Secure income – Portfolio Insight


and no expected impairment or loss; to my mind, this means the portfolio is deliver- ing in line with our investment thesis.


So, despite the crisis it is business as normal? Hitchcock: Broadly speaking, that’s right. We are inevitably focused on how the cri- sis will unfold and, as I mentioned, mar- kets have been a bit quieter in certain spaces (as expected), but ultimately are continuing to move along as we anticipated. We have a strong pipeline.


What returns can investors expect in these markets? Hitchcock: The overall aim of our Secure Income Fund is to generate an average return of Gilts plus 250bps.


Over the past number of years, we have been able to generate a return of more than 50bps to comparable assets in the publicly traded markets. In the current markets, the premium range is wider at approximately 30 to 120bps+, and with spreads north of where they were, the ability to generate strong returns to public markets has increased.


What is your modus operandi in this market? Hitchcock: Our modus operandi is to optimise portfolios for our clients and to invest in a thoughtful way that generates good long-term returns that are stable and secure. We do this through investment in a variety of private debt asset classes. This provides


more than simply the


opportunity to harvest illiquidity or com- plexity premia. It offers diversification by sector and company, and enhanced docu- mentary protection, which combine to provide through-the-life returns typically above public benchmarks. As long-term buy and hold investors we are not overly concerned about short-term fluctuations in value that are driven by wider markets. Over time, portfolios ben- efit from access to better structured


transactions and with a diversified invest- ment mix.


One of the advantages we have is that we are resourced in a way that enables us to source and manage sizeable portfolios of investments. We employ experienced sec- tor experts who can source extensively and innovate structurally (in a low risk way). Our scale and expertise means that we can invest in a range of attractive asset classes and, furthermore, analyse the rel- ative attractiveness of those investments so as to deploy monies prudently.


How are you sourcing these assets? Hitchcock: We are not driven by a particu- lar channel of origination, although there are clearly advantages of accessing the markets in certain ways. Overall, we think there are advantages (and disadvantages) with each of different approaches. How- ever, since our fundamental driver is see- ing the widest possible universe of oppor- tunity, to allow us to be selective in deployment, we are channel agnostic. We believe there are three principal meth- ods of investment sourcing: i) agents (e.g. banks)/advisers, ii) sponsors/advisers, and iii) direct (borrower).


In various ways, the methods of sourcing are not independent and market partici- pants overplay the channel argument. Some of our competitors focus on direct origination because they believe it achieves larger allocations - they might also argue for better structural protec- tions and returns, although practical experience suggests this is debatable. The playing-field of investors able to success- fully and consistently originate directly is further limited by the resource and expe- rience required. In reality, some of the most attractive investment spaces focus on more traditional sourcing from bank agents. Not only does this provide access to the widest possible universe of oppor- tunities but it also maintains relation- ships with the organisations that bring opportunities. As one of the largest inves- tors in our markets, the method of origi-


nation is far less important than attaining the right investment opportunities for our clients.


Laura Brown: Our scale in these markets is hugely important. A big part of our business is managing secure income assets for Legal & General’s annuity busi- ness. With that scale we have a lot of mar- ket access that allows us to get into these processes early and shape transactions.


How are you managing risk in this market? Hitchcock: We take a stringent approach to ensure we engage with all borrowers, and that we are analysing and stress test- ing the potential impacts of cycles, and looking at potential impacts on performance.


Our asset management policy requires regular analysis and reviews on all of our investments and communication with all borrowers. We are constantly monitoring our assets and ensuring that we are positioned in case action is required.


PI: Where does secure income sit in your clients’ portfolio? Amie Stow: Secure income assets are a core part of a cashflow-driven investing strategy. Many of our clients will already have lia- bility-driven investment and buy and maintain credit portfolios. Secure income strategies sit alongside those. It has long been the case that large pen- sion schemes have been able to access these assets, but we have been looking over time to extend access to a wider range of pension schemes. That has been a big part of the work that we have been doing, to package these investments into a fund that can be easily accessed.


Issue 93 | May 2020 | portfolio institutional | 31


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