Kames Capital – Are parts of the alternatives market in bubble territory?

Listed alternatives including infrastructure, aircraft leasing, and renewable energy remain attractive in the current environment despite a jump in premiums, according to Kames Capital’s senior multi-asset investment specialist Nick Edwardson.
The three segments of the alternatives space have seen yields shift significantly in the last year, with listed renewable energy, for example, now collectively trading at a 12% premium to NAV.
Such premiums have caused concern among investors that the market is overvalued. However, Edwardson says all three areas continue to offer opportunities to investors.
“Parts of the alternatives market look more fully valued than historically when viewed in terms of premium to NAV,” says Edwardson.
“However, contractually-backed cash flows, high initial yields, growing dividends and low correlations with other classes are likely to ensure that alternatives remain an important part of a total return multi asset solution.”
Like many assets, alternatives face risks from both political uncertainty in the UK and rising interest rates, with both of these factors at the forefront of investors’ minds at present.
Edwardson says the potential for a significant shift in government policy could prove detrimental generally to PFI/PPP projects, especially as they have long been anathema to some on the left of British politics.
Meanwhile, a materially higher interest rate environment may impact investor enthusiasm, given that many investors consider these currently to be an attractive alternative to fixed income.
However, Edwardson adds neither scenario is currently the base case among the alternatives team at Kames. Instead, they see the increase in demand for alternatives in recent years – and the expansion of the specialist investment universe – as supportive.
“The opportunity set for investment in UK-listed specialist income investments (leasing, infrastructure and renewables) has increased significantly over the last five years as a combination of new funds have been launched and existing funds have sought to raise capital,”  says Edwardson.
“There also continues to be demand from both the specialist income funds themselves for additional capital that they can deploy into available investment opportunities, and from investors who are seeking access to the attractive income streams that these funds provide.”