By Daniel Lanyon on Thursday 21 July 2016
The head of Old Mutual Global Investors’ Cirilium range of fund of funds has been buying up newly launched investment trusts in the nascent alternative credit space.
The likes of the £100m Hadrian’s Wall and £150m Honey Comb investment trust are preferable as fixed income alternatives over P2P focused trusts, according to Old Mutual Global Investors’ Paul Craig.
The past few years has seen a boom in the number of alternative credit funds and trusts that seek to give investors exposure to debt outside of the regular bank and fixed income markets. Many of these are in the P2P and marketplace lending space. Others are direct lenders to businesses, and still more in areas of speciality finance.
Craig, who runs Old Mutual’s Cirilium range of multi-asset fund of funds which total about £3bn of assets under management, is a fan of the sector. The Cirilium range includes the Old Mutual Cirilium Balanced, Old Mutual Cirilium Dynamic, Old Mutual Cirilium Moderate Old Mutual Cirilium Strategic Income and Old Mutual Cirilium Conservative funds.
The manager has one of the best records of any fund of funds managers since the aftermath of the financial crisis within the Investment Association’s various multi-asset sectors. Craig launched the range back in 2008 and they were originally called the Henderson Cirilium funds having been subsequently sold to Old Mutual Global Investors in 2014 by Henderson.
He owns stakes in three alternative credit funds across the Cirilium range. They are all closed-ended trusts listed on the London Stock Exchange. These are SQN Asset Finance, Honey Comb, and most recently, Hadrian’s Wall - which is the only new investment trust to have floated this year.
Hadrian’s Wall is targeting a yield of 6 per cent and a total return of 7-8 per cent by offering exposure to loans to UK SMEs secured by underlying assets and collateral. Loans target mid-market sized firms with annual revenue between £1m-25m.
Craig said: “prior to the financial crisis, a number of alternative style investment strategies were launched by entrepreneurs capitalising on an opportunity and this time around you are actually getting proper experienced servicing of already tried and tested opportunities that can now be accessed by private investors because the banks no longer wish to participate.”
“Hadrian’s wall is a prime example. For us as multi-managers we can look at all the new issues that come to market and we don't need to pigeonhole as to whether it is P2P or direct lending or whatever.We buy on the merits."
Many other investors in the alternative credit space have instead opted for the likes of P2P Global Investments and VPC Speciality Lending. These investment trusts offer exposure to loans originated by P2P and marketplace lending platforms such as Lending Club and Zopa. However, Craig has been reticent to venture into these as yet.
"We have been somewhat absent from the P2P space not because we think it is a bad investment class but more that it is such a new class that it is not tried and tested and we just do not know how the rating will react in less certain times. The beauty of the likes of Hadrian's Wall versus P2P is that there is a bit more granularity and because we are running diversified portfolios we are quite happy to take that concentration of credit risk within the portfolio because we don’t need the additional diversification within the portfolio.”
"The granularity of these portfolios makes it easier to calculate the net asset value (NAV) of these portfolios, Craig says, which he thinks will equal less discount sensitivity than from the likes of Hadrian’s Wall compared to P2P-focused trusts. Also, while it is hard to know what will happen with interest rates, as long as Hadrian’s Wall are able to make loans to good quality businesses, and that they are able to repay, then we can expect a return of close to 10 per cent per annum. For us that is very attractive because it is providing us with a return that is not dissimilar to equity but with far less risk than equity and very little in the way of interest rate risk.”
Another reason the manager is happy to invest in Hadrian’s Wall, he says, is that while it launched prior to the Brexit vote the investment team are still 100 per cent in cash at present. "Chances are they will require greater collateral and charge a higher rate of interest so the Brexit outcome could actually be positive for Hadrian’s Wall,” he said.
Craig does not rule out investing in the P2P focused funds and he expects the space will see continued growth a increasing number of new fund launches in the coming years.
“It is a bit like infrastructure which has grown a lot and now investors feel considerably more comfortable and tends to be valued more on a yield basis than an NAV basis. With Hadrian’s wall they have to make the loans but on the assumption they are able to make those loans then you are locking in a circa 8 per cent per annum,” Craig said.
“it is an interesting space and clearly you are going to have winners and losers. Ironically as you get more entrants it encourages others to try as well. As long as the new funds don't fail spectacularly then I can see the sector getting bigger.”
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