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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
Waverton
Matthew Parkinson, a fund manager working on wealth management firm Waverton’s multi-asset strategies, kicked off week four with a masterclass in how to use alternatives within the portfolio mix.
He discussed how the 60/40 approach to construction, long touted as near bulletproof, had come off the boil over the last two years as fixed income and equities suddenly became positively correlated. However, he emphasized that this is not unprecedented, with a similarly positive correlation typically seen when inflation rises above 2.5%.
This, he argued, leaves investors with a clear diversification problem, especially if inflation remains structurally high going forward. There is significant risk to be found in “risk-free” assets.
Enter, then, alternatives. Since 2017 the team at Waverton has been overweight alternatives and underweight traditional fixed income, as this was when they felt fixed income was beginning to look vulnerable.
Matthew explained that the team uses two alternatives “buckets” for two distinct purposes: an absolute return bucket for downside capital protection and a real assets bucket with a view to achieving excess returns through the cycle.
With the absolute return allocation, the team seeks to achieve positive returns on a rolling 12-month basis, with low volatility, limited correlation to equities and at a low cost (given that this is in exchange for relatively low return). They use a mix of strategies to achieve this including specialist short-dated fixed income, macro hedge fund strategies, such as BH Macro, which harvest structural risk premia, driven by idiosyncratic opportunities.
Meanwhile, the team’s real assets mix focuses on investments that are underpinned by an asset, with inflation-linked cashflows and the ability to provide excess returns over the course of a cycle. These include property, infrastructure and commodities and as each have different risk and return profiles, the team allocates to them at different points in the cycle. With these types of assets it is, Matthew explained, crucial to allow compounding to do its job in order to get the full return over the cycle.
Matthew also discussed managing the inflationary and rising rate environment, alongside structuring real assets investments and a broad range of topics besides.
Taylor Maritime
Taylor Maritime (TMI) CEO joined us for the second day of alternatives week to give an overview and update on this distinctive trust focused solely on cargo ships. He discussed the outlook and dynamics of a market that often has little or no representation within portfolios; a true alternative.
He began by highlighting that shipping accounts for 90% of global trade, and is the cheapest and most efficient way to get goods around the globe.
Within this market, TMI focuses on dry bulk (not container) ships, that are shallow and have their own cranes, a combination which means they are able to access a variety of ports and carry a range of cargoes. This diversification means that the trust achieves relatively smooth earnings, as it is able to respond to demand where it emerges.
The trust itself is at an interesting point in its trajectory. Edward discussed how the recent acquisition of Gridrod, another shipping operator, had added substantial scale to the trust’s capabilities and that it is now the leading operator of ships of its fleet’s size. While this is of operational benefit, it does mean leverage is at a particular high, and the team is focusing on bringing this down over time.
Several trends are driving demand this year, he explained. The reopening of China is a significant factor, and TMI kept a larger proportion of the fleet open for charters this year in anticipation of this shift. Also fueling demand are rising grain volumes and the dislocated coal market with Russian coal still unavailable.
At the same time, supply is being compressed, in part due to the growing environmental pressures on fleets meaning that they are slowing (as this is less carbon intensive) and older ships are being scrapped.
Majedie Investments
On day three of alternatives week, we were joined by Olivia Macdonald and Dan Higgins from Marylebone Partners, who were recently appointed to manage Majedie Investments (MAJE), one of the UK’s oldest investment trusts.
While the focus remains on equities, Olivia and Dan explained that the trust is now run under a liquid endowment model, with an inflation plus target. In practice, this means extending the remit outside of the traditional 60/40 strategy, while not investing in truly illiquid investments which lock money up for multi-year periods. Instead, the team seek to take advantage of idiosyncratic opportunities in equity markets, such as technical dislocations in valuations.
Olivia and Dan discussed the three strategies that lie at the heart of the overall investment process, special investments, external managers and direct investments. While these are complimentary and run as a single portfolio, they allow the team to focus on whichever area is offering the strongest risk/return profile at any one time.
The first strategy, special investments, focuses on medium term co-investments, thematic funds and Special Purpose Vehicles that offer eclectic returns, such as activist investing in brands that are underperforming. When looking at the external managers bucket, the team seek exceptional funds within their respective sectors or specialisms, such as credit specialists that can look through the capital structure. Finally, within the direct investments strategy, the team look for strong, growing businesses at comparatively conservative valuations.
Olivia and Dan highlighted that the liquid endowment model is not applied to any current investment trust, meaning that MAJE now gives retail investors access to a model only previously available to the likes of high net worth clients, family offices and endowments.
Olivia and Dan also discussed how the trust is run under a flat fee structure based on market capitalisation, which means that the trust’s management is motivated to close its discount, and it has a stake in Marylebone Partners, creating further alignment.
Greencoat UK Wind
Day four of the week saw Greencoat UK Wind (UKW) present. Manager Stephen Lilley started by looking at some of the trust’s performance figures from 2022, noting the high level of cash that the trust generated and the increase in its NAV.
He then moved on to give an overview of the trust’s activities, outlining its investments in the equity and debt of UK wind infrastructure and how that translates into dividends for shareholders. One area of note here was the comparison between yield and the capital growth of the trust.
Another point of increasing significance that Stephen touched on was the discount rate. He looked extensively at how this is calculated and showed the trust has typically been quite conservative in valuing its portfolio, even accounting for the past 18 months.
Stephen then moved on to examine the portfolio and some of the acquisitions the trust has made. Probably the most noteworthy acquisition has been a stake in Hornsea 1, which is currently the largest wind farm in the world
Finally, Stephen looked at the trust’s ESG credentials, noting that the trust’s investments help to provide 1.8m homes with renewable energy. He also illustrated how the trust is substantially helping to cut CO2 emissions in the UK.
NB Private Equity (NBPE)
NB Private Equity (NBPE) manager Paul Daggett was the final manager to present last week, capping off a month of talks from leading managers in the investment trust sector.
Paul started by showing how NBPE has performed, noting that the trust’s private equity holdings have delivered strong outperformance over the past decade. That has been achieved in part because of the access the managers get to deal flow via Neuberger Berman’s co-investment programme.
Paul then looked at why private equity represents a compelling investment opportunity. In particular, he looked at how the number of public market opportunities has actually shrunk over the past two decades, meaning many companies are only accessible via private markets.
Another significant part of the talk was on the trust’s balance sheet. In short, Paul and his team have been prudent with leverage and so still have the capacity to make new investments, something that shouldn’t be overlooked given the fact volatile markets may present greater opportunities.
Paul then looked at performance of some of the portfolio companies. Many of these have seen substantial earnings growth, despite inflation and the wider economic downturn we’ve seen developed over the past 18 months.
Finally, Paul provided an update on the trust’s balance sheet and a look at its current unaudited NAV. This is an area that investors have expressed particular concern about and Paul was able to provide reassurance around this point.
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