With the US-China trade war, concerns about global growth and political turmoil in the UK, there’s been lots to make investors nervous in 2019. Markets have mostly made a positive return for the year, with the average investment company up 11%1, but there’s much uncertainty about what could happen next.
At times of market stress, diversification is key. Investment companies in the Flexible Investment sector invest across multiple asset types, from quoted and unquoted companies to bonds, commodities, specialist debt and property. Some have a specific objective to preserve investors’ capital and deliver positive returns through different economic environments.
The Association of Investment Companies (AIC) has spoken to managers from the Flexible Investment sector to find out how they are constructing their portfolios, which asset classes are presenting the best opportunities and their outlook for markets.
Outlook – caution warranted but attractive prospects for alternative assets
Alex Barr, Senior Portfolio Manager of Henderson Alternative Strategies Trust, said: “With an ageing bull market, recession fears at their highest for eight years, increasing corporate debt levels, ongoing US-China trade concerns and an extraordinary and ongoing Brexit saga, some caution is warranted on mainstream markets. What will be crucial in allaying investors’ fears is confidence in policy responses. Broadly speaking it’s a case of ‘ok so far’: the European Central Bank has returned to its QE programme and the Fed has been loosening rates. And, both the US and China have vested interests in damage limitation on trade talks. As such we see relatively better returns in equity markets coming from ‘mid-risk’ assets which have quality characteristics and stability of income. Returns from fixed income are more likely perhaps to come from investment grade assets, high yield and emerging market debt.”
Charles Jillings, Manager of UIL, said: “We remain of the view that long-term global GDP is positive, that lower interest rates help most corporates as the cost of debt across the world falls and that well positioned businesses with strong management teams will deliver above average returns. We are of course concerned that an event, either financial or political, could cause a serious setback for equity markets and that negative interest rates and high sovereign debt are risk factors to monitor very carefully. As long-term investors we attempt to look through the short-term noise with an eye on the longer-term value.”
Tony Foster, Senior Investment Manager of Aberdeen Diversified Income and Growth Trust, said: “Markets appear to be pricing in sluggish global growth and further easing of monetary policy. Valuations, which are the drivers of future returns, are generally very high. We see little value in UK government bonds yielding less than 1%, for example. By contrast, we see attractive return prospects from a broad range of less traditional asset classes. This includes infrastructure, emerging market bonds, asset backed securities and a range of special opportunities.”
Paddy Dear, Manager of Tetragon Financial Group, said: “The composition of Tetragon’s portfolio is primarily made up of a diversified pool of alternatives. Often, we are buy-and-hold-to-maturity investors which, when combined with our long duration capital, affords us the opportunity to weather market cycles. Cycles are inherently unpredictable, both in timing and in magnitude. Our approach is to try to balance the risks in our portfolio such that we can weather the next storm and continue to compound capital.”
A smoother return
Alex Barr, Senior Portfolio Manager of Henderson Alternative Strategies Trust, said: “Current market conditions are characterised by uncertainty, volatility and no small amount of nervousness. With an expectation that these conditions are likely to prevail for some time Henderson Alternative Strategies Trust offers the opportunity to access return profiles that are less correlated to more traditional asset classes. As such, the company can play an important volatility mitigation role within traditional portfolios.”
Tony Foster, Senior Investment Manager of Aberdeen Diversified Income and Growth Trust plc, said: “Our investments are carefully selected to have a wide range of return drivers and risk characteristics. Our truly flexible investment approach allows us to take full advantage of the beneficial effects of portfolio diversification. This means that we can potentially deliver a smoother return to our shareholders over the long term.”
Paddy Dear, Manager of Tetragon Financial Group, said: “We believe that Tetragon’s investment manager has constructed a portfolio that can generate positive returns in a variety of economic environments and across various credit, equity, interest rate, inflation and real estate cycles. Tetragon’s ability to invest in a broad range of asset classes and strategies, partner and invest with what we believe are superior asset managers, make investments directly on its balance sheet, adjust its cash holdings as appropriate to market cycles and maintain a long-term view, contribute to our long-term performance.”
Constructing a portfolio
Tony Foster, Senior Investment Manager of Aberdeen Diversified Income and Growth Trust, said: “We invest in a wide range of publicly listed and private market investments in both mainstream and alternative asset classes. Our approach has been designed to make full use of the powers of the investment trust structure to invest in less liquid assets that offer attractive long-term returns.”
Alex Barr, Senior Portfolio Manager of Henderson Alternative Strategies Trust, said: “Henderson Alternative Strategies Trust is a flexible multi-alternative investment company with an investment brief across a wide range of strategies. These include, but are not limited to, private equity, hedge funds, infrastructure and credit. We aim to deliver performance from three distinct sources: asset allocation, portfolio construction/timing and via underlying (or direct) positions held in the portfolio.”
Paddy Dear, Manager of Tetragon Financial Group, said: “Tetragon invests in a broad range of assets, including bank loans, real estate, equities, credit, convertible bonds, private equity, infrastructure and TFG Asset Management, a diversified alternative asset management business.”
Opportunities – gold, emerging market debt and private equity
Charles Jillings, Manager of UIL, said: “We are not driven by asset allocation but rather we seek out deep value, compelling investments. We are currently in favour of Brazil in the emerging market space as we expect its growth to accelerate. We are pro disruption in the fintech space. We like gold, and we are attracted to nickel, given battery technology disruption.
“Resolute Mining, an LSE-listed gold miner is an indicative example as it has been a core UIL investment for over ten years and represents 15% of UIL’s portfolio. We remain excited about its prospects as this company has enviable long-life mines and is in production in multiple jurisdictions. Led by John Welborn they constantly optimise their mining operations and are the first gold miner to fully automate an underground mine with the obvious benefits flowing to the bottom line. In an era of low and negative interest rates and with weakening non-US dollar currencies, gold offers a hedge for investors. Political volatility is underpinning demand, while a number of important central banks are buying physical gold. We expect gold to continue to rise over the medium term.”
Tony Foster, Senior Investment Manager of Aberdeen Diversified Income and Growth Trust, said: “Emerging market debt is an asset class that many investors mistrust. It is true that these markets are periodically in the headlines – today, for example, it is Argentina which is heading for yet another sovereign default – but, in many cases, emerging economies are in good shape and bonds are trading on attractive yields of 5-6% or more. History shows that this asset class can usefully increase portfolio diversification. At the end of 2018, for example, when global equities fell by over 13% in three months, emerging market debt made a positive contribution to our portfolio returns.”
Alex Barr, Senior Portfolio Manager of Henderson Alternative Strategies Trust, said: “We remain optimistic about private equity, our largest sectoral allocation, though we are mindful that the current cycle is extended. With that in mind, within private equity we remain more focused on already proven business transformations more typically found in private secondary funds, or within listed private equity vehicles.”
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- Overall weighted average investment company share price total return (ex VCTs) from 1 January to 31 August 2019.
- The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 363 members and the industry has total assets of approximately £197 billion.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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