Yesterday, our investment committee met with the very experienced Pietro Nicholls, manager of the RM Alternative Income Fund. “Alternatives” have crept into the lexicon of portfolios over recent years acting in most cases as bond proxies, that is, investments that have predictable returns. As such they are usually included in the fixed interest element of a typical 60/40 equity/bond portfolio.

In the case of the RM Alternative Income Fund, they invest into three main areas:  

Infrastructure and Sustainable Assets‍

Much of this is led by Government policy supported by long term structural drivers, which includes the building of hospitals, schools, ports and renewable energy. The latter is the most obvious with the need to provide low carbon energy generation and importantly, the storage of such.

Real Estate

‍The growing and ageing population in the country today will require both public and private finance to meet the infrastructure demands of dentists, doctors, pharmacies and nurseries on one hand and care homes for the elderly on the other. Then there is student accommodation.

Digital Infrastructure

‍More and more data centres are required to cater for the growing internet usage and cloud storage facilities. Additionally, telecommunication companies are investing in advanced towers to move from 4G to 5G as well as fibre optic cables. And when you next drive down a motorway and see a large supermarket distribution warehouse to one side surrounded by HGV lorries, that might also be where some of your money in invested.

Pietro and his team spend a great deal of time on Macro analysis in formulating their investment decisions. This means paying particular attention to how their investments are affected by such factors as GDP, payrolls, housing starts and finishes, the prevailing indicator economic trends and finally interest rate and inflationary expectations. This helps the management team in shaping their views relating to equity risk premium, duration risk and currency hedging strategies.

ESG is a vital component in the investment process and the team consider environmental management, labour practices, health & safety, diversity and inclusion, supply chain management and leadership and governance and business ethics in their portfolio companies.

Most of the investments benefit from upwards only rent reviews and increasing tariffs which hopefully feed through to a rising future income, hence my title, the “Cost of Living Fund”. All the above are classified as non-cyclical investments, ones that are required every day.

In summary the fund focuses on capital preservation and stable income generation. It has the potential to protect against rising interest rates and inflation. Whilst Pietro considers the fund as one that creates a total return, we like it as an income play, with capital growth. The fund currently yields 7.38%. We believe it acts as a perfect diversifier within your portfolio.

Comments taken from RM Funds - VT RM Alternative Income Presentation - February 2024

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The views are those of the author only. The above does not constitute a recommendation to buy the fund and advice should be sought from your financial advisor as to the appropriateness of this fund in your portfolio. The value of investments can fall as well as rise.

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