Following the last portfolio positioning update, we wanted to describe how we allocate capital to two other areas of the portfolio, Fixed Income and Specialist Assets.
Our Fixed Income allocations, both sovereign and corporate, are determined by our view on the attractiveness of yields relative to history. We believe that without the guidance of history, investors lose the opportunity to learn from and avoid the mistakes made by investors that lived before them. In almost 4,000 years of historical study however, negative short-term nominal rates are without precedent – the guidebook of history is blank.
Valuation however does provide guidance and today, we find large swathes of the fixed income markets unattractive, offering lower and lower yields as central banks experiment with the global monetary system. However, there are pockets of interest. As is often the case, areas of the market with complexity and illiquidity breed inefficient pricing. Whilst many fixed income assets are the guinea pigs of central bank policy, offering more risk than return, we invest with managers looking for more rewarding yields in comparison. As an example, the managers of the TwentyFour Select
Monthly Income Fund, which invest in overlooked parts of the fixed income market, recently reported that the portfolio’s 13% gross expected yield is the highest since inception.
As we do in Equities and Fixed Income, our asset allocation decisions in Specialist Assets are based on fundamental analysis. One key aim of our Specialist Asset exposure is to make investments in income generating assets that are unsuitable as investments via the open-ended structures we use for Overseas Equities and Fixed Income. The listed investment trust market is where we find the best opportunities.
Given the diverse nature of this area of the portfolio, there is less practicality to viewing the opportunity set as a universe, as we do across Equities, whereby several common valuation metrics can be used across a large percentage of that universe. We therefore believe that close contact with management teams gives us the best insight into the attractiveness of their particular niche and combined with investment trust valuations, allows us to determine how much of the portfolio we should be investing in each of four areas: Property, Private Equity, Specialist Financial, and Infrastructure. Examples include investments in music royalties (Hipgnosis Songs Fund), wind farms (Greencoat UK Wind plc), and primary care medical facilities (Assura plc).
We believe we own some of the highest quality managers and assets in each niche and in the current environment, we have seen evidence of that quality. Of the Specialist Assets positions which have paid a dividend over the last 12 months, 60% have been able to maintain or increase their dividend, which is almost double the proportion observed across the aggregate of FTSE All Share* constituents, of which over half cut their dividend to zero. Despite volatility of share prices, which we discuss below, the critical nature of many of the assets we hold in this part of the portfolio means they are still able to generate sufficient income for investors, even in the most challenging of periods for most businesses.
Not the Nine O’Clock News… or the News at Ten
The recent volatility we have experienced can easily become more than just a topic of conversation. Without protecting the mind from being overwhelmed by the daily gyrations of the stock market, an investor can lose focus of the fact that a listed equity represents an investment in the collective actions of a group of people with the shared goal of wealth creation. Staring at a screen of equity prices, flashing green and red, gives the investor an endorphin flooded experience like the browsing of a social media feed or a night at the casino. With 24-hour connectivity and a non-stop stream of news flow, an investor can become disconnected from reality, forgetting that beyond the screen, a business operates without being transfixed by its day-to-day stock price movements.
Whilst the share price of a business is an expression of what buyers and sellers believe that business is worth at any given moment, that view can become far out of touch with reality. Two recent pieces of news in the portfolio highlighted this. Within the UK equity portfolio, Marston’s plc announced it would be entering into a joint venture with global brewer Carlsberg, creating a high-quality UK brewing and distribution business. The agreement values the Marston’s brewery businesses at £580m, despite the market capitalisation of Marston’s being valued at just £206m prior to the announcement. On the day of the announcement, the shares closed 103% higher.
Elsewhere in Specialist Assets, AEW UK REIT announced the sale of its largest holding. The asset, a 35-acre site that was acquired for £12.4m in 2018 and was producing a net income yield of 10%, was sold for £18.8m. Prior to the announcement, the REIT was trading on over a 30% discount to the last reported net asset value, a price that could acquire a portfolio of assets with a margin of safety, in addition to the potential for a significant re-rating of those assets.
The two events show that beyond the stock market, the assets of a business are being valued by a separate group of stakeholders, industry operators with an often more detailed and longer-term view than the stock market. We place a much larger weight on this kind of news, over the latest headlines describing why equities have risen or fallen on any given day.
*FTSE All Share excluding investment trusts and REITs.
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The views expressed are those of Tom Delic at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca Investment Managers Limited and do not constitute investment advice. 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 communication is for information purposes only and should not be read as an offer or recommendation to buy or sell any securities. If you are unsure of any investment decision you should seek a professional financial advisor. 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 Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. All calls are recorded. Your capital is at risk. FP20 149.