Multi-asset opportunities are expanding whilst spot FX keeps status quo

Over the past few months, it has been very much evident that b-book market makers have been making hay.

Revenues are up, and many retail electronic brokerages have been busier than ever, albeit with existing customers, and standard, spot FX assets on a warehouse trading basis.

This has been a very vital shot in the arm for the FX business globally, largely fending off the devastation that many other business sectors have suffered as a result of the draconian closures of so many businesses globally by respective governments, and at the same time representing an end to many years of low volatility.

Volatility is up, trading is up, but the new clients are scarce, as are the diversified asset classes required in order to attract longer term, more high net worth clients.

During this period, however, some of the fund managers are continuing to add new products which tap into different investment resources and offer their clients a continually expanding range of assets in which to trade, one such example being the successful launch of Home, which will invest in homeless accommodation, mentioned here earlier this month.

It is to be followed by other launches, including the Buffettology Smaller Companies Trust, inspired by the investing philosophy of star US fund manager Warren Buffett, who is known as the Sage of Omaha.

Additionally, as FinanceFeeds reported last week, there is a continuing interest in undervalued British companies from a stock investment and trading perspective.

Some of the commentary from the City of London today debates that attributes demonstrated by businesses in niche sectors,  for example Home’s mix of yield and social purpose was appealing, however there is a growing realisation that investment trusts, sometimes seen as old-fashioned, can be a good deal in 2020.

Why are they back in vogue?

There have been very few dividends lately, and the fall from grace of fund manager Neil Woodford head the list, demonstrating that despite the plate glass image and SW1 postcodes, the long established old school tie brigade should be viewed in the same light as some of the less well thought of OTC FX firms.

FinanceFeeds has detailed this on several occasions. The FX industry should step up and go multi-asset, we have the tools to do so, available via a simple API connection. The travesty really is that Mr Woodford has got away with his misdeeds, despite the anger of Hargreaves Lansdown co-founder Peter Hargreaves who lambasted the fund, whereas an FX firm would have had its name dragged through the mud for far less serious transgression than that carried out by Woodford, especially relating to the inability to withdraw client funds!

Investment trusts therefore, which are stock market-quoted companies in their own right that own shares and other assets, can dig into reserves to provide income and are gaining popularity.

investment trusts, many of which were established in the 19th century, embody other Victorian values such as the importance of thinking long-term. Woodford filled his fund with unlisted holdings which are difficult to sell at speed. But, within an investment trust, stakes can have time to prosper.

In City jargon, an investment trust is closed-ended, meaning it has a fixed number of shares, so the managers are not forced to stage a fire sale of the underlying assets when people want their money back. Instead, investors simply sell shares in the trust.

This contrasts with managers of embattled open-ended funds, where units are created and dissolved when investors buy and sell. When a lot of people want out, assets may have to be sold in a hurry, or, as with Woodford, the fund may be frozen.

Investment trusts also offer the chance to put money into a wider range of assets than plain vanilla shares. Hg Capital, a private equity trust, backs companies that provide software to firms who need better technology to thrive.

Greencoat UK Wind supports renewable energy. The soon-to-be-launched Round Hill Music Royalty will own rights to some hits of The Beatles and The Rolling Stones, and offers a 4.5 per cent yield.

Carthew highlights Henderson Opportunities, a UK tech trust at a 19.7 per cent discount, with a yield of 3 per cent. Interactive Investor likes F&C, where the discount is 9.9 per cent. Baillie Gifford UK Growth, on a discount of 4.7 per cent and with a yield of 3.2 per cent, is less intimidating.

Jason Hollands of Bestinvest picks RIT Capital Partners, which was known as Rothschild Investment Trust, and members of this dynasty remain as shareholders and hold places on the board. Ben Newell of Investec contends that ‘skin in the game’ aligns the interests of managers and investors.

This dynamic has been gaining pace throughout the summer of 2020, and began two years ago, here in London.

In July, one of the oldest fund managers in the world, Schroders, launched Schroder Portfolios, a range of six new risk-aligned funds that follow a multi-managed, multi-asset investment approach through a combination of asset allocation and active and passive investments.

The funds, which are available on a number of platforms, aim to provide investors with the benefits of a model portfolio with the efficiencies of a unitised fund. With access to both alpha and beta, the funds are able to invest in a range of assets including investment trusts and ETFs.

The multi-manager Schroder Portfolios draw on diversified investment skills to find the best solutions for investors and combine asset allocation from Schroders, an investment committee chaired by Alex Funk, CIO at Benchmark Capital and Manager of the funds and independent fund research from Rayner Spencer Mills Research (RSMR). The portfolios are under constant and continued review by the investment committee and are formally rebalanced and reviewed on a quarterly basis.

Back in 2018, four new very large investment trusts poured into the British market, commencing from a very high capital base, which is something rarely achieved by OTC brokerages who have to often bootstrap their businesses and rely on outsourced third party infrastructure.

The four new funds were launched by well recognized major asset managers and aimed to head onto the market in the form of new investment trusts, between them raising upwards of £1 billion from investors at the outset. Shares in the funds are now traded on the London Stock Exchange and the aim was to make money for long-term investors – and, of course, the managers themselves.

Fellow city stalwart Mark Mobius, one of the architects of Britain’s very first emerging markets trust in 1989 which he managed until 2015, also launched a new fund at the same time.

The new trust had ambitious targets – annual long-term returns of between 12 and 15 per cent from a portfolio of between 20 and 30 emerging market companies. While some may say Mobius is a bit long in the tooth at 84 years of age, he has brought two emerging markets specialists with him from asset manager Franklin Templeton (where he was when launching said emerging marekts trust 29 years ago) – Carlos Hardenberg and Grzegorz Konieczny.

For Joe Bauernfreund, the Far East holds his opportunity, as his firm, Asset Value Investors (AVI) looked to raise £100million for this trust that will invest in a tight portfolio of Japanese companies.

Although Asset is not a household name, it manages an established investment trust – the £1billion global British Empire. This has outperformed peers over the past three years – a return of 76 per cent against 69 per cent for the average global growth trust – but underperformed over five.

The trust’s annual management charge is one per cent and the launch’s closing date was October 18, 2018 with share dealings commencing five days later. The trust was said to be likely to pay a dividend although there was no commitment to dividend growth at launch.

Brian Dennehy, director of investment fund scrutineer FundExpert, believed at the time that Japanese smaller companies offer investors the potential for attractive long term returns. Many companies, he said, are ‘undervalued and under-researched’, but rather than take a gamble on a new trust, he suggested investors should look at established funds. These include Baillie Gifford Japanese Smaller Companies and M&G Japan Smaller Companies, a view somewhat countered by today’s view that undervalued and under-researched company stock is worth a punt.

Lastly, Merian Chyrisalis launched a new fund managed by Richard Watts and Nick Williamson, which was operated by Merian Global Investors – Old Mutual Global Investors as was – and invest in UK unquoted companies. It hoped to make money as the businesses it buys move from private ownership through to a listing on the UK stock market.

We have the tools, let’s see the electronic brokerages go down this route!