Investors looking for exposure to specialist alternative assets could consider investment trusts such as Syncona, CATCo Reinsurance Opportunities and Riverstone Energy, according to the analysts at Numis Securities. 
Interest in alternatives has been strong over recent years as investors seek to diversify exposure away from equity and bond markets. The fact that some alternative assets offer returns that are uncorrelated to mainstream markets has been especially attractive as concerns mount around stock and bond valuations.
With this in mind, Numis Securities analysts reveal the three specialist alternative investment trusts they think could be appealing holdings at the start of 2018.
Syncona
Starting with the life sciences space, Numis’ analysts highlighted Syncona as a potential ‘core’ holdings thanks to its strong management team and the upside in its holdings.
The £1.4bn investment trust was formed through BACIT’s acquisition of the Syncona life science portfolio – which was an independent subsidiary of the Wellcome Trust – in December 2016, resulting in a FTSE 250 company.
Performance of trust vs sector since Dec 2016
Source: FE Analytics
Numis noted that the trust has a “unique” long-term funding model to back global life science life sciences businesses and, unlike many venture capital investors, seeks to build a focused portfolio of standalone life sciences companies with the aim of backing the businesses through to commercialisation.
“To-date, Syncona has directly founded six of its seven life science holdings. These are not me-too companies, but cutting-edge technologies providing important new treatment options for patients in areas of significant unmet need,” Numis said.
“Historically, much of the value of UK life science IP has been lost through drip-drip funding and selling out too early, often to US corporates. However, the merger with BACIT brought Syncona a unique circa £500m fund of funds treasury function that it can deploy strategically to bring its life science holdings through the capital-intensive phases of development, capturing the value uplifts as its holdings commercialise.”
Syncona is trading at a premium to net asset value (NAV) of 38.2 per cent and is yielding 1.1 per cent, according to figures from the Association of Investment Companies.
CATCo Reinsurance Opportunities
Next up is the CATCo Reinsurance Opportunities investment trust, which Numis has as a ‘core’ recommendation because of its potential for high, uncorrelated returns.
Performance of trust since launch
Source: FE Analytics
The $289.8m trust offers exposure to investments linked to catastrophe reinsurance risks, principally by investing in fully collateralised reinsurance contracts. Owing to events such as hurricanes Harvey, Irma and Maria, 2017 was the worst year for the portfolio since launch in 2010 after it posted a 24.79 per cent loss in total return terms.
The performance chart above relates to the trust’s ordinary shares, but Numis said investors its C shares could be well placed, as this issue was deployed at the start of 2018 so is unaffected by events during 2017.
“In our view, the events of 2017 have highlighted some drawbacks of CATCo’s structure. Firstly, we believe that the expected liability to a major catastrophe can rise significantly from the initial estimates. Secondly, the time to settle claims means that capital can be tied up in side pockets for several years (albeit that CATCo earns Libor on sidepockets and also on provisions that have not yet been paid out),” the research house said.
“Nevertheless, we believe that CATCo is one of the few listed vehicles that has the potential to offer an attractive risk/return from a strategy that is truly uncorrelated with bond or equity markets. In our view, the C shares are well-placed to benefit from the rise in reinsurance rates, without any concerns over liabilities to the events of 2017.”
CATCo Reinsurance Opportunities’ C shares are trading on a 5.6 per cent premium to NAV.
Riverstone Energy
The final specialist alternatives trust on Numis’ list is Riverstone Energy. The group said this £1bn trust is a ‘trading’ opportunity and noted its strong portfolio and management team.
The trust launched in 2013 in what was seen as a high-profile event, thanks to the fact that manager Riverstone LLC is the largest global private equity investor focused solely on the energy sector and has raised around $37bn of capital since 2000.
Numis noted that 2017 was a relatively “dull” period for the trust with share price returns of just 0.6 per cent in US dollar terms, which came after a strong 40 per cent return in the previous year.
Performance of trust vs sector since launch
Source: FE Analytics
But the analysts added: “Since the last valuation date, the price of oil has increased by circa 28 per cent. While the success of Riverstone’s investments is not directly correlated to commodity prices, this is a supportive backdrop for portfolio valuations. In the interim results, sensitivity analysis highlighted that a 10 per cent weighted average change in the price of oil would result in a 6 per cent change in the total fair value of investments.”
The research house also said one of its previous reservations over the trust had been the dilution of returns from US corporate taxes of 35 to 41.5 per cent on profitable disposals. However, the US corporate tax rate was cut from 35 per cent to 21 per cent on 1 January, alleviating this concern.
Riverstone Energy has ongoing charges of 2.10 per cent and is trading on a 19.4 per cent discount to NAV.