By Daniel Lanyon on 30th November 2016
Hawksmoor’s Ben Conway is bullish on the prospects for alternative credit but is avoiding one of the fastest growing areas of the market…for now.
P2P lending and the funds that invest in the nascent market remain unattractive until they have been fully tested through a market cycle, according to Hawksmoor’s Ben Conway, a fund of funds manager.
The take up of p2p loans into multi-asset portfolios by intermediaries such as fund of fund managers, wealth managers and independent financial advisers is a key determinant in the continued growth of the asset class, most industry experts agree.
For many in the advisory or discretionary investment market, however, its rapid growth is a sign for caution rather than optimism as unexpected financial crises over the decades have periodically hit budding markets as investors rush for the door in a flight to safety.
However, in recent years many retail investors have gained small amounts of exposure through p2p bulls such as Neil Woodford, manager of the £9.3bn CF Woodford Equity Income fund and Invesco Perpetual’s Mark Barnett who manages a host of portfolios totalling more than £20bn.
This is largely made possible through the use of the UK investment trust structure, a closed-ended fund that allows for p2p loans to be held in a fund without potential liquidity problems.
The largest of these are the £860m P2P Global Investments fund and the £390m VPC Speciality Lending fund. These closed-ended portfolios buy loans that have been originated by platforms and then the income is passed on to shareholders of the funds with target yields between 5-10 per cent.
While they have broadly made decent returns, at least relative to regular fixed income, both portfolios have seen weakness in their share price relative to their net asset value. P2P Global Investments is on a discount of 25.1 per cent while VPC Speciality Lending is on a discount of 28.4 per cent which can be a problem for volatility targeting investors such as wealth managers and funds of funds.
For Conway, co-manager of the Hawksmoor Vanbrugh and Hawksmoor Distribution funds, p2p is too untested in a 2008-style market scenario, he says, although he believes the broader alternative credit spectrum to offer some of the best value in the marketplace.
“We haven't touched p2p, we haven't gone near it...yet. We have looked at them all. They haven't been through a cycle, it's too new,” he said.
“We are too conservative. They may well be good investments, I'm not saying they won’t be. However, for us they are too new and don't have track records and we are not sure yet which one has the best business model as - of course - they [funds and platforms] are all slightly different,” he added.
While Conway is reticent of the p2p marketplace, he is bullish on the prospects of other alternative credit strategies such as Ranger Direct Lending and GCP Asset Backed Lending, also both are investment trusts listed on the London Stock Exchange.
“The common thing about them is that banks are not doing them anymore, people who might be interested in it, say an insurance company, who might be interested in this type of capital, it’s too fiddly and too difficult and the size of the deals are too small. So, you get these specialty organisations like GCP, Ranger in the US who have come in to fill the gap.”
“We as investors can take advantage of it. I think it is fantastic, think there is a broader issue as to why are these returns being earned...it's basically because QE hasn’t worked.”
“Both Ranger and GCP Asset Backed Income are classic use of the investment trust and for us that is music to our ears as multi-asset investors. You just couldn't get access to these asset classes any other way.”
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