Alternative credit funds offer the standout area of value in global financial markets, according Hawksmoor’s Ben Conway, who believes fixed income alternatives such as direct lending and asset leasing funds
A range of factors have prompted a more risk-off attitude in recent months and years, evident by the recent Bank of America Merrill Lynch survey of global fund managers pointing to cash levels reaching their highest point in 15 years. At the same time with the bond market in disarray and equity markets uncertain in direction, the search for yield has prompted a quandary for many investors.
For Ben Conway, who co-manages the Hawksmoor Vanbrugh and Hawksmoor Distribution funds of funds, the growing universe of alternative credit funds is offering a strong alternative to fixed income as well as an outstanding area of value across markets.
“It [alternative credit] is the one clear area of financial markets that is undervalued. In a world where most financial assets are overvalued, that is a very, very rare thing,” he said.
Alternative credit refers to the broad universe of funds that originate or buy loans from a variety of sectors underserved by either the bond market and/or by traditional banks. This can take the form of direct loans, online or marketplace loans, or those made via p2p platforms. In addition, specialist funds that invest in asset leasing, litigation funding, student debt and many more niches also fit the criteria.
The idea is that they provide loans to those struggling to find credit – but able to pay them back – with income hungry investors, often institutions who once had high fixed income allocations but have more recently moved away from bonds.
This is one reason why alternative credit funds are such good value, Conway says. In addition, it is because these firms have a speciality in a certain type of lending that is quite difficult or complex. For example, direct lending needs sophisticated technology and sometimes the contracts between parties involved can be quite complex.
However, Conway says the over-arching reason relates to the action of central banks in recent years as well as the broader cyclical trend affecting the banking system since 2008 and the global financial crisis.
“It is a clear reflection that QE is not working because it is not reaching some parts of the economy. The reason why these things are cheap is because some people are paying up for finance. Very, very loose monetary policy and the flattening of the yield curve meant in theory cheaper borrowing for all concerned but that has obviously not been happening."
"The reason why that is not happening is because there has been a completed dis-intermediation of the banks because they have massively withdrawn from this area because of what has happened post-global financial crisis, because of de-leveraging, regulatory reasons and they've de-risked their balance sheets.”
“It has left this really nice hole for specialty finance companies to plug.”
This has led, he says, to specialty organisations who have moved in to fill the gap and in turn created a whole new asset class of funds, with plenty of room for growth.
“We as investors can take advantage of it. I think it is fantastic for investors, I think there is a broader issue as to why are these returns being earned...it's basically because QE hasn’t worked.”
Conway has co-managed the Hawksmoor Vanbrugh and Hawksmoor Distribution funds, alongside Daniel Lockyer and Richard Scott, since January 2014. The funds have both returned more than their sector averages over the past three years, according to data from FE Analytics, as well as the wider UK corporate bond market and the FTSE All Share.
Performance of funds vs sectors over 3yrs
Source: FE Analytics