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Seneca reduces equity holdings ahead of market downturn

26 October 2017

26 October 2017

Peter Elston, chief investment officer, Seneca Investment Managers, comments:

“There’s much talk about when the bull market in equities will end. We believe it will be around 2019, ahead of an economic downturn in 2020, but it’s vital to take action well in advance. Many investors are holding off from reducing risk, presumably waiting until the bull market has ended, but we don’t think that’s the right approach. To be protected when the markets turn, you need to taper your risk ahead of that change.

“This month we further reduced our equity holdings across all of our funds. With a global economic downturn expected in 2020, a bear market will set in ahead of this. We have created a framework to reduce our risk exposure gradually over time to avoid the need for drastic asset allocation changes once the market does turn.

“Our time frame is a very broad estimate and it’s likely that the market changes won’t occur when we expect them to. This is why we are taking action early: we feel in this situation it’s the ‘what’ that matters, not the ‘when’.

“We’re now in a period of monetary tightening across the developed world, which could mean interest rate increases, tapering of asset purchases or balance sheet shrinkage. The US is ahead of other markets in this cycle, however the UK, Eurozone and Japan are not too far behind. Given where markets are in the cycle, equity returns should remain positive but are falling.

“The proceeds of our reduction in equities went into a combination of specialist assets and short duration high yield bonds, which we believe are attractive for the inflation protection and yields they offer.”

Equity allocations now stand at 38% for the Seneca Diversified Income Fund, 56% for Seneca Diversified Growth and 58% for the Seneca Global Income & Growth Trust.

ENDS

 

Media enquiries:
Roland Cross / Alastair Doyle / Helen Cotton, Four Broadgate
SenecaIM@fourbroadgate.com

Tel: +44 (0) 20 3697 4200

 


 

About Seneca Investment Managers

Seneca Investment Managers, based in Liverpool with a national client base, operate a multi-asset value approach to investing. Investors range from institutions such as pension funds and charities, through to financial advisers, discretionary private client managers and personal investors.

 

Seneca Investment Managers has a heritage stretching back to 2002 and prides itself on the ability to identify and invest where there is both quality and unrealised value.

 

Past performance should not be seen as an indication of future performance. The value of investments and any income may fluctuate and investors may not get back the full amount invested.

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca and do not constitute investment advice. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.

The LF Seneca Funds may experience high volatility due to the composition of the portfolio or the portfolio management techniques used. This document is provided for the purpose of information only and if you are unsure of the suitability of this investment, you should take independent advice. Before investing you should read the key investor information document (KIID) as it contains important information regarding the fund, including charges, tax and fund specific risk warnings and will form the basis of any investment. The prospectus, KIID and application forms are available from Link Fund Solutions, the Authorised Corporate Director of the Fund (0845 608 1497).

Before investing in the Seneca Global Income & Growth Trust plc, you should refer to the latest Annual Report for details of the principle risks and information on the trust’s fees and expenses. Net Asset Value (NAV) performance may not be linked to share price performance, and shareholders could realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital.

This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

Seneca Investment Managers Limited (0151 906 2450) is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at 10th Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP17/419

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Next global economic contraction could start in 2020 – Seneca Investment Managers

19 July 2017

  • Equity returns will start to fall, but for the time being remain positive
  • Portfolio reductions in equity weights likely to continue for the next two years

Peter Elston, chief investment officer, Seneca Investment Managers, says:
“The global economy has been strengthening, and we’re getting further into the current business cycle that begun in 2009. This cycle has already been longer than average, though to a great extent this is a function of the severity of the contraction that preceded it – the worse the ‘accident’, the longer the recovery.

“We, therefore, feel that it’s now time to start thinking about the next global economic contraction, which we anticipate will occur in or around 2020. This prediction is based on an extrapolation of current employment and inflation trends, as well as taking account other factors such as structural slack in labour markets. If our timing is correct, the chances of which may be slim, the current cycle will have lasted 11 years, much longer than typical.

“As for asset allocation, we’re at the point in the cycle when equity returns should start to fall, albeit remain positive, and so we would anticipate the reductions in equity weights across the range of portfolios Seneca manages, that we have implemented in recent months, to continue for the next two years.

“It’s hard to say how severe the next downturn will be. Some argue that it will be mild, because this time monetary authorities have the tools to prevent economic weakness causing stress in financial markets. Others argue that it will be more severe, because debt levels are now higher and central banks will have less scope to lower interest rates or expand already bloated balance sheets.

“Frankly, we do not know which is more likely, but are fairly confident that the next economic downturn, however severe, will see declines in equity markets. Through a sensible asset allocation framework we can reduce market risk and will strive to protect investors.”

Ends


 

Media enquiries:
Roland Cross/Alastair Doyle, Four Broadgate
SenecaIM@fourbroadgate.com

Tel: +44 (0) 20 3697 4200

 

NOTES TO EDITORS:

About Seneca Investment Managers
Seneca Investment Managers, based in Liverpool with a national client base, operate a multi-asset value approach to investing. Investors range from institutions such as pension funds and charities, through to financial advisers, discretionary private client managers and personal investors.

Seneca Investment Managers has a heritage stretching back to 2002 and prides itself on the ability to identify and invest where there is both quality and unrealised value.

Past performance should not be seen as an indication of future performance. The value of investments and any income may fluctuate and investors may not get back the full amount invested.

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca and do not constitute investment advice. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.

This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

Seneca Investment Managers Limited (0151 906 2450) is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at 10th Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP17/237

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Beware dividend concentration in UK large caps – Seneca Investment Managers

27 June 2017

Comment from Peter Elston, CIO, Seneca Investment Managers

  • Venture into the mid cap space and find many decent yielding stocks
  • No need to sacrifice dividend cover or quality
  • UK equity income sector is not the only choice, multi-asset makes sense

“Dividend concentration among UK large caps is a growing concern, and there could be extreme concentration risk for investors in UK large cap income funds.

“However, venture into the mid cap space, and you can find plenty of decent yielding stocks. This is the focus for the UK equity segment of our multi-asset funds, principally because over time mid caps tend to perform better than large caps, both in terms of returns and volatility-adjusted returns (since 1998, the FTSE 250 index has beaten the FTSE 100 index by 5 percentage points per annum). But this is not the only reason. Mid caps are also under-researched, so stock picking opportunities abound.

“Our UK stocks, most of which are mid caps, on average yield 4.3% compared with 3.0% for mid caps in general. You may think we’re sacrificing dividend cover but this is not the case. Average coverage for our stocks on a forward looking basis is 1.9 times compared with 2.1 times for the mid cap universe (and 1.6 times for large caps). Nor are we sacrificing quality: our return on equity is 21.4% on average compared with 13.8%.

“According to Trustnet, the median fund yield in the IA UK Equity Income sector at the end of May was 3.9%. Furthermore, the median FE Risk Score for the sector was 85 (this means that on average, the volatility of funds in the sector was equivalent to 85% that of the FTSE 100 index). Finally, the median two-year fund performance was 13.8%.

“A search for income does not need to be confined to the UK Equity Income sector though. Comparing these numbers with those of our LF Seneca Diversified Income Fund reveals some interesting results. Our fund yields 4.7% versus the median income yield of 3.9% for the IA UK equity income sector. Ah, but that’s because it is sacrificing total return, I hear you say. Not true. Two year total return has been 16.6% versus 13.8%. In that case it must be because the fund is more volatile. Again, no. The fund’s FE Risk Score is 43 half that of the UK Equity Income sector average! The merits of a multi-asset approach are, we think, obvious.”

Ends


 

Media enquiries:
Roland Cross/Alastair Doyle, Four Broadgate
SenecaIM@fourbroadgate.com

Tel: +44 (0) 20 3697 4200

 

About Seneca Investment Managers

Seneca Investment Managers, based in Liverpool with a national client base, operate a multi-asset value approach to investing. Investors range from institutions such as pension funds and charities, through to financial advisers, discretionary private client managers and personal investors.

Seneca Investment Managers has a heritage stretching back to 2002 and prides itself on the ability to identify and invest where there is both quality and unrealised value.

Past performance should not be seen as an indication of future performance. The value of investments and any income may fluctuate and investors may not get back the full amount invested.

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca and do not constitute investment advice. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.

This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

Seneca Investment Managers Limited (0151 906 2450) is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at 10th Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. [FP17 199]

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Value Investing, whatever the fashion

22 June 2017

We adhere to our value ethos come what may.  Value investing is a patient game. It should never be out of fashion, but for most of the last five years the crowd has favoured other styles. We’re happy to be judged on our record over that period.

Here’s an overview of what makes us tick.

 

We work as a team

Each of our managers focuses on investment research for one discipline, be that asset allocation, areas of the equity market, bonds or specialist asset (e.g. infrastructure, leasing, private equity). We only invest in things we really understand. We like to dive deep – if we come up mucky, better before we buy than after.  Each specialist’s findings and recommendations must be value-based, and are subject to scrutiny from the team.  When ideas are implemented, it tends to be across all our portfolios.

 

Process rules! 

Ours is simple and strict.  Investors know what they will get.  We maintain target holding portfolios for each fund.  Each research specialist is responsible for target weightings in their area across every portfolio.  Any change to the target for an individual holding or change to asset allocation has to be approved by the team, and logged on our research intranet, the grid.  If it’s not on the grid, it doesn’t exist.  In our real portfolios, implementation is the responsibility of named pairs of individuals with oversight for each fund.  The deviation between each actual portfolio and its target holding portfolio is monitored closely, with a maximum deviation of ten percent to accommodate factors like income management.

 

Simple, active management

Multi-asset is a crowded space.  Traditional balanced funds invested purely in equities and bonds sit alongside smoke and mirrors funds, whose returns are obscured through the use of derivatives. We sit between these extremes.  Our funds are straightforward, long term, long only funds, investing in a wide range of risk assets.

 

How active are we?

Very.  We ignore the composition of indices.  We want our positions to count. For example, at the end of March 2017 in UK equities in the Seneca Global Income & Growth Trust plc, we owned twenty-two equally weighted stocks in position sizes of circa 1.5%, of which three were top 100 companies and 19 were mid-caps.  Our funds are diversified at asset class level and conviction driven within each asset class.

 

Multi-faceted approach to risk 

Risk can’t be reduced to a single number, and it’s absolutely not simply short term volatility.  The most significant risk is the permanent loss of real capital.  We strive to avoid this.  For example we hold no developed market government debt because it is screamingly expensive.  While not volatile, it will lose money in spades. A more rounded view is required, incorporating factors such as risk of loss, volatility, liquidity and more, with value offering a margin for error in every decision.

 

The value of investments and any income may fluctuate and investors may not get back the full amount invested.

The views expressed are current at the time of writing and are subject to change without notice. They are not intended as investment advice or a recommendation to invest in any of the investments mentioned. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.

This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

Before investing in the Seneca Global Income & Growth Trust you should refer to the latest Annual Report for details of the principle risks and information on the trust’s fees and expenses. Net Asset Value (NAV) performance may not be linked to share price performance, and shareholders could realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital.

Seneca Investment Managers Limited is the Investment Manager of the Funds (0151 906 2450) and is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP17/156

 

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Seneca adds social housing stock and private rented REITs to portfolios

7 June 2017

  • Civitas Social Housing, the first real estate investment trust (“REIT”) dedicated to existing portfolios of social homes in England and Wales added to Seneca portfolios
  • Investment also made in PRS REIT, the first quoted REIT to focus purely on the private rented sector (“PRS”)

Richard Parfect, fund manager, Seneca Investment Managers, says:

“Traditionally the REIT sector was all about shops and office space, but recently we’ve added two specialist REITs in very different sectors, both offering the opportunity for an excellent yield and potential for future growth.

“PRS REIT is the first REIT investing in the private rented sector. It floated on the London Stock Exchange on 31 May raising £250 million and is supported by the UK Government’s Homes and Communities Agency. We took part in the IPO as we recognise the potential for income, with an attractive dividend yield of 6%, and capital growth. In essence, the fund is focused on providing quality family housing to rent, which is a growing segment of the UK market where there is a great shortage of family properties. With the initial capital raised, the fund’s objective is to provide funding and work in conjunction with housebuilding partners to develop in excess of 2,500 new rental homes across key regions in the UK.

“Civitas is the UK’s first REIT dedicated to building up a portfolio of social homes. The company works in partnership with Registered Providers (RPs) such as housing associations and local authorities to support the provision of capital to deliver more social homes. It has an appealing deal flow as evidenced by the recent acquisition of a portfolio of social housing in Southampton. Through these acquisitions, RPs are able to free up capital to reinvest in further social homes. With a target yield of around 5% plus the potential for capital growth, we view this as an attractive stock for our specialist allocation across the Seneca portfolios.”

Ends

 

For further information, please contact:

Four Broadgate

Roland Cross / Alistair Doyle

Telephone: +44 (0) 20 3697 4200

Email: SenecaIM@fourbroadgate.com

 

NOTES TO EDITORS:

Seneca Investment Managers

Seneca Investment Managers, based in Liverpool with a national client base, operate a multi-asset value approach to investing. Investors range from institutions such as pension funds and charities, through to financial advisers, discretionary private client managers and personal investors.

Seneca Investment Managers has a heritage stretching back to 2002 and prides itself on the ability to identify and invest where there is both quality and unrealised value.

Past performance should not be seen as an indication of future performance. The value of investments and any income may fluctuate and investors may not get back the full amount invested.

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca and do not constitute investment advice. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.

This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

Seneca Investment Managers Limited (0151 906 2450) is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at 10th Floor, Horton House, Exchange Flags, Liverpool, L2 3YL  FP17/159

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Many Happy Returns for investors in the Seneca Global Income & Growth Trust plc

30 January 2017

The award winning* Seneca Global Income & Growth Trust plc (the Trust), is celebrating the fifth anniversary of its revised investment mandate with continued strong returns, growing dividends and low volatility.

Over the 5 year period to 19th January 2017, the Trust has:

  • Achieved a net asset value total return of 66.3%, versus a benchmark return (Libor + 3%) of 19.5%; a Flexible Investment Sector total return of 50.5%; and a UK equity market return of 51.8%.**
  • Delivered this return with an annualised volatility over the five years (standard deviation of returns) of 8.3%, significantly lower than either the AIC Flexible Investment Sector (10.6%) or the UK equity market (14.2%).**
  • Achieved a Sharpe ratio of 0.99, significantly higher than that of the AIC Flexible Investment Sector (0.55) and the UK equity market (0.43).**
  • Grown its dividends every year since 2013, whilst adding to revenue reserves.**

Seneca Global Income & Growth Trust plc is a well-established multi-asset trust managed by a knowledgeable team with extensive experience of closed-ended funds. The Trust adopts a straightforward investment policy in keeping with Seneca’s multi-asset value investing approach. The Trust’s portfolio comprises directly held UK equities, overseas equities and fixed-income holdings held via select third party managers and a range of specialist investments, including focused REITs, leasing businesses and infrastructure investments. The emphasis throughout is on growth of income, quality and value.

The Trust had net assets of £64.3m**, offered a current yield of 3.8%** paid quarterly, and operates a discount control mechanism aimed at managing its share-price very closely around its Net Asset Value. As of January 1st 2017, the Trust was re-assigned from the AIC Global Equity Income Sector to the AIC Flexible Investment Sector.

David Thomas, CEO of Seneca Investment Managers, says:

We are very proud of the success of the Seneca Global Income & Growth Trust, which has exceeded its objectives for investors over the last five years whilst sensibly managing risk. At Seneca, we look more widely for both growth and income, and firmly believe our multi-asset value approach will continue to stand shareholders in good stead as we work to build on this success.  We wish the Trust and its investors ‘many happy returns’.

Richard Ramsay, Chairman of the Seneca Global Income & Growth Trust plc, says:

‘The Trust’s five year record is a testament to the merits of its Investment Policy and the effective execution of this policy by the Manager.’

 


 

Periodic performance, volatility and sharp ratios to 18th January 2017 (%)**

Cumulative performance**

SIGT 5th Anniversary press release - Table 1

Discrete performance**

SIGT 5th Anniversary press release - Table 2

Annualised volatility (standard deviation of returns), and Sharpe Ratio, five years to 18th January 2017**

SIGT 5th Anniversary press release - Table 3

*Seneca Income & Growth Trust plc won Overseas Income Company of the year at the 2015 Investment Week Investment Company of the Year Awards, is a Money Observer rated fund 2016 and is on the WhichInvestmentTrust.com buy list.

**All return, sharp ratio and volatility data source, Cantor Fitzgerald. All figures shown total return. AIC Sector data represents average unweighted figures for the peer group.  Source for Net Assets, Personal Assets Trust Administration Company.  Source for current yield, Bloomberg and RNS of 16/11/2016. Source for revenue reserve account, SIGT reports and accounts.  Sharpe ratio is defined as: (the average rate of return – the risk free rate of return/standard deviation of returns).  Risk free rate taken as 2.5%.

Important Information

Past performance should not be seen as an indication of future performance. The information on this email is as at 19.01.2017 unless otherwise stated. The value of investments and any income may fluctuate and investors may not get back the full amount invested. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.

This press release is provided for the purpose of information only and if you are unsure of the suitability of this investment you should take independent advice. Before investing you should refer to the latest Annual Report for details of the principle risks and information on the trust’s fees and expenses. Net Asset Value (NAV) performance may not be linked to share price performance, and shareholders could realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital. Seneca Investment Managers Limited is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP17 / 18

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Seneca Global Income & Growth Trust plc joins AIC Flexible Investment Sector from January 2017

5 January 2017

Following consideration by the Board of the Trust, the Manager and the AIC (the Association of Investment Companies), as of 1st January 2017, the Seneca Global Income & Growth Trust plc (SIGT) has moved from the AIC Global Equity Income Sector to the AIC Flexible Investment Sector.

SIGT is a multi-asset Trust, which aims to deliver a combination of income and growth with low volatility.  On balance, we believe that the combination of these objectives sits most suitably in the Flexible Investment Sector, which has become the home of SIGT’s most relevant peers.  With the sector having formed almost a year ago, and established itself in investors’ minds, we believe now is an appropriate time to move.

There has been no change to the way in which SIGT will be managed.

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Peter Elston’s Investment Letter – Issue 17: September 2016

6 September 2016

An interesting essay by San Francisco Fed President, John Williams

Having written about secular stagnation and the natural rate of interest in my August letter, it was interesting to see San Francisco Fed President, John Williams, write about low natural interest rates in his latest Economic Letter. I’m no expert, but it seems to me that Williams is the leading authority on the subject, having written a seminal paper (1) alongside colleague, Thomas Lauback, back in 2001. Therefore, I think he’s worth listening to.

Indeed, his conclusion is an appeal to central banks and governments to “share responsibilities” [for boosting growth]. He goes on to invoke Machiavelli, suggesting that “we can wait for the next storm and hope for better outcomes or prepare for them now and be ready” (one wonders to what extent his essay swayed opinion at the Jackson Hole Symposium).

To recap, the natural rate of interest is essentially the rate that keeps inflation stable. It has nothing to do with monetary policy and everything to do with structural factors such as demographics, trend productivity and economic growth, emerging markets reserve accumulation as well as general global demand for savings. Williams points to the decline in the natural rate of interest to what are now very low levels over the past quarter century and considers what can be done to increase it. As should be evident, the prevailing natural rate of interest reflects future economic growth prospects, which is why it is so important for investors.

It is a shortage of private investment demand in combination with an oversupply of savings that has caused the natural rate of interest as well as long-term real bond yields to fall as far as they have. In the developed world, it seems to me, private investment is weak either because population growth is low, because economies are already advanced, or because there is no new productivity busting technology out there (past examples include the plough, the steam engine, the internal combustion engine and the computer). There isn’t much we can do about the first two, but governments should be doing everything they can to encourage the commercialisation of new productivity-busting technologies (please excuse the pun, but driverless cars should be getting a smoother ride). Furthermore, in the absence of strong private investment, surely there is a strong case for a big increase in public investment, particularly in infrastructure.

In a critique of Williams’ essay (2), former US Treasury Secretary and proponent of the secular stagnation thesis, Larry Summers, suggests that Williams does not put enough emphasis on infrastructure investment as a means of stimulating growth and thus raising the natural interest rate. Summers is convinced that debt-financed infrastructure investments pay for themselves, essentially as a result of multiplier effects (economist Philip Milton received rapturous applause when he suggested similar on BBC’s pre-Brexit Question Time (3)). Williams does write that, “returns on infrastructure and research and development investment are very high on average”, though it seems Summers wanted him to be much bolder.

As for the savings glut, while developing countries seem intent on accumulating safe haven bonds, this is not the only problem. Take the savings industry in the developed world, for example. In many respects, allowing companies to close defined benefit pension schemes was one of the biggest mistakes ever made by governments. If you are saving for yourself rather than in a pool with others, you are naturally going to over-save. I am guilty of this myself as I believe I have to assume that I and/or my wife are going to live to 110. We are both hopeful that we will be gone by 90, but we have to assume the worst. Scale this behaviour up, and the resulting increased demand for savings is a huge drag on economic growth. As Oscar Wilde said, “Anyone who lives within their means suffers from a lack of imagination”.

To illustrate just how damaging the abandonment of pooling with respect to pension savings has been, imagine if we did the same for another industry where pooling is central: insurance. The idea of insuring yourself is of course absurd.

Let’s hope that in the not too distant future governments can start applying some common sense either with respect to infrastructure investment, putting more incentives in place with respect to new technologies, or discouraging over-saving.


(1) Measuring the natural rate of interest https://www.federalreserve.gov/pubs/feds/2001/200156/200156pap.pdf
(2) http://larrysummers.com/2016/08/18/6937/
(3) https://www.youtube.com/watch?v=0dUUDFTFzOo


 

Current fund targets

The target weights in the table below are where funds should be positioned currently. Actual positions may deviate slightly from these target weights as a result of market movements or ongoing trades for example.

Table 1: Current fund tactical asset allocation (TAA) target weights (as of 31 August 2016, prior month’s targets in brackets)

Table 1 - PE Investment Letter - September 2016

  • We reduced the equity targets for all three funds by 2 percentage points in light of recent strong market performance
  • Reductions came entirely out of Europe ex UK; although the region has underperformed over the last year or so, our level of conviction has decreased somewhat following the Brexit vote and the political difficulties it exposed
  • We remain 3 percentage points overweight in Europe which reflects the decent yields on offer both in absolute terms and in relation to history
  • Furthermore, Europe’s business cycle has further to run than in the UK and US, thus there remains better potential for earnings to rise
  • As for use of target proceeds, 1 percentage point went into cash and 1 percentage point to Specialist Assets
  • We will consider uses for the 1 percentage point cash in the coming weeks as opportunities arise
  • As for the increase in Specialist Assets, the 1 percentage point was spread across eight existing holdings within REITs, Specialist Financial and Infrastructure

SDIF

  • Profit was taken on several UK equity holdings bought at much lower levels in the market falls post the Brexit vote
  • The Essentra position was increased following price weakness on CEO leaving announcement
  • The position in Schroder European Alpha Income was sold to reduce overall exposure to European equities
  • Baillie Gifford High Yield Bond Fund was sold – switched into Muzinich Short Duration High Yield to improve portfolio income
  • We increased investment in Royal London Sterling Extra Yield Fund, Royal London Short Duration Global High Yield Fund and Twenty Four Select Monthly Income Fund, to further consolidate holdings

SIGT

  • Several UK equity holdings were top sliced – taking profit on purchases made in the market sell-off post Brexit
  • The holding in Essentra was increased following price weakness on announcement of CEO departure
  • Schroder European Alpha Income Fund was sold to reduce exposure to European equities
  • We purchased Invesco Perpetual European equity Income Fund to increase emphasis on Value managers, which was partly funded by reduction in Blackrock Continental Income Fund
  • US equity holdings were consolidated with sale of IShares MSCI USA Dividend ETF – switched into existing holding in Cullen Global North American Dividend Value Fund

SDGF

  • Consolidated European and Japanese holdings down to two in each geography, thereby increasing weighting to Invesco Perpetual European Equity Income Fund and Goodhart Michinori Japan Equity Fund
  • We significantly reduced our holding in the Polar Capital Biotechnology Fund on strength, with a view to ultimately exiting sector specific funds. The proceeds were invested in the iShares MSCI USA Dividend IQ UCITS ETF, pending the completion of due diligence on a new active manager

Download this investment letter as a PDF


Important Information

Past performance is not a guide to future returns. The information in this document is as at 31.08.2016 unless otherwise stated. The value of investments and any income may fluctuate and investors may not get back the full amount invested.
This document is provided for the purpose of information only and if you are unsure of the suitability of these investments you should take independent advice.
The views expressed are those of Peter Elston at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca and do not constitute investment advice. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.
LF Seneca Funds
These funds may experience high volatility due to the composition of the portfolio or the portfolio management techniques used. Before investing you must read the key investor information document (KIID) as it contains important information regarding the funds, including charges, tax and fund specific risk warnings and will form the basis of any investment. The prospectus, KIID and application forms are available from Link Fund Solutions, the Authorised Corporate Director of the funds (0345 608 1497).
Seneca Global Income & Growth Trust plc
Before investing you should read the Trust’s listing particulars which will exclusively form the basis of any investment. Net Asset Value (NAV) performance is not linked to share price performance, and shareholders may realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital.

Seneca Investment Managers Limited is the Investment Manager of the Funds (0151 906 2450) and is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP16/155.

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Peter Elston’s Investment Letter – Issue 16: August 2016

8 August 2016

Secular stagnation and the natural rate of interest

One of the most interesting features of global financial markets over the last 20 years has been the inexorable decline in long-term real interest rates (see chart below of yields of index linked bonds of maturities over five years across various developed markets). As is evident, this is a global trend, though not all countries have 20 years of history.

Chart 1: Index linked bond yields (maturities over 5 years)

Chart 1 - PE Investment letter - August 2016 Source: Bloomberg, Seneca Investment Managers

The decline has reignited the debate about ‘secular stagnation’, a term coined in the late 1930s by American economist Alvin Hansen to refer to the feeble recovery in the US economy that followed the Great Depression. Hansen argued that weak trends in population growth and technological innovation meant that the low growth would continue for many years.

That there is a vibrant debate about whether global growth is stagnating or not is itself instructive, as it suggests the study of economics has not advanced much in recent decades – surely we should know the answer to this question! Earlier this year, Prospect Magazine (1)  ran a series of four articles on the subject, two by proponents of the stagnation thesis and two by opponents. They were all written by well-respected economists, and consequently all were persuasive.

The economists arguing in support of the stagnation thesis were former US Treasury secretary Larry Summers and Northwestern University professor Bob Gordon. Representing the other side of the debate were GaveKal co-founder Anatole Kaletsky and University of Illinois at Chicago professor Deirdre McCloskey.

Of the four articles, I found Anatole Kaletsky’s the most convincing. Here is an excerpt:

“Cuts in public spending and tax hikes, motivated by irrational paranoia over public borrowing, have been so severe that it has not been possible to offset their effects through low interest rates. Inadequate demand, combined with labour deregulation and globalisation that would have been healthy if conditions had been normal, have squeezed wages downwards, reducing incentives for investment and aggravating inequality, which in turn has exacerbated the weakness of consumer demand. 

“To make matters worse, inflation is systematically exaggerated in official figures. If the true level of inflation since 2008 has been negative, as appears quite likely, then even zero interest rates were too high to stimulate rapid growth.”

In Kaletsky’s world, the fall in long term real interest rates in recent years was indeed the result of lower growth but this lower growth, particularly since the Great Financial Crisis, was due to cyclical factors (poor monetary and fiscal policy) rather than structural ones.

On the subject of structural factors such as innovation, Kaletsky sees evidence of technological progress everywhere. Robert Gordon, on the other hand, “assumes that the weak economic statistics are proof that, however much new technology we see around us, progress has slowed down.” I can’t help but side with Kaletsky, seeing as I do the extraordinary ways in which our lives continue to be made better, whether with respect to medical advances, battery storage, energy production, car and airline safety, or online shopping.

That being said, it does not appear likely that governments are going to change course with respect to public spending policy any time soon, and instead will continue to pander to growing protectionism within their electorates. This may well mean that economic growth in the medium term continues to weaken.

In such a world, one can either accept the resulting lower returns from bonds and equities, and the lower future consumption that they imply, or one can try to achieve higher returns by investing more actively – seeking out those areas of equity markets such as smaller companies or certain emerging markets that are likely to perform better over time. We would strongly espouse the latter.


(1)     http://www.prospectmagazine.co.uk


A proposal for the British government

I have a proposal for the British government. It’s not complicated: sell vast quantities of 50-year debt and buy vast quantities of UK equities.

In late July, the Treasury sold £2.5 billion of debt for £5.1 billion. During the lifetime of the bond it will have to pay a total of £0.2 billion in interest but this isn’t much in the grand scheme of things. Let’s say the Treasury sensibly puts this to one side and is left with £4.9 billion. Surely it can find something to do with this over the fifty years. If it can make a return on investment of at least -1.4%, then it will have the funds to repay the £2.5 billion par value.

You may have realised that I am referring to the most recent tranche of the 0.125% 2065 inflation linked Gilt that was sold on 26 July for 201.335% of par. In other words, the aforementioned return of -1.4% required to pay back the bond at maturity is a real return. You could just as easily use a nominal bond and a nominal required return. However, using the inflation linked Gilt makes it easier to understand the point at hand, namely that current yields imply the government cannot make a real return on investment of even -1.4%. (At this point I am reminded of economist Paul Samuelson’s famous remark that at a permanently zero or subzero real interest rate it would make sense to invest any amount to level a hill for the resulting saving in transportation costs.)

Back to my proposal: surely a basket of UK equities will return more than -1.4% per annum over the next fifty years?

They are already yielding 4.1%, so you’d need corporate earnings – and thus dividends – to fall 5.5% per annum in real terms over the long term for total annual real returns to equate to -1.4% (note: this derives from a mathematical truism that says that total return is equal to the dividend yield plus the growth in dividends, otherwise known as the Gordon growth formula). Even if we say that dividends are currently twice the sustainable level, and start with a 2% yield, we’d still be left needing earnings growth of just -3.4% per annum.

Now, earnings and dividend growth over time tend to be around two percentage points per annum less than GDP growth (note: this is because listed companies are generally the larger ones and thus have less propensity to grow than the average company). So, even if we assume an immediate and permanent 50% cut in dividends, GDP growth for the next 50 years could shrink 1.4% per annum and the British government would still break even.

Can economic prospects really be that bad? It’s possible, I suppose, but unlikely.


Current fund targets

The target weights in the table below are where funds should be positioned currently. Actual positions may deviate slightly from these target weights as a result of market movements or ongoing trades for example.

Table 1: Current fund tactical asset allocation (TAA) target weights (as of 31 July 2016, prior month’s targets in brackets)

Table 1 -PE Investment Letter - August 2016

  • No changes to tactical asset allocation during the month.
  • Both Sterling and Gilt yields stabilised, following June’s sharp falls.
  • Equity markets around the world performed well, with markets responding well to strong July payrolls in the US that suggested the US economy was still growing at a moderate pace.
  • It is becoming clear that Brexit has impacted household and business confidence that will likely merit a response from the Bank of England.

SDIF

  • The holding in the AXA US Short Duration High Yield Bond Fund was sold to further consolidate holdings, with the yield on the fund having fallen to a less attractive level.
  • The fund’s position in the TwentyFour Dynamic Bond Fund was reduced to provide funding for an increase in the TwentyFour Select Monthly Income Fund, which offers a higher yield.

SIGT

  • Royal Dutch Shell was exited following a significant re-rating which led to a premium PE and yield compression.
  • New investment in IShares FTSE UK Dividend Plus which maintains UK equity weighting pending further work being carried out on a new direct investment.
  • Added to position in Polypipe following Brexit related sell-off.
  • Top sliced Asian equity holdings to maintain weighting following strong performance this year.
  • New investment in International Public Partnerships in order to broaden the exposure across a range of infrastructure sectors. This was funded with a managed exit from Bluefield Solar Income Fund which has a narrower mandate.

SDGF

  • Initiated a position in Intermediate Capital, manager of alternative credit strategies. Strong growth in permanent capital AUM. Yield over 4%.
  • New investment in Dairy Crest. Cathedral City increasing market share. Yield over 4%, improving cash flow and returns, post disposal of dairy business. Premier Foods being exited.
  • Royal Dutch Shell exited. Significant re-rating – premium to NAV and yield compression.
  • Atlantis China Healthcare Fund exited, favouring regional manager, Stewart Investors.
  • New investment in Aberdeen Private Equity Fund on unwarranted discount to NAV as well as strong NAV growth.

Download this investment letter as a PDF


Important Information

Past performance is not a guide to future returns. The information in this document is as at 31.07.2016 unless otherwise stated. The value of investments and any income may fluctuate and investors may not get back the full amount invested.
This document is provided for the purpose of information only and if you are unsure of the suitability of these investments you should take independent advice.
The views expressed are those of Peter Elston at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca and do not constitute investment advice. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.
LF Seneca Funds
These funds may experience high volatility due to the composition of the portfolio or the portfolio management techniques used. Before investing you must read the key investor information document (KIID) as it contains important information regarding the funds, including charges, tax and fund specific risk warnings and will form the basis of any investment. The prospectus, KIID and application forms are available from Link Fund Solutions, the Authorised Corporate Director of the funds (0345 608 1497).
Seneca Global Income & Growth Trust plc
Before investing you should read the Trust’s listing particulars which will exclusively form the basis of any investment. Net Asset Value (NAV) performance is not linked to share price performance, and shareholders may realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital.

Seneca Investment Managers Limited is the Investment Manager of the Funds (0151 906 2450) and is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP16/137.

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Seneca funds added to James Hay Investment Centre

28 June 2016

Seneca Investment Managers (Seneca), the Liverpool based multi-asset value investment house, announces the availability of its two open-ended funds, the LF Seneca Diversified Income Fund and LF Seneca Diversified Growth Fund, on James Hay, the platform for retirement wealth planning. Over 56,000 James Hay clients will now have access to Seneca’s funds via James Hay’s Investment Centre.

Both funds are managed according to the principles of Seneca’s multi-asset value approach, offering investors a diversified portfolio of value-oriented holdings consisting of directly invested UK equities, managed overseas equities, fixed income, and specialist investments.

Steve Jackson, Head of UK Retail at Seneca Investment Managers, says: “A number of our IFA and wealth management partners have requested access to our funds through James Hay’s platform. Increasing recognition and strong performance have raised the profile of our offerings, and we are pleased that we can now meet that demand.”

Paul Bagley, Director of Distribution at James Hay, says: “We offer one of the widest investment ranges of any platform from cash and funds all the way through to third party DFMs, unquoted shares and commercial property. It’s great to be able to expand that choice still further at the request of advisers with the addition of these two funds.”

The LF Seneca Diversified Income Fund is a Dynamic Planner 5 profile linked fund, a Trustnet 4 crown rated multi-asset portfolio which aims to deliver a high and growing income with the potential to preserve the real value of invested capital. The fund has historically delivered a dividend yield of circa 5%*, with income paid out on a monthly basis.

The LF Seneca Diversified Growth Fund is a multi-asset portfolio combining tactical asset allocation with a mid-cap UK equity portfolio, a range of overseas, value orientated equity managers, significant exposure to specialist assets and modest holdings in fixed interest markets.

Ends

*The historic yield reflects distributions declared over the past twelve months as a percentage of the period end unit price. It does not include any preliminary charge and investors may be subject to tax on their distributions. The fund’s expenses are charged to capital. This has the effect of increasing the distribution(s) for the year and constraining the fund’s capital performance to an equivalent extent. Income has been paid monthly since July 2015.

 

For further information, please contact:

Four Broadgate

Roland Cross / Josh Voulters / Roya Abbasi

Telephone: +44 (0) 20 3697 4200

Email: SenecaIM@fourbroadgate.com

 

NOTES TO EDITORS:

Seneca Investment Managers

Seneca Investment Managers is based in Liverpool with a national client base. Investors range from institutions such as pension funds and charities, through to financial advisers, discretionary private client managers and personal investors. The firm specialises in multi-asset value investing.

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