MPS Update
21 OCTOBER 2020
Our approach at City Asset Management is one of real return investing, where we focus on client outcomes. This means traditional private client indices have limited relevancy to us, except for our growth mandate, which is managed on a relative return basis. Most of our assets for MPS and DFM are managed on our real return approach. The basic premise is that, if we are successful in delivering the investment strategy, you as the client have a good idea where your net personal wealth should be over a reasonable time period. Our mandates on offer are to achieve CPI plus 2%, 3% and 4% over an investment cycle, which we view as a minimum of five years. To achieve this, we have followed a multi-asset approach for well over a decade.
Structuring MPS multi-asset portfolios has some challenges, particularly for those assets that do not lend themselves to platform investing. Platforms generally, and there are some exceptions, do not permit closed end fund investing. As they are market traded instruments as opposed to being executed via a daily trade call to the fund manager or more likely their ACD, they do not fit the simple scalable business model. A substantial part of our asset allocation can only be accessed through closed end funds. This has become a larger issue due to our move away from absolute return funds, which had a fair Covid 19 market crash but did not provide the level of diversification predicted. Alternative income has been the main beneficiary of our asset allocation move.
So how do I square this circle of investing within alternative income without closed ended funds or is the MPS service not a true reflection of our multi-asset views? This challenge is most apparent with our allocation to alternative income. We were early adopters of investments in this space and have watched the sector grow in recent years. Asset backed index linked investments that can potentially yield more than 5%, once fully invested, are attractive. As a total return investor, the fact that most of the return comes from income is an irrelevancy; in fact, in this environment the clarity and sustainability of the income stream should be an advantage. Thankfully, there is a solution that works on MPS; we loosely call these “access funds”.
In brief, these are specialist open ended funds. Their mandate is to invest within alternative income, which consists of the asset backed index linked income streams (infrastructure by way on an example) but, in some instances, also provides access to specialist credit and property. There is an additional layer of fees, which no one likes paying, but they provide more than just a route to market. Manager skill is present in the form of managing liquidity, diversification and, of course, asset selection. This is The value of your investments can fall and you may not get back the amount invested. Past performance is not a guide to future performance. Please see our website for more detailed information and risk warnings. You should not invest in or deal in any financial product unless you understand its nature and we recommend you seek advice. Compliance code: EN2567 a small price to pay for access to what, in my view, is still a relatively undiscovered source of alpha and can aid real return generation with limited correlation to markets. Examples of excellence in this space include Time Defensive Income Securities and the Foresight UK Infrastructure Fund.
James Calder
Research Director
The value of your investments can fall and you may not get back the amount invested. Past performance is not a guide to future performance. Please see our website for more detailed information and risk warnings. You should not invest in or deal in any financial product unless you understand its nature and we recommend you seek advice.
Compliance code: EN2567