Investing: the rise of the credit fund
With the UK and the US preparing to resume to normal life as they emerge from the economically painful lockdown-unlockdown bounce, Citywealth’s April French Furnell explores the investment opportunities and challenges ahead because the true investment challenge is to perform well in difficult times. April gets the low down from wealth managers with decades of experience on their views on how to tackle a rebounding market because as Warren Buffett says “It’s Easier to Look Back Than to Look Into the Future.”
The outlook for 2021 is, on the whole, positive says Iain Tait, Head of the Private Investment Office at London and Capital, “We think economic conditions look strong and are in a period of rebounding growth”, which will be seen first in the US and UK. However, with the uncertainty around ‘solving’ the pandemic there is real potential for setbacks along the way. Luc Filip, Head of Private Banking Investments at Syz Private Bank, explains: “The supportive monetary and fiscal policies worldwide and the relaxing of lockdown measures creates a favourable investment context, if all goes to plan”. The fly in the ointment is that many governments are fighting to complete vaccination programs with new variants of Covid being discovered.
Buying the dip
However, the markets have already shown signs of recovery since last year which means that we are out climbing out of the dip. “Many distressed opportunities from last year have seen significant recovery”, says Tait, “and those that haven’t, probably have other reasons as to why not”. He does say though that there are still some distressed opportunities in travel and hospitality but recommends buying businesses connected with travel rather than travel stocks themselves. Julius Baer’s Head of Investment Advisory UK Mark Winterburn agrees with the rallying statement: “There are limited opportunity sets left that can be considered as ‘distressed’ given the recoveries in both fixed income and equity markets over the last 12 months.”
Stocks: under the hood
Many clients with investments or thinking of investing may not know that the wealth management industry has a debate about choosing ‘value’ or ‘growth’ investments. This means that there are two types of investments: one where investment managers look for undervalued bargain stocks (value) and the other is stocks that are growing well (growth) and so can deliver better than average returns. Filip shares his thoughts: “Value sectors [such as energy like oil, financials and materials] are important, we want to be exposed to cyclical markets. There is an opportunity to catch the right sectors as they benefit from the recovery”. That said, Sanlam’s CIO Phil Smeaton adds his view: “Despite the temporary attractiveness of cyclical stocks, it’s important to ask: are they going to have enough growth to make value outperform growth on a structural basis”. This means looking at the company’s debt and other factors that can affect the returns. He explains that while some investments could work out – when you understand the company and buy at the right moment – many more will fail to deliver. “I believe it’s a short term trade and not a long-term position”.
Assessing investment targets
UK equities (shares) look promising and overseas investors are creeping back after years of stalemate with the uncertainty around BREXIT. As the UK’s COVID vaccination schedule marches ahead of other countries, the UK is on track to be one of the first economies to reopen and start growing which brings with it much needed investment opportunity. “Getting exposure to this is a good thing”, says Smeaton. “The question is how to get this exposure? Bad businesses can have a good run, but can they compound and improve in the long term? It’s important to look at the structural growth and opportunities behind the business. Furthermore, are the customers in the UK? Just because a company is listed in the UK, it’s revenue might not be derived from the UK market.”
Tech’ remains strong as the “the driver of the bull market”, according to Winterburn. “Valuations in our view still do not reflect the strength of the sector. Technology also remains at the heart of many structural themes in the global economy such as cybersecurity, fintech, cloud & artificial intelligence and digital payments, which have been accelerated by the pandemic”. While the US is the tech giant, UK tech is punching above its weight in developing niche technologies and offers greater growth potential, according to a recent report by Canaccord Genuity Wealth Management.
Direct investing: Land and ‘fake’ meat
There is an established and growing interest in direct investments into businesses, according to Tait. “Given the fear of inflation, we are seeing UHNW clients investing in agricultural land and commercial properties. There is also an increase in clients investing directly into forward looking strategies such as alternative energy companies or synthetic meat businesses”, he says. The commercial property sector is one which has seen an uptick in activity of late, helped along by companies announcing their intentions to bring staff back. While it might be two or three days a week, as opposed to five, it is seen as a sector set for rebound. To back this idea up, Jonathan Gilbert, Investment Partner at commercial property consultancy Hartnell Taylor Cook says that there is opportunity in the fully refurbished stock entering the London office market at present. “This is typically fully-let offices with longer leases of 3-5 years”, He adds, “Post-pandemic, offices that do not have health and safety considerations and wellness amenities will no longer be considered ‘top-tier’, so will need refurbishment post-purchase to attract the best tenants. He says as well that mid-market office stock prices are too high with “large pre-pandemic price tags attached”. As such, he would recommend staying away from ‘development stock’ in the belief that refurbished and fully-let assets can offer greater opportunity in an uncertain environment”.
Logistics is another asset proving popular with investors, particularly given the surge in e-commerce during the pandemic. While it has been noted that there are supply and demand issues, such as the scarcity of industrial assets near urban centres needed to act as ‘last-mile’ hubs which have led to a lower yield in recent years, the fundamentals are strong and the sector is expected to see a prolonged period of growth worldwide. A positive indicator is that Legal & General Investment Management invested more than £100million on UK industrial real estate sites in February 2021 bringing their Industrial Property Investment Fund to more than £2.5billion in assets. Sanlam recently added a property business with a logistics arm to its portfolio. The company is based in Asia. “We like to do things with individual companies and this one ticked a lot of boxes”, explained Smeaton pointing to the fact that Asia and emerging markets are keeping more of what they produce. “We’ve slotted this company into the portfolio and it is funded from fixed income.”
Credit Funds (a quick version of private equity)
Credit fund investments, which are generally low risk investments for capital preservation are a further area of consideration, however there are a plethora of credit funds with higher risks available. The benefit is that they have shorter lock in times than private equity investments. According to Pieter Staelens, Portfolio Manager at CVC Credit Partners European Opportunities Ltd, “It’s not going to perform like a high-growth US tech stock allocation but it has a place in a portfolio as a steady earnings product.” For those considering credit funds, now is the time, according to Nyasha Dhitima, Client Services Director at IQ-EQ. “There has been a lot of funding from governments as they support their countries throughout the COVID-19 pandemic. As soon as this funding dries out, there will be financing gaps in the market and I believe this will be where the opportunities will be for UHNW investors. This is the right time to be partnering with the right Credit or Debt Fund manager in anticipation of more activity once COVID-19 is under control with vaccination roll outs in full force and market activities start to stabilise”, he explains.
Finally: Is inflation bad?
Looking ahead, what are the challenges? “Although fundamentals look healthy, there’s no getting away from the fact that valuations are elevated and market sentiment is bullish. Experience has taught us to tread carefully particularly when everyone seems to be piling in or at least positioned similarly”, says Tait. On top of this, inflation is the word on everyone’s lips. “All these economic conditions coupled with the policy measures in place means that there is a risk of inflation. That said, although we think that we may see rising inflation in the short to medium term, we don’t see it becoming very elevated or prolonged. In our portfolios we have navigated away from inflation and rate sensitive highest quality fixed income and towards equity and high beta credit which is looking at how some stocks move or are different to the rest of the market”. Winterburn expands the view: “We see good inflation, not bad inflation”. He explains, “While we expect even higher readings over the next few months, we view these high inflation readings as a red herring. We observe this as transitory reflecting depressed prices from a year ago rather than a spike in prices today. This is good inflation, resulting from recovering economic activity, rather than bad inflation, reflecting a loss of trust in the world’s currencies”. For investors who are concerned, they should know that there will be little effect on real assets, which historically tend to do well in periods of inflation. As always, wealth management is about understanding where your wealth is placed and how risk is allocated and where it is performing. “You can never say ‘this will definitely happen’ but if it’s a risk, you want to know you are on the right side of it and what is the opportunity from it”, added Smeaton.
And so armed with considered advice and some investment thoughts, a final word from Warren Buffett “Be fearful when others are greedy. Be greedy when others are fearful,” the opportunities are many to get on the up-side of the ‘unlockdown’.
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