Steve Brann of the CF Miton Arcturus fund shares his investment tips, including capitalising on Asia’s increasing appetite for meat over rice and vegetables
The past year has been a pretty testing one for markets, with a near run on the American banking system a stark reminder that there are no free lunches and risk can only ever be managed, not totally dismissed. The key to our approach is creating portfolios that are both diverse and contain non-correlated themes, so that we achieve decent performance and weather different market conditions.
Three investments we currently like are the M&G Leveraged European Loan Fund (MGLELBE), a well-capitalised fund that invests selectively in leveraged loans; Macau Property Opportunities Fund (MPO:LN), a UK-listed property firm investing in the former Portuguese territory of Macau; and, among the ETFs, ETF Lean Hogs (HOGS:LN), a simple fund that essentially tracks the price of pigs, traded via futures contracts on the Chicago Mercantile Exchange.
The M&G European Leveraged Loan Fund focuses on a sector that has suffered from the dramatic de-leveraging of the banking and hedge-fund industry over the past six months. It targets senior and secured loans, which usually rank above other forms of debt, putting them among the earliest to be repaid should the issuer hit bankruptcy. During the credit crisis many of the banks and hedge funds that struggled to raise capital have been forced sellers of these loans, in turn creating an exceptional opportunity for this type of fund.
Indeed, we think that this market bottomed recently as investors priced in default rates of over 15%, when actual default rates were running at less than 1%. Looking forward, although we expect default rates to increase, we’d have to see an almost unprecedented deterioration in European economic conditions to get anywhere near a rate of 15%. This fund also enjoys secured credit lines with major British banks at some of the lowest rates in the market. This enables it to cherry-pick high-quality loans from forced or distressed sellers.
Macau Property Opportunities (MPO) is a London-listed property company that invests in the former Portuguese territory of Macau, a short ferry ride from Hong Kong and the only place where it is legal to gamble in China. In recent years, newly-built casinos have proliferated. The Venetian is the most significant of these, being the world’s third-largest building. It is capable of housing 90 747 jumbo jets. Macau has now surpassed Las Vegas in gambling revenues and the local economy is booming.
Unfortunately, being listed in London, the firm’s shares have actually fallen 25% in the past year, swept downward with other property shares listed in the UK. Yet, unlike all the others, Macau Property Opportunities has actually recorded half-yearly average increases in its underlying property net asset values of around 25%. This is an anomaly worth exploiting.
Lastly, our Lean Hogs ETF is a play on the appetites of rising middle and lower classes in Asia as they move from a rice and vegetables to eating more protein. This trend is seen in the sharp rise of US exports to countries such as China. Yet, faced with rising feed stock costs, many farmers, especially in Canada, have slaughtered non-profitable herds, reducing the supply of pigs. As such, lean hog prices are set to surge and won’t continue to lag other agricultural commodities for much longer.