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Profile: defining the benefits of LDI for private clients

Profile: defining the benefits of LDI for private clients

Like many wealth mangers, Peter Doherty – chief investment officer and managing partner at Tideway Investment – has in recent years grown tired of repeatedly speaking to investment consultants’ receptionists and answering machines as he sought to grow his business.

Similar to a fair number of those managers, he has vented steam on the issue in a public forum, in his case posting recently on LinkedIn, a platform generally acknowledged as a place writing goes to die.

Unlike the majority of those wealth managers, however, his outburst went finance-sector viral, gathering more than 20,000 views in a week and sparking a spirited debate among people working for some of the sector’s leading gatekeepers, including KPMG, Redingtons and AXA IM’s pensions business.

The 43 likes it gathered along the way – versus a posting history average in the single digits – suggested that the side-helping of snark he served alongside it resonated with his audience.   

‘How long will Tideway Asset Management have to wait before one of the investment consultants bothers to get in touch?’ he wrote. ‘We are a top performing emerging manager investing in the right assets for UK pension funds. Getting any response has proved elusive so far. Perhaps everyone is busy selling their own in-house solution?’

The excess of frustration may be due to the fact that, unlike a large number of managers eagerly attempting to grow their unscalable value strategies, or promoting their spin on the latest me-too investment fads, he is in charge of a strategy tailor-made for an institutional audience.

 

The fact that it has very rapidly found a dedicated following among a long tail of smaller private client accounts may be the more remarkable achievement.

Doherty joined Tideway in 2010 following a 20-year career in fixed income sales and product structuring at a who’s who of Wall Street giants: Goldman Sachs, Bear Stearns and Bank of America. He had many years earlier been a client, and had remained a friend, of company founder and former Wealth Manager cover star James Baxter.

‘We basically wanted to deliver an institutional level of bond market expertise to a private client audience,’ he says. ‘Even in an era of endless quantitative easing (QE), it can feel like a bit of a friendless asset class.

‘I joined the company in 2010 and then spent the period up to 2014/15 building up the investment and private client sides of the business and launching [the company’s Ucits products] Hybrid Capital and Bond funds.

‘What was a transformational factor for us was pension liberalisation though. James wrote a guide to defined benefit transfers which has been downloaded more than 60,000 times and we have offered advice on more than £700 million in pension assets.’

Unsurprisingly, some of that has proved to be sticky. The company currently manages close to £350 million; around £200 million of it in the company’s Hybrid Capital, Real Return and GBP Credit funds, and the remainder held for private clients, primarily within its range of unitised Horizon portfolios.

 

Doherty says that at the current rate of growth he expects the company’s total assets to surpass £500 million on fund assets of £300 million this year. The firm’s mandates have served as their own best adverts in recent years, drawing retail investors as they have climbed the performance tables.

The Real Return fund topped Citywire’s Bond – Absolute Return sector over the last year, while his Hybrid and GBP Credit funds respectively scored first and second places in the Bond – Sterling sector. 

‘Our pensions business has effectively seeded our wealth and funds business,’ he explains. The company currently has 40 employees, with six full-time asset managers and another 10 planners educated to chartered equivalence. In the last 12 months the company has made senior hires in operations and marketing and now believes it has the capacity to manage up to around £1.5 billion.

Reflecting the firm’s institutional, fixed income pedigree and pensions focus, the Horizon service is classified into three duration-based risk categories. These are targeting liability-matched returns, over zero-to-five years, five-to-10 years, and 10-year plus risk buckets, aiming for real returns of up to 2%, 5% and 6% respectively. 

‘The LDI [liability-driven investment] type approach means you end up with a strong risk buffer. You get a medium duration and some risk at the back end. [For pensions savers] that is logical and that works. And for an increasing number of discretionaries no longer able to efficiently take part in direct bond issues [as average deal sizes have ballooned this decade], it works for them as well.’

 

That means that only the company’s most aggressive portfolios feature significant equity exposure, with the Tideway equivalent of a balanced managed allocation capped at 25% in stocks and 20% in absolute returns.

Unsurprisingly, fixed income strategies occupy the bulk of Doherty’s time. Part of the company’s recent outperformance has been a willingness to position more aggressively in duration over the last 12 months, with lower risk portfolios at an average three year maturity and medium risk at six. 

Up until the sudden repricing of the last month, the far end of the curve had consistently fallen over the last year, even as many strategic bond portfolios remained heavily clustered in short duration. 

This is combined with a low level of trading activity (turnover stands at an average of 25% a year) and a willingness to hold to maturity – the sort of discipline which has been handsomely rewarded by almost 30 consecutive years of consistent yield compression.  

Doherty says he is a long term sceptic on highly bid, low-spread high yield debt, and has a strong preference for hybrid structures - contingent convertibles and an alphabet soup of other forms of subordinated debt securities. These offer a ‘complexity premium’ arbitrage for those equipped to do the risk/return, which he says has contributed the majority of recent returns.   

He cites a 2015 perpetual callable issue by Sainsbury’s, which came to market with a yield of 6.5%, as an example of a major trade sitting in the middle of the company’s sweet spot.

 

‘Cutting out all of the noise, we are getting paid that to lend to the middle of the company’s balance sheet. [Sainsbury’s] is quite a leveraged business, it has a huge property estate, so the appeal for them is that this doesn’t impinge on its leverage ratios.

‘The cash from that issue was used to pre-fund [Sainsbury’s] pension scheme. The interest is tax-deductible, so if they issue a hybrid with a 20% cash deduction that works out very well for them.’

While dubious about the value accruing to owners of mainstream sovereigns (‘if you hold a traditional 25 year Treasury the only people who might see some of value in it are the grandkids’) he is nonetheless fairly equitable about a reversal in the bull market which has prevailed for almost his entire career.

Benchmark sovereigns have crossed over some major long-term trend lines in the last week as the global recovery finally entered a unified upswing, following a decade of partial and misfiring growth. 

Ten-year Treasuries, for instance, rose to 2.7%, breaking through a downtrend unbroken since 1990. While a sharp markdown is never pleasant, Doherty points out that both equities and real estate are likely to feel much or more of the pain of a rising risk-free rate as fixed interest markets.

‘There is obviously something wrong when you are receiving a negative real return on government bonds – otherwise we would all be doing QE all the time without worrying about the consequences. But this is something that is priced in across asset classes – bonds are not going to be alone in feeling the pressure.’

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