depend on growth in emerging market music expenditure, the take-up of global streaming, and the royalties paid by digital platforms.

The drivers of each of these investments are very different, both from one another and from the drivers of more conventional asset classes. What they have is a common focus on generating attractive levels of asset-backed, long term income, whether the asset be an aeroplane, a building or a song catalogue. In addition to diversifying our portfolio by asset class, holdings such as these also diversify the streams of income which support the growing dividend we pay.

There is now a wide range of trusts for investors to choose from offering exposure to a diverse spectrum of assets. If like us you believe a traditional bond/equity mix is no longer sufficient to guard against the vicissitudes of the markets, the specialist investment trust market now offers a real opportunity for careful and selective diversification.

Gary Moglione
Seneca Global Income & Growth Trust plc

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