Opportunities in bonds, private equity, and REITs

Chris Salih (CS): Hello, I’m Chris Salih, investment research analyst at FundCalibre, and today, today I’m delighted to be joined by Richard Parfect, fund manager on the Elite Radar VT Momentum Diversified Income Fund. Richard, once again, thank you for joining us today.

Richard Parfect (RP): You’re welcome.

CS: A a lot of the perception of bonds at the moment is, is quite interesting. I think few people think that with rates falling that perhaps it moves from sort of a, an income focus to more of a capital appreciation focus. But the talk we’ve been sort of having internally is with an externally with managers hasn’t necessarily born out. I mean, what are your views on, on the bond market given what’s happening with rate cuts and, and further predictive rate cuts and those yields falling? Like are you finding, where are you trying to position and do you sort of have a view on the bond market at the moment?

RP: I don’t have a strong view clearly rates are falling or sector fall. Obviously UK is sort of leading the way there, just as we sort of led the way into the rate rises. Yeah, we we’re sticking to you, we, we, we use, you know, third party managers Yeah. As you know on the bond side, apart from obviously Gil, you know, best in Gil ourselves, but, you know, in terms of credit and emerging market debt, it’s the same names that we’ve held for, for many years. You know, the likes of Eric Hol at Moreland Sterling Extra yield you know, where where we, where, you know, that active management skillset that they bring, you know, that, that they’re, they’re quite often, you know, they’re picking out names where there’s you know, sort of unusual sort of, you know, maybe special situations to ’em.

And it’s not, you know, clearly there’s an element of, you know, playing the bond yield and, and duration, et cetera. But the, there, there’s, there’s a bit more going under the bond going on underneath the bond there with that. But that stock selection yeah, we, our, our, so duration is, is well in, in gilts our duration is 11 years. The actual, if you were to look at the dates then it’s the, the, the weighted average is 17 years, the mature, the data maturity. But obviously because we are buying, you know, relatively higher coupon gilts that brings a duration back down to about 11 years. The duration on on our credit side is well, we’ve got short duration more than the short duration. That’s about two to three years. And the, the sterling extra yield is a bit longer, sort of six to seven years. So you know, we, we, we, we, we don’t try and be too clever there. We, we just, you know, we, we we’re ask our skill set is really sort of trying to pick the decent managers and, and withhold the managers such as Eric Halton in high regard.

CS: Okay. we, we talked a bit about equities. We’ve done a bit on fixed income. We, we did touch on alternatives, but I want to sort of focus on ’em a little bit more now. We touched on ’em through the, the specialist trust you mentioned a little earlier obviously there was a strong period where these, this part of the portfolio was integral to meeting those dividend, those, those income targets during qe, et cetera. Maybe less so now. Maybe we could just talk about that bucket of the portfolio in a bit more detail, what it looks like. Have you had a few sort of recent wins that have done quite well and you know, by the same token, is there an element of similarity to bonds in that you’re also being quite paid quite well to wait in certain parts of that market as well?

RP: Yeah, we’re certainly being, certainly being well paid to wait and we are now starting to see increasing amounts of corporate activity in those, you know, sort of alternatives alternative income space. What do I mean by that? Well, it’s it is now probably the exception Mm-Hmm. <Affirmative> where it for managers to not be buying or boards to not be buying back stock. I, I, you know, share buybacks are, are, are dur go now. We’re starting to see m and a you know, strong, the, the, the, the, the strong, the weak mm-hmm, <affirmative> you know, London Metric has been very active in, in, in, in buying smaller you. So less, less you know, less well managed or less, less well positioned REITs. And yeah, it’s, you know, Darwinism is, is is really starting to, to to, to come to the fore now.

And, and that’s, that’s to be welcomed and, and it means that we are starting to see, well, we, we’ve had wins within the, within the income fund we have, we hold, we did hold RHM music royalties and hypnosis songs fund. Both of those got taken out by, by yeah, m and a at significant premiums to the the prevailing share price at the time. And yeah, we, the distress share prices, or at least share prices that imply distress are often being proved to be incorrect, you know, the wrong price. And unfortunately for the longer term, it means that some decent assets or interesting areas of assets are being taken out by, by private asset, by private investors. But that, but there is the benefit clearly for the short term sort of valid rediscovery.

More recently as well, we’ve had good outcomes from d holding in DNA two DO and modern two, which is aircraft leasing. We’ve held that for, well since it was launched, basically got very oversold and we always had strong faith in the, the the underlying asset, the A three 80 and the lessor Emirates. And as we, as we expected Emirates has bought the, the remaining five aircraft and DNA two at a, at a higher price still from what they paid in previous years for, for earlier aircraft. And that’s been a very high yielding vehicle for us, which which has been great, but it’s also delivered significant capital terms as well, given where we were, we were buying it quite aggressively in, in Covid. And we also own DNA three, which is a, a sort of a younger version. And, and so that, that’s been a, that’s been a good, good outcome and the market, market mispriced that, that asset all the way through it always got it wrong.

CS: Just, just quickly before we move on obviously it’s a huge sort of toolbox in terms of those alternatives. You’ve got all sorts of asset classes, infrastructure, you mentioned private equity. A few have, maybe just give us a quick line on REITs, ’cause there’s been quite a bit of talk about them recently. Are you seeing quite a lot opportunities in that space?

RP: Yeah, yeah. There’s opportunities there’s opportunities and frustrations. <Laugh> is probably fair to say. You know, we, we, we owe the, the, the constituents that we own don’t change very often. So for example, a WK REITs we’ve held since IPO continues to be excellently managed high level of income. Actually the shares of trading are quite a narrow discount now. I think they’re quite popular amongst the retail investor community and and with good reason. Yeah, so that, so you, that that’s, that’s a state a, a strong, stable member of our portfolio. London metric as well, you know they, as I said earlier, very active in m and a space very strong management team, strong logistics thesis there to, to their assets. We hold PRS suites, which you’ve probably seen, well, I expect you’ve seen the, the <laugh>, the shenanigans that have gone on.

We, we, we supported that that shareholder action. We were we’d already told the company the manager that we were intending to vote against the, the chairman at the next A GM for reasons that, you know, won’t be unfamiliar to, for what’s been said publicly. So so, so we, we were happy to support that action and good to see sort of resolution. We, we, we, you know, we liked the management, we liked the assets. We was just felt there was, there’s some, some improvements that could and should be taken. We weren’t particularly happy with the, the way that the contract had been been extended as well. So but that, those shares have been, they’ve been sort of trading too cheap and they’ve been, they’ve been rising in recent weeks, you know, well, so that’s, that’s been good to see.

Probably the most frustrating thing in the portfolio is because, you know, be disingenuous for me to, to suggest otherwise, it, it, we hold life science reads. So those shares are trading at significant discount, about a 58% discount in net asset value yeah, is to the, the, the, the you know, the read is too small. And it’s been a bit slow in terms of getting some of the leases signed on, on the development assets at Oxford. You know, we still think the thesis for you know demand for lab space is strong. You know, we, we, we, we, we don’t think that’s going away. But the, you know, the, the reader has certainly struggled from, from a market perception perspective, and I would expect yeah, well, I wouldn’t be surprised if <laugh> if, if action is taken in some way to address that, either by the manager themselves or by third parties. You know, we we’re seeing, we’re seeing this, this happen in the space and it’s a, it’s a fairly well known trust, so it wouldn’t be, wouldn’t be surprised.

CS: Okay. On that now, Richard, thank you very much once again for joining us today.

RP: No thanks, Chris.