The debt sector is growing and by all accounts it is just the beginning of an investment boom. It is now one of the highest-yielding investment company sectors and since launching in 2006 it has grown to become the sixth largest sector with total assets of £8.6bn, according to figures from the Association of Investment Companies (AIC).
Markuz Jaffe, investment companies analyst at Cantor Fitzgerald, said many of the products that have appeared have served to fill gaps left by banks that retreated from lending, as a result of regulation forcing them to hold more capital against certain types of lending activity.
He said: “Where banks are not [lending] or they might give you a prohibitively high rate so they can still earn a decent return on their capital, it opens up these various niches for direct lending funds or credit strategy funds to fill that gap.”
Yield
With interest rates at low levels, investors looking for income have also been attracted by the generous yields achieved through a wide range of different strategies, including corporate, asset-backed, distressed and peer-to-peer loans. Mr Jaffe said: “The market is evolving, so if you think where many years ago you used to buy government bonds, or investment grade bonds that would deliver a decent yield above inflation, that’s no longer possible.
“So these product shave crept up a lot in the investment company space. They offer a high yield and a lot of it is high quality lending, with a lot of security behind these loans to fall back on if the borrower does default or run into difficulty and they offer competitive yields.”
“Clearly, these companies invest in alternative assets and should be considered as part of a balanced portfolio for the long term. If investors are in any doubt as to whether investment companies are suitable for them they should speak to a financial adviser,” Annabel Brodie-Smith, communication director at the AIC, said.
Increased demand
Ewan Lovett-Turner, a director in Numis Securities’ investment companies research team, said there has been increased demand for income and uncorrelated assets. And as the debt sector has grown, it has also become more varied.
For example, direct lenders like RM Secured Lending have a strategy that offers investors the ability to preserve capital, protect against inflation and rising rates, while generating attractive risk-adjusted returns. Since its launch in 2016, the investment trust has invested in over 25 corporates across 16 sectors in the UK and Europe.
This includes three investments into healthcare, providing finance to support the care of over 11,000 patients, five investments into renewables, enough to power 35,000 homes and 12 investments into specialist real estate.
At NB Global, its Global Floating Rate Income fund invests in a global portfolio of senior secured floating rate loans. These are loans made to non-investment grade companies to finance some type of corporate activity, typically a merger or acquisition but they could be used for other purposes, for example a capital expenditure project.
