Aircraft leasing is an example of a specialist asset. Typically, the asset-leasing vehicle owns passenger aircraft, which it leases to airlines. This business used to be done within the mainstream financial industry, but the sector has opened up to new players, giving direct access to this opportunity rather than by owning shares in a bank.
These investments have grown, partly because banks have had to step back and strengthen their balance sheets since the global financial crisis, creating opportunities for others to step in and take on aircraft leasing. The vehicles are yielding a high 8-9 per cent, but those yields do not come from risk-free assets. Risks include low terminal value of the aircraft or insolvency of the airline.
However, these risks are idiosyncratic and the way to address them is to diversify across a number of these holdings; not just asset leasing but other types such as peer-to-peer lending, real estate investment trusts, renewable energy and infrastructure funds. Investing in enough of these can reduce the risks associated with one particular investment.
Not being able to rely on bonds means that we all have to work that much harder to get an income in retirement. Safety nets are being removed and lots of risk is being transferred to individuals and their advisers.
Demographics provide a remarkably predictable way to gauge the changes in market requirements and also highlight new investment opportunities. But seeking out these higher-yielding prospects may require investors to engage managers with the necessary resources and expertise to manage the risks and deliver a reliable income.
Peter Elston is chief investment officer at Seneca Investment Managers
