Speaker 0:
hello and a very warm welcome to this edition of talking markets where we're going to be focusing on alternative assets. My name is Jonathan Wilcox, global head of distribution here at Premier Might. And I'm delighted to have with me Robin Willets, who's co manager of the Premier Might and Defensive Growth Fund. So, Robin, a very warm welcome to the talking markets Armchair.

Speaker 0:
And I suppose you know, I've talked about alternative assets two or three times already. But what do we mean by alternative Asset? What does it mean to you and and sort of What do investors want to use alternative assets for?

Speaker 1:
Thanks, Jeffy. So when we're considering alternative asset classes, we're looking for investments that we believe will have a low sensitivity to the traditional asset classes of bonds and equities and also low sensitivity to the broader macro economic environment.

Speaker 1:
That's not to say there'll be lower risk than those type of investments, but they'll have different risks and different performance drivers as well. Therefore, they should provide, uh, attractive diversification benefits for investors portfolios.

Speaker 0:
OK, and so that's alternative asset in general. But I suppose specifically, you know, I know you use alternative assets in the Premier Might and Defensive Growth Fund. But you also, of course, work on the diversified range of funds as well and use alternative assets there. So what sort of alternative assets are we talking about?

Speaker 1:
Well, I think that the more established alternative asset classes would be property, hedge funds, infrastructure and private equity.

Speaker 1:
But really, uh, due to the demand for, uh, more types of alternative asset classes, we we have a much broader range to look at now. Um, they might include shipping, digital infrastructure, battery storage, energy efficiency projects and even, um, music royalties, which is one that gets a lot of press coverage.

Speaker 0:
Thanks, Robin. So,

Speaker 0:
you know, is there a tendency for alternative assets to be viewed with a broad lens by investors? And I suppose you know, you've talked about a whole bunch of stuff here. You know, property, shipping, hedge funds, battery storage, musical royalties Is your exposure to alternatives well diversified. And then when you think about these different bucket alternatives, how what what sort of drivers of return are you looking for?

Speaker 1:
I think you're right. I think there is a tendency to look at it. Alternatives as as bond proxies. But we're looking at investments which often have inflation linkage, attractive investment drivers in their own right,

Speaker 1:
and that can provide that kind of diversification. And I think examples for that might be, you know, in the battery storage sector, the attractiveness and the ability of battery projects to benefit from the intermittent nature of renewable energy, which is growing, uh, the supply and demand demand dynamics of the essential shipping industry and

Speaker 1:
the growth of streaming. So

Speaker 0:
it's quite broad spread, and you're trying to mix it all up. So you get a diversified rate of return.

Speaker 1:
Absolutely yes. We want to have a diversified range of alternative asset classes that that makes

Speaker 0:
sense now. You know, there are different ways of expressing that view, and I know investment trust is a is an area of expertise for you, Robin in particular and often falls into that alternatives wheelhouse. But we also know that investment trusts have had a terrible time in the last sort of few months and discounts, and if you wide enormously, as most of our viewers would know, so

Speaker 0:
you know, why do you think that's happened? Why why is this occurred.

Speaker 1:
Robin. Yeah, again, You're right. There's been quite a dramatic de rating of the investment company sector, especially in investment companies that invest in alternatives. I think there's a few reasons for that. I think,

Speaker 1:
you know, we've seen the fixed income market. The quite a sharp rise in interest rates and bond yields has led to some investors, especially low risk investors, leaving the alternative sector selling their shares and maybe re entering the bond market quite attractive yields the yield we haven't seen for quite a while. I think there are concerns about discount rates that are used within the valuation process of investment companies as a risk free rate rises, then discount rates rise and therefore valuations fall.

Speaker 1:
And I think we've also seen quite indiscriminate selling in the UK in the F 2 50 a lot of that index that the constituents are these type of investments, al alternative investment companies.

Speaker 1:
We believe it's been overdone and we think it's a it's a really a significant opportunity in the space at the moment,

Speaker 0:
OK, and can I just ask another question about alternatives and I want to explore a little bit more about the non correlated sort of nature of alternatives and how that works from a portfolio diversification benefit. You know, can you explain to to us and and the viewers why, for example,

Speaker 0:
investing in shipping or musical royalties just gives you that diversified, non correlated returns with your traditional equity or fixed income asset classes?

Speaker 1:
Well, I think it goes back to those idiosyncratic drivers. Um, which we're which we're looking for. We're looking for those asset classes which will be resilient to a weaker economic environment to weaker bond markets to weaker, um, equity markets as well. So we're looking for those idiosyncratic risks

Speaker 1:
that will provide us with, uh, that performance, uh, in in what we would consider all market conditions.

Speaker 0:
OK, good answer. Right now. Let's drill down deeper. Robin, William, its When you get up in the morning, you stretch your arms, you smell that first cup of coffee and you sit down at your desk.

Speaker 0:
What do you get most excited about in alternatives? What are you

Speaker 1:
looking for? Well, look, right. Look, First of all, we're looking for those asset classes which you think will provide that resilience of return in all market conditions. Um and to be honest at the moment, it it It's a really exciting time for me. I think I think there's there's a dislocation in pricing, Um,

Speaker 1:
and you know, I'm looking at share prices kind of across the sector. It's not just in particular areas, it's kind of across the sector. And I think there is a missed pricing there. I think,

Speaker 1:
um, that over time, you know, often in the investment company space, we get this dislocation in the short term. Um, and, you know, obviously we've seen what's happened in the fixed income market that's caused that that volatility. But, you know, we think the underlying asset classes are really strong and will perform well. And I think maybe an example of that example would be the kind of one of the larger sectors in the space, which would be renewable energy. Um

Speaker 1:
uh, generation. You know, that's wind solar. Um, and you know, we the share prices are trading at, you know, very high discounts to to NAV firsts. The historic norms. Um, they're you know, often the the streams are inflation linked. They're growing. They're often often government backed via subs subsidies.

Speaker 1:
The companies are trading on dividend yields.

Speaker 1:
Very attractive dividends. Kind of 6 to 8%. The dividend yields are very well covered. Um, and you know, we we think, you know, this is a mispricing. Meanwhile, we're having more and more conversations with the boards of these companies, very constructive conversations about kind of remedial work they can do for the share prices. I think

Speaker 1:
I think investment company boards have have have really improved their governance. Uh, I'm pleased to say they're being more proactive in dealing with shareholders and and providing shareholder value. And so I think going forward, there's going to be a lot of M and a consolidation. And we're seeing

Speaker 1:
companies looking to to recycle assets, to selling assets to justify their valuations and therefore reinvest in better opportunities or even just to buy back their own shares at a really creative levels for their NAV. So So

Speaker 0:
you feel there's a driver to closing the discounts coming from this sort of level, then clearly be what's going on. Yeah,

Speaker 1:
the discounts aren't sustainable. You know, the thing about investment companies is that pleasing. There's a lot of,

Speaker 1:
uh, shareholder protector built in often in, you know, when they're launched and and things like continuation votes. You know, regular continuation votes are coming up, and that gives shareholders a say on kind of the future of the companies and and and whether, you know, boards really need to to get to work on providing that value for for their

Speaker 0:
give me one more sec. I'm not gonna let you go away with this without giving another area of alternatives that you like.

Speaker 1:
Um, look, I think, uh,

Speaker 1:
I think music royalties is a really attractive sector, and I think that's been a lot. There's been a lot of about in the press. Um, it's been very high profile. That's maybe led to, you know, uh,

Speaker 1:
a fairly a fairly dramatic selloff in the share price of these companies. Uh, meanwhile, the underlying assets performing very well, and they're becoming more and more consistent in the returns. We're seeing growth in music streaming around the world. Um, I don't know, Jeffy. Maybe your Spotify account prices has gone up recently, and this all feeds into that sector. Meanwhile, the share prices are are are trading at, you know, broadly, half a valuation. Um, and I think

Speaker 1:
there's a lot of bad stuff baked into that share price. But it sounds

Speaker 0:
such such such a diversified underlying asset class music royalties, which has nothing to do with underlying equity markets. For example,

Speaker 1:
absolutely. And and, you know, we've seen

Speaker 1:
I don't know about you, but, you know, I think in in in tough economic times, I you know, I would be paying my Spotify account, uh, a subscription, Uh, in the tough times and the good times, That's how you know music will get us through that kind of Yeah,

Speaker 0:
exactly. Exactly. Let's talk about ESG. You know, do you think about ESG in the context of alternatives as well? I mean, you you mentioned solar renewables, etcetera. So that presumably part of it, But maybe just walk me through a little bit about your your ESG view.

Speaker 1:
Yeah. Look, I think investment companies have a huge part to play in the alternative sector and within the ESG. And the impact that they have, I think

Speaker 1:
especially in in the environmental space. Uh, you know, I think investment coming in, especially in this country, being pioneers in that space, you know, look at the renewables and the energy efficiency I think the the kind of the newer areas are the energy efficiency projects, which is really just making buildings more efficient. So, you know, after we've got the energy, it's not wasting it. Um, and then battery storage. I think it is going to be hugely important going forward as you get more and more, um, intermittent, um,

Speaker 1:
energies provided by the renewables. Um, And, um, so, yeah, I think that's only going to continue to grow in the space. So, um, we are very pleased to be a part of that.

Speaker 0:
I'm I'm so enjoying this chat with you, but we can't go on all afternoon or all morning as well, because, actually, we're out of time. But I must ask you one more question. So, you know, when we talked about going back to you as co manager of the premier and defensive growth fund, you know, as you said, it is. It's trying to do an absolute return type of strategy.

Speaker 0:
But the world has changed. Today you can get well. We all can get cash at four or 5% money market funds at 5%. Maybe. Is that a purer form of absolute return? now. So where does defensive growth play? In a world where cash or money markets now

Speaker 0:
produce something which they haven't done for the last 15 years?

Speaker 1:
Well, to be honest, we're able to take advantage of of that that change changing regime, those higher rates you can get from kind of lower risk investments. Um, so defensive growth fund, where we, you know, we're aiming to to make returns in excess of cash and with a consistently low return profile, rather to to, um, to equity markets.

Speaker 1:
So, you know, I've spoken about the opportunity within the alternative space, but I guess for us, uh, really the core of the portfolio, the defensive core of that portfolio is offering us those type of attractive eels you've just spoken about. Um, for example, You know what we call it the asset pool, which is really how we manage liquidity in the fund. It it it offsets some of the leverage we use some of the via, um, via some of the derivative strategies.

Speaker 1:
You know, previously, we've been sitting in cash, but now we're able to invest in short term government bonds that really attractive yields. Add to that what we call the defined investments part of the portfolio, which are low beter defensive type investments, bond like and characteristic Um, now we were very happy to to stay out of the bond market coming into the last year as we felt that the the returns didn't justify the risks. And, you know,

Speaker 1:
that worked out pretty well for us. But we now have an opportunity to dip our toe into a short dated, high credit quality corporate bonds, um, and kind of across the sectors within our investment company and and derivative universes. So if you imagine that the as a pool and the fine investments was the CO the find that really attractive baseline, uh, return,

Speaker 1:
which we can then add on alternatives which are kind of have a which require a higher return profile and then our tactical trades, which we think should be able to to take advantage of of of more dislocations and asset classes with that kind of asymmetric type, uh, return profile, you know, limited capital last but potentially high return profile.

Speaker 1:
And then finally, we're able to add what we call the protection strategies or more of our hedges or defensive strategies. um, at attractive levels because volatility has been so low

Speaker 1:
in markets. So we're able to to add those that protection at really attractive prices. We think the the opportunity for returns is as attractive as ever been since we've been involved with the fund. So we're doing. I think we're doing something very different to a money market fund and with a with a higher return

Speaker 1:
potential.

Speaker 0:
Robin Willis It's been an absolute joy to have you on talking markets today. Your enthusiasm is really quite infectious and talking about alternatives. So thank you for spending your time with us and thank you to you, too. The viewer for also taking time out of your day to view this edition of talking markets, and we very much look forward to seeing you again next time.