Many investors think ISA investing is all about sticking equities away for the long term and forgetting about them. However, we think there are good reasons for allocating to alternative income-generating assets in your ISA, even for those concerned with longterm capital growth. We think that many investors don’t fully appreciate the benefit of reducing the volatility on a portfolio. When thinking about long-term returns, the tendency is to think of the average return in the long run as what you will get, and to think of volatility as a measure of the mark to market “discomfort” along the way. However, this ignores the devastating effect of sequencing risk, and the fact that a particular average annual return can be consistent with negative eventual outcomes. Adding uncorrelated assets, such as alternative income funds, to your portfolio can massively reduce the risk of a terrible investment outcome, and, as we shall see, without necessarily reducing the expected return. This is certainly true when you consider how favourably the returns of these alternative income funds compare to those from equities in recent years, another fact we think is under-appreciated, and which sets them apart from traditional diversifiers such as high-quality bonds. There is no guarantee that future return patterns represent the past, of course. With respect to the alternative income funds we consider below, there are specific risks to capital which have to be considered. However, we think that there is a way to use these trusts taking these risks into consideration. The re-investment of the income from these trusts, reliable in the short term, gives the investor the opportunity to “pound-cost-average” their investment in equities when they look cheap, or reinvest in the same high yielding alternative assets. We consider how this might work below, and look at a range of alternative income funds that might be suitable.
Companies: TRIG UKW HICL NBLS MGCI
M&G Credit Income Investment Trust launched in November 2018 and targets a dividend yield of LIBOR plus 4% per annum once fully invested. The trust offers investors access to illiquid and private debt markets, usually only the preserve of institutional investors, which offer attractive yields for taking extra liquidity and complexity risk. At all times, the managers have committed to ensure that at least 70% of the investments will be investment grade. Their aim is that the trust will offer the yield of a high yield fund, but with the credit risk of an investment grade fund. With the economy in a late cycle phase, the lower level of credit risk could prove attractive as time goes on. At the same time, most of the investments are expected to be floating rate, offering protection from rising interest rates, and the duration will be low (currently around two years). Since launch the trust has made good progress on getting invested. In line with the stated strategy, it has so far invested largely in liquid public securities which will serve as liquidity to invest in private, less liquid opportunities as they come up. The dividend level in the first accounting period is planned to be LIBOR plus 2.5%, payable in two instalments, with the trust moving to quarterly dividends and a LIBOR plus 4% payout from 2020 onwards. The trust is managed by Jeremy Richards, for 25 years manager of the fixed income allocation of the Prudential’s Life Fund, who is able to draw on the expertise and analysis of a vast team of analysts at M&G working in highly specialised sectors of the fixed income universe. He works with his deputy Adam English and also Will Nicoll, co-head of alternative credit at M&G. M&G’s resources and scale are such that they are often the originators of innovative structures, a trend in which it is anticipated that the trust will be able to participate, benefitting from the extra yield that typically comes with an immature asset class. Since launch, the trust has traded strongly and currently stands on a 4.9% premium. The board has the authority to buy back shares to protect the discount, while there will also be a liquidity window held every five years allowing investors to redeem their investment at NAV. Having raised £100m in the IPO (the lower end of its target), the trust recently came back to the market with a fully subscribed placing raising an additional £25m in January, largely from original investors who wanted to increase their holdings.
Companies: M&G Credit Income Investment Trust Plc
AUGM* - Augmentum Fintech - New investment | CAT - CATCo Reinsurance Opportunities - Investment manager update | MGCI - M&G Credit Income - Proposed placing
Companies: Augmentum Fintech M&G Credit Income Investment Trust Plc
M&G Credit Income Investment Trust will invest in private and illiquid fixed income debt assets, aiming to deliver a dividend yield of LIBOR plus 4% per annum over the long term. The trust will offer retail investors access to the illiquid and private debt markets which are usually the preserve of institutional investors, and which offer attractive yields for taking extra liquidity and complexity risk. The trust will be managed by Jeremy Richards, for 25 years manager of the fixed income allocation of the Prudential Life Fund, who will be able to draw on the expertise and analysis of a vast team of analysts at M&G working in highly specialised sectors of the fixed income universe. M&G’s resources and scale are such that they are often the originators of innovative structures in which this trust will be able to participate, benefitting from the extra yield that typically comes with an immature asset class. The board will have authority to buy back shares to protect the discount, while there will also be a liquidity window held every five years allowing investors to redeem part of their investment at NAV. M&G is aiming to raise up to £250m, and Prudential will seed the trust with up to £80m or 25% of the trust. A placing programme is envisaged, which will allow the trust to grow further during the first year.
Research Tree provides access to ongoing research coverage, media content and regulatory news on M&G Credit Income Investment Trust Plc. We currently have 4 research reports from 2 professional analysts.
Cenkos’s first half results demonstrated the benefits of its flexible operating model and strength of its client relationships. While challenges related to COVID-19 are set to continue, Cenkos’s focus is on growth companies and its fund-raising year-to-date has had a greater emphasis on corporates financing M&A and growth opportunities rather than for defensive purposes. This should prove more sustainable although, as always, the timing of transactions in the encouraging pipeline reported remains uncertain.
Companies: Cenkos Securities plc
Avation is a lessor of 46 commercial aircraft to a diversified airline client base. This morning, the group has released results for the 12-months to 30 June 2020, which illustrate the challenges faced by its customer base as a result of Covid-19, as well as the corrective actions taken by the Board that have resulted in profitability being maintained in the year as a whole. Loan repayment deferrals of c.$24.4m were obtained in the period, in comparison to $13.1m short-term rent deferrals being granted to airline customers and thus emphasising management's focus on liquidity during an unprecedented period for global airlines. Avation again reports that it is currently reviewing alternatives in relation to the 6.5% senior notes due in May 2021. Whilst at this point our forecasts remain under review, and near term challenges remain across the industry, we believe that demand for aircraft from lessors such as Avation will increase in time as a result of airlines being even more reliant upon aircraft leasing firms due to the retirement of older aircraft during 2020 in combination with much weaker balance sheets that are unable to support direct aircraft purchases.
Companies: Avation PLC
Record’s Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.
Companies: Record plc
Primary Health Properties (LON:PHP) is a real estate investment trust (REIT) that holds a portfolio of 510 primary health facilities in the UK (92% of the portfolio by value) and Ireland (8%). The business model is to manage the properties for rental income and to grow the portfolio over time. The
Companies: PHP PP51 PHPRF
Cenkos Securities plc has terminated coverage of Record Plc. Our previous recommendation (BUY) and forecasts can no longer be relied upon. Please contact Cenkos for further information.
What’s new: Today’s trading update reveals 17% rise in assets under management (AuM), double digit revenue growth, and an increasing operating margin as the business scales. The outlook is positive. Highlights are: 12.6% rise in 1H Group Revenues to £11.0m (1H last year: £9.7m); 21.9% rise in 1H adj operating profit to £5.0m (1H last year: £4.1m); 17.4% rise over 6 months in AUM to £7.8bn on 30 September 2020, n.b. From 31 March 2020 the WMA balanced index rose 11.6% to 4510; - Market movements added 12.5% to AUM (i.e. Tatton outperformed WMA); - 1H net inflows of £328.1bn were 4.9% of opening AUM (i.e. c 10% annualised net inflows); 3.0% rise in Paradigm Mortgage Services member firms to 1,591 2.5% rise in Paradigm Consulting member firms Interims will be announced on Wednesday, 18 November 2020
Companies: Tatton Asset Management Plc
Following on quickly from its impressive full year results, these interim results confirm that our confidence for growth in the Program Management business was not misplaced.Contracted Premium increased 95% YoY (and 12% ahead of December 2019) to $925m –a stone's throw away from the $1bn 2020 guidance set in 2018. At the same time, Gross Written Premium (GWP) grew 42.6% to £247.2m, resulting in Economic EBITDA turning positive, at £0.8m compared to a loss of £0.3m in 1H19
Companies: Randall & Quilter Investment Holdings Ltd.
As expected following the US banks’ releases, Barclays’ third quarter results saw a sharp reduction in provisions build-up while the emergence of delinquencies has been delayed by the State’s supporting measures. Management continues to expect a reduction in the cost of risk next year. It remains to be seen if this guidance is capable of withstanding new lockdowns or a no-deal Brexit.
Companies: Barclays PLC
Tatton has reported an in-line H1 financial performance: revenue totalled £11.0m (vs N+1Se £10.9m) and £5.0m adj. EBIT (50% N+1S FY21e). AuM grew by 3.4% to £7.8bn as net inflows continued throughout H1 (+£328m) – a positive performance given the backdrop. Paradigm, particularly in Mortgages, has been resilient post-lockdown. Having delivered 50% of our earnings forecast for FY21e, there is potential for upside. However, we leave our forecasts unchanged and a margin for safety as we remain alive to potential external risks/volatility.
The most pleasing aspect of Tatton’s trading update for the six months ending 30 Sep 2020 (H1 2021) was how robust its fundamental offering to clients (financial advisers) has proven to be in highly uncertain market conditions. It continued to attract strong net inflows into its asset management business while also growing its base of IFA consulting and mortgage services clients. The prospect of beating our previous FY21 forecasts looks promising. Longerterm growth prospects also look strong. We do, however, remain wary of the potential impact of further large market dips. For now, we maintain our fundamental valuation of 300p per share but see room for significant upside on that mark if Tatton continues to deliver.
ANGLE plc (AGL.L): Acceptance of FDA submission | Feedback plc (FDBK.L*): Partnership agreement | Open Orphan (ORPH.L): Human Challenge Study Model contract with UK Government
Companies: AGL FDBK ORPH
The interims confirmed that Covid-19 was minimally disruptive operationally in H1 20 and, ironically, may have improved both of R&Q’s divisions’ mediumterm trading outlooks. As the pandemic and other industry events have generated significant losses for insurers, they have created the current ‘hardening’ market driving demand for Legacy and Program Management.
John Laing Group (JLG) has announced the sale of its Australian wind farm assets for A$285m (£157m), a valuation described as a ‘small uplift’ to book value. This news is significant for two reasons: 1) it provides some reassurance that the book value of JLG’s renewable assets is now relatively conservative; and 2) accounting for about a third of its renewable portfolio, the disposal represents material progress on JLG’s strategy to exit this market. We make no change to our numbers ahead of the company’s Q3 trading statement expected next week.
Companies: John Laing Group Plc
NextEnergy Solar Fund has low operating costs, low finance costs and has consistently delivered generation outperformance. We estimate that it can sustain its current level of dividend with an electricity price well below today’s price. The shares show the lowest NAV premium of all the UK renewable yieldcos and the highest yield.
Companies: Nextenergy Solar Fund
Whilst there are some bright spots, such as payments companies, which are beneficiaries of the shift to online shopping, fears about the potential impact of COVID-19 have hit valuations across much of the financial sector. The fall in Polar Capital Global Financials Trust’s (PCFT’s) NAV reflects this situation.
Companies: Polar Capital Global Fincls Trust
