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Borrows benefits from banking sector woes with mid cap focus

Borrows benefits from banking sector woes with mid cap focus

Eight years on, the fallout from the credit crisis is leading to strong investment opportunities for investors seeking a good income stream coupled with the potential for capital growth. That is the view of Alan Borrows, co-manager of the Seneca Global Income & Growth Trust, a multi-asset investment trust that holds direct equities as well as funds.

‘The woes of the banking system are a theme across the portfolio,’ he said. ‘Since 2008/09 we’ve seen banks withdraw from money markets amid pressure from regulators to bolster their balance sheets, and that’s given rise to opportunities for other players.’

In the middle of last year Borrows took a position in Ranger Direct Lending, a peer-to-peer lending investment trust that focuses on the small and medium-sized enterprise (SME) market and targets a 10% dividend yield.

The rise of technology has spurred the secured loans market to move increasingly online, leaving traditional high street banks unable to compete, said Borrows. Intermediate Capital Group, the FTSE 250 provider of mezzanine finance to European companies, is another of his holdings.

Distinctive among investment trusts in having a multi-asset, value-oriented approach to investing, the Seneca trust seeks to outperform three-month Libor plus 3% over the longer term, with low volatility and the prospect of income and capital growth.

Since January 2012, when it adopted this benchmark, it has achieved this, with the dividend growing by an annual 3%-5% in the past four years.

Midfield attack

Allocation to UK equities is achieved through direct equity holdings, 18 at present, of which 14 are mid caps.

‘Mid caps aren’t as well covered by the market and have significantly more potential to grow. We look for companies misunderstood by the market,’ said Borrows.

He likes house builders. ‘A lot of support is being given to the housing sector,’ he said. ‘We don’t expect UK interest rates to rise this year and there’s little scope for them to rise over the short to medium term. That’s positive for house builders.’

Exposure to asset classes other than UK equities is achieved through third-party fund managers that run active strategies in both open and closed-ended vehicles. The trust’s overseas allocation is made up of 17 funds. Its three largest positions are in European funds, followed by one Asian and one Japanese fund.

‘We’ve been progressively overweight Europe over the last 12 months or so. European companies are a big beneficiary of lower energy costs, but we hedge 68% of our euro exposure,’ said Borrows.

With ongoing charges of 1.51%, the trust is expensive relative to single-strategy funds. However, David Thomas, chief executive of Seneca Investment Managers, said: ‘Alan and I have our own liquid wealth in this trust, so we try to align ourselves as closely as possible with the trust.’

 

ADVISER VIEW

Roddy Kohn

Managing Director, Kohn Cougar

It is hard to get excited about Seneca Global Income & Growth Trust. It has all the bells and whistles you would expect and is clearly popular, but it has got too much ‘me tooism’ about it.

The fund has all the reassurance we get from seeing Santa Claus’s sleigh at Christmas but, just as Christmas throws up a lot of Santas in shopping centres, you have to wonder what is different about this particular sleigh and whether the ride will be worth it.

The trust seeks value among the medium and small-cap sectors with low volatility; and returns have been ahead of the benchmark over one, three and five years.

However, it has a whopping ongoing charge in excess of 1.5%, probably due to overseas investments being managed by third-party fund managers.

You would be better off investing in specific-country funds or looking at open-ended funds.

ANALYST VIEW

John Newlands

Head of investment companies research, Brewin Dolphin

Seneca Global Income & Growth Trust has battle-hardened investment managers and offers defensive qualities and good yield.

Seneca has strong brand identity and, being largely located in Liverpool, is distanced from the short-termism of parts of the Square Mile. I also like the trust’s moderate use of low-cost borrowings.

But the managers’ multi-asset value investing approach means the underlying portfolio will typically combine exposure to equities and bonds with such holdings as property and private equity. This approach can dampen positive returns in sharply rising markets and moderate falls under weaker conditions.

This trust is best suited to more risk-averse seekers of long-term, globally diversified total investment returns.

Finally, though of less concern to the smaller investor, I would caution that with assets of less than £100 million, the trust cannot sell large lines of stock as quickly and easily as bigger funds.

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