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Your Investment Update – Q1 2021
Portfolio implementation Hello, Mr UK Government. How can I help you today? How much would you like to receive for lending money to the UK government? This can be a tricky question to think about. A bank might approach it as follows: “Thanks for coming in today, Mr UK Government. Just to start: What’s your net annual income?” “It varies, but last year it was around £800bn.” “I see. Has COVID made it harder to plan financially?” “A little. We spent more on eating out and childcare this year.” You can probably tell that I thought about this recently. It’s crazy to think about a government going through a similar process and being told how much its borrowing would cost. Meanwhile, Mr UK Government currently pays just under -0.1% to loan money from us over 5 years. We pay the government to borrow from us!
Loaning to governments is done through the global bond market. Traditionally, government bonds would be a core part of many client portfolios, balancing the risk of cyclical equities with the lower risk and guaranteed payments of bonds. But those large allocations in traditional portfolios are now returning negative rates of interest. What do you do when faced with the prospect of a ‘low risk’ investment that’s guaranteed to lose you money? At 7IM we look elsewhere for those sort of returns, by combining different types of bonds and alternative assets. For a start, our long-term or strategic asset allocations (SAAs) are built with half an eye on this problem. We place a chunk of assets in corporate debt: loans to companies rather than governments. These pay a little more than government bonds.
Alternative assets and merger arbitrage To help balance the extra risk that comes with lending to companies, we also have built experience in and a focus on so-called alternative assets. Alternatives provide for other ways to generate dependable returns than government bonds. We focus on liquid lower-risk strategies, where we can access money quickly and easily should we need it. This year we added a strategy investing in mergers and acquisitions to all of our portfolios. Investing in companies going through a merger can be done in a way to almost guarantee a return should the merger go through (termed merger arbitrage). The risk is that the deal fails to materialise but this risk is often much lower than the return available implies.
