Each week, a professional investor tells us where she'd put her moneynow. 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.
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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?
