Going For A Song
Tideway Market Update, 9th October 2020

James Baxter

Before talking investments this week, I thought I would share my recent experience in the high street mortgage market. 

In very quick order, over the last couple of weeks my trusted mortgage adviser was able to re-mortgage our home loan for 10 years, on an interest only basis with the Halifax, with a starting rate of 1.2% fixed for three years. Conveyancing papers have all been signed with a low-cost solicitor which came as part of the package along with an online valuation completed to confirm less than 50% loan to value, which I did not even know had happened. A few things struck me on this:

  • The ease with which it was arranged through the adviser and ‘packaged conveyancer’ compared to how it used to be
  • The rate, it’s low cost money and not a particularly high hurdle to overcome in investment returns, although risks, tax and costs must be considered
  • The term, as we are advancing in years this now sees me through almost to 70
  • The lack of hassle over interest only, which used to be easy to arrange, but a while back became very hard, it seems to be getting easier again

Talking to the broker, the market is clearly developing. Whilst he is not qualified to advise on equity release loans, which are generally more expensive and to be generally avoided, he has seen one high street lender do a regular mortgage through to age 99. If we can effectively have interest only lifetime loans at high street rates, then with the interest rate outlook these could be useful financial planning tools allowing us all to keep more assets invested for longer, as well as being tax efficient for inheritance tax. Just a thought and not to be construed as advice and is something that would require careful consideration with your wealth manager.

On investments, it was a pleasure to have lunch with Peter Doherty last week, the first since lock down and his move to Sanlam. As ever it was good to exchange views and hear Peter talk about the funds he manages and developments with Sanlam.  He has clearly been enjoying having more funds to invest and the Hybrid Capital fund, in particular, has raised some £40m of new assets. This is good news for us existing investors as it lowers costs and it gives Peter new money to deploy in depressed markets after the March sell off. This fund has recovered faster than most bond funds in the UK.

As picked up by Nick below he is also benefiting from working with other fund managers, particularly on the High Income Real Return fund. Our conversation turned to the Hipgnosis fund managed by music entrepreneur Merck Mercuriadis and listed as SONG on the London Stock Exchange.  You may not have realised that you part own rights to songs written by artists such as Mark Ronson or the Kaiser Chiefs but if you invest in one of our multi asset Horizon portfolios – you do, and it can be quite a cool thing to drop into conversation if we ever get back to having dinner parties again! Peter actually bought the first holding in the High Income Real Return fund whilst still at Tideway and it has appreciated around 17% since and pays a healthy dividend from the royalties earned. The fund has been able to raise a significant amount of money and Mercuriadis, who appears to be trusted in the artists’ community has bought $1bn of song rights in the last couple of years. A good example of a truly alternative income source.  

Finally, we have just passed the end of Q3 2020.  Most of our portfolios are moving, or are close to moving, into profit for the year, so please do look and see how yours is doing.

Q3 Valuations and the High Income Real Return Fund - Nick Gait

With the third quarter of 2020 at an end you will soon be receiving your quarterly valuations which can be located in the Client Portal. Your valuation will provide you with your performance during the period as well additional colour regarding how that performance was achieved. The quarterly factsheets for our multi asset Stable Return Portfolios are also available for your viewing if you are interested in the longer-term performance of the strategies.

Oils and Energy:

Our exposure to the energy sector is below benchmark, particularly when consideration is given to the fixed income element of your portfolio where neither the Sanlam Credit nor Sanlam Hybrid Capital Bond Fund has any direct exposure to the sector.

In terms of exposure in the equity book, Unicorn have never invested in the sector as they do not believe they have an advantage in this area, preferring to focus on sectors with more stable cashflows and better dividend coverage. Heriot Global also has no direct exposure to the energy sector after selling their last remaining holding prior to 2020 whilst investing in the energy sector has never been a part of Lindsell Train’s investment process which focuses on quality companies with barriers to entry.

Most of our exposure to the sector comes through our more value orientated funds such as Schroder Global Equity Income and Artemis Global Income. Artemis Global Income has been reducing their exposure for just over a year with an overall allocation of just 3.2% at the end of July compared to 10.8% one year prior. As you may have read from our previous communications, Schroder Global Equity Income, as a value manager, often takes contrarian bets based on companies trading below their intrinsic value. As a reminder the team will conduct extensive fundamental analysis on all companies, they invest in often going months on end without making an investment if the price is not right. 

To avoid value traps, the team will amongst other things assess both ESG and structural challenges facing the wider industry and incorporate these risks into the discount rate used to value the company. The higher the discount rate as a result of these risks will mean they require a lower price than they otherwise would to maintain their margin of safety. The fund has a 6.8% allocation to the sector as of end of June with highest exposure being in Eni, an Italian multinational oil and gas company. Blackrock Emerging Markets is also slightly overweight it’s benchmark, though due to the team’s investment process and with a portfolio turnover of 100% in any given year, this will likely vary considerably over time.

Property:

According to the Financial Times there is roughly £22bn of investor money tied up in UK commercial property funds. After closing in March only a handful of the major participants have lifted the restrictions on their funds and allowed investors access to their money due to fears of investors immediately depleting cash reserves by demanding access to their money.

As a firm, we have always felt that open ended property funds are not fit for purpose due to the inherent liquidity mismatch; the daily liquidity requirements of an open ended UCITS fund to the relatively illiquid property that is being invested in. This relatively simple analysis aside, investors were given a warning of this mismatch in 2016 when a number of high-profile UK property funds had to gate temporarily until the cash being asked for by investors could be raised.

Tideway also has exposure to the Real Estate sector through Schroder Global Cities Real Estate (we have talked about this fund in more detail in a previous communication) that invests in Real Estate Investment Trust (REIT) securities. These trade on exchange like listed equities and therefore cash proceeds can be easily realised when needed. The obvious drawback to this more liquid strategy is that the fund is much more highly correlated to wider equity markets, especially in times of market stress. We much prefer less diversification over the short term than for our investors to be unable to access their monies for an unknown period. We would anticipate that when these funds do return cash to investors, much of it will go into the listed Real Estate space.

Gilts and Fixed Income:  

As a reminder Tideway have long held the view that at low rates government securities are not worth holding particularly after inflation and fees. In their monthly Asset Allocation piece, TS Lombard, have stated that the case for holding governments is waning and have reduced their holding due to both reduced income and reduced diversification benefits. For us the latter point is most significant, and casts doubt over the usefulness in any portfolio.

TS Lombard’s analysis is comforting to hear and reaffirms our position of not holding government securities and our overweight position in Credit through Sanlam, Artemis and Royal London managed funds. Again, with a period of low to zero rates looking very likely, we expect other investors to follow suit.

Our “Low Risk Bond” portfolio which contains Short Duration Credit offerings from Sanlam and Royal London as well as a corporate bond strategy from Artemis is currently yielding 3.22%. Although not “risk free” like securities issued by the government we have faith in our managers to manage risk carefully by avoiding companies likely to default on their obligations and to limit drawdowns in normal market conditions.

Have a good weekend,
The Tideway Team

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Tideway Investment Group comprises the following entities: Tideway Investment Partners LLP and Tideway Wealth Management Limited. Tideway Wealth Management Limited is an appointed representative of Tideway Investment Partners LLP, which is authorised and regulated by the Financial Conduct Authority. FCA number: 496214.

Tideway Wealth Management Ltd
107 Leadenhall Street
London EC3A 4AF

+44 (0)20 3143 6100
info@tidewayinvestment.co.uk

© Tideway Investment Group 2020

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