Each week, a professional investor tells us where she’d put her money now. This week: Lucy Walker, Sarasin & Partners.
Global equities have made a volatile start to 2016. The MSCI AC World index was down as much as 10% by mid-February and the Vix – a measure of the volatility of the US S&P 500 index – rose above 28. However, equity markets have since rallied.
The MSCI AC World finished the quarter up by 2.8% and the Vix has fallen to 14, below its average for the last few years. Emerging markets have led the charge, having returned a remarkable 16% in sterling terms. Meanwhile, government bond yields remain at incredibly low levels. The ten-year UK gilt yields less than 1.5%, making life difficult for investors who need income.
One area we see as helpful for obtaining higher yields is asset leasing, which involves purchasing assets and leasing them to creditworthy businesses. This provides investors with a regular income stream. If payments are not made, the underlying asset can be seized. In the Sarasin Fund of Funds, we hold SQN Asset Finance Income (LSE: SQN), which has a target dividend of more than 7% – clearly attractive in the current market. However, the most appealing aspect is that since launch the fund has had near-zero correlation to both equities and bonds, providing true diversification for a multi-asset portfolio.
Another income-orientated holding is Apax Global Alpha (LSE: APAX), which invests in private equity. The trust is managed by Apax Partners, which has more than 30 years of private-equity experience. The manager specialises in four sectors (consumer,health care, services, and technology and telecommunications) with a particular focus on digital: previous investments include Autotrader and Orange.
Apax Global Alpha differs from other listed private-equity funds because it does not invest solely in private equity, but also invests in corporate debt. The trust targets a 5% dividend – attractive for a private-equity vehicle. It aims for a total return of 12%-15% per year, so clearly has some risks. However, the fund trades on a discount to net asset value of 16%, which we believe offers a very good entry point.
A more recent addition to the Sarasin Fund of Funds is the Aurora Investment Trust (LSE: ARR). Since early 2016 the trust has been managed by Phoenix Asset Management, a firm that focuses solely on UK equities. Phoenix was co-founded in 1998 by Gary Channon, who has subsequently delivered impressive returns of 9.8% per year, compared to around 4.5% per year for the FTSE All Share. The firm’s philosophy is to buy great businesses when they are cheap, usually because of short-term issues, but where the long-term prospects are excellent.
The Phoenix UK Fund has a minimum initial subscription of £100,000, putting it out of reach for most individual investors, but Aurora is listed on the London Stock Exchange and is available to everyone. A particularly interesting aspect of the trust is its fee structure. There is no management fee. Instead, it charges a performance fee of one-third of all returns above the FTSE All Share. This is subject to a clawback if there is any underperformance over the subsequent three years. What better alignment of the manager’s and the investors’ interests could one wish for?