Each week, a professional investor tells us where he’d put his money. This week: Alistair Evans, Symphony Fund.
The vote to leave the European Union has led to considerable market volatility. Sitting in cash may seem like a sensible ploy in times like these, but I firmly believe it is not the best option. Allocating some money to volatile instruments that are designed to benefit from this type of environment, combined with an allocation to stable and cheap income-producing assets, is a better approach.
Given that interest rates are so low, you would think that savers would be poorly compensated while borrowers would benefit from low rates. But, in reality, there is currently a total disconnect between the rates that savers are receiving and the rates being charged to borrowers.
A friend of mine requiring debt finance to expand his engineering business recently expressed amazement at the interest rates he was being quoted. Given that small and medium-sized enterprises (SMEs) are the main engines of growth in the economy, why does a solid engineering business with good cash flow and good assets have to pay interest rates in the high teens?
Much of this can be attributed to bank deleveraging in the aftermath of the 2008 financial crisis. The need to deleverage causes banks to shed assets and reduce lending, resulting in tighter borrowing constraints for businesses, especially the SME sector where it is often most required.
However, this means that opportunities have opened up for businesses to step into the gap and offer innovative solutions for both investors and borrowers, a process known as disintermediation. These businesses can offer both attractive-yielding investments and additional options for borrowers, particularly in the SME space.
Aside from peer-to-peer (P2P) lending, where this kind of opportunity currently exists, the other area worth considering is asset-backed bonds. These are backed by a loan, lease or receivable held against specified assets (which may include real estate, for example).
They are an alternative to investing in corporate debt, which is more often unsecured, and they can offer attractive returns at an acceptable level of risk. Furthermore, many are listed on a recognised stock exchange and are therefore freely transferable, meaning they can be held in an individual savings account or a self-invested personal pension.
There are two secured bonds that I currently like. Both are listed, tradable bonds on the Irish Stock Exchange and security is provided by real underlying assets. One is a longer-term bond called EM Secured notes due 2031 (ISIN: GB00BD4F3X58) that has financed one of the leading holiday-resort management groups. It has a target yield of 7% with possible upside. The other is a social finance bond which provides learning technology equipment to schools (and is therefore funded by local authorities) called ACF Secured notes due 2019 (ISIN: GB00BDD88415). This pays a 5% semi-annual coupon.
My other recommendations at the moment include Intermediate Capital Group 5% 2023 (ISIN: XS1200576699), a retail bond, and shares in hedge-fund manager Man Group (LSE: EMG) whose flagship AHL fund should benefit from increasingly volatile markets.