Every unresolved problem
June 6, 2019

lain's Morning Porridge  -

"Every unresolved problem eventually creates something worse to solve it…" 

I switched on the television this morning and watched Naga sitting on the Brek-drek couch in Normandy, then a cutaway to a piper at the moment British Troops landed on Sword Beach. He was playing Highland Laddie, the same tune I wrote about on Monday, when D-Day piper Bill Millan played it as he and his commando colleagues stormed up the beach. Marvellous stuff.

Unfortunately, despite the BBC's being in France, it did not provide any insights as to why the Fiat Chrysler/Renault merger collapsed last night. President Macron was just along the road, so it's a shame Naga hadn't walked over to ask why? We know the French government and union board members voted against it… but they are only two of nine board members. Personally, I didn't understand the merger anyway…who drives a French car? Quel fromage as the French never say….

Elsewhere a credit downgrade while Trump escalates the Mexican standoff! The European Central Bank meets and has to work out how to bail out the Italian banks with more TLTROs (targetted longer-term refinancing operations) while castigating Italy for borrowing too much, and we are wondering what next..

Back in Blighty.. 

It's a tad cruel, but a few months ago I was at a meeting at the University Investment Management advisory group, and we were reviewing post-grad research proposals. One of them was a semi-serious proposal to analyze Neil Woodford's performance a fund manager; the aim would be to rate Woodford buy investments as reliable sell signals. Oh…how we giggled…

Woodford's tumble from grace may prove to be a systemic moment for the fund management industry. Other funds, set up to mimic Woodford, have also gated themselves. I would not like to be Hargreaves Lansdown or St James's when customers start to question fee arrangements and their roles directing them into Woodford funds.

The Investment Association is concerned about the reputational damage Woodford's done to the retail investment sector. (NSS Award on its way…) The FCA wants to know if Woodford broke rules capping investments in unlisted assets… Maybe not, but he clearly arbed them. It's worth remembering it was the gating of certain funds that presaged the last big crisis… just saying…

The crisis at Woodford was one of liquidity – the pace of withdrawals exceeded his ability to liquidate assets. Much the same thing happened to GAM last year when investor withdrawals following the dismissal of a fund manager effectively crushed its liquidity and removed GAM as a player.  

Both Gam and Woodford effectively made the same mistake: dressing up wholly illiquid assets as liquid ones, and that investments theoretically compliant with UCITS (Undertakings for Collective Investment in Transferable Securities) are liquid. Both of them were caught. Woodford had the extra issue that his investments were just plain bad. The liquidity illusion is a particularly dangerous one – listing a stock in Guernsey, or a bond on an obscure Danish exchange, does not make it liquid. But it might be enough to get the investor buying it to tick the box saying UCITS-compliant.

There are no liquidity guarantees - assets becomes impossible to sell under two scenarios: i) a general market shutdown, or ii) a whiff of scandal around the holder's name. For the last few months folk have been waiting for Woodford to crash. It became inevitable.

There is serious regulatory danger here – regulators are going to sniff around the Woodford wreckage and conclude current rules on investing in "illiquid" assets need to be tightened. They will congratulate themselves mightily when new rules effectively ban investments in anything except FTSE 100 stocks and bonds that can prove they are actively traded. They will hi-five themselves on a job-well-done making investment safer. 

Of course, they will also be closing financial markets to any but the largest borrowers, thus effectively killing growth across the economy. The over-hasty post-crisis regulation in 2009 did much the same thing – new bank capital rules forced banks to stop taking risk in their lending, which crushed property and development lending. Eventually we've seen new lenders emerge (and look how successful direct lending by crowd funding has been (US readers: sarcasm alert) – Lendy went into high-profile administration last week. 

SME lending is developing in some very interesting directions (including Shard's own SME lending fund, Shard Capital Partners), but removing banks from the lending markets was…unhelpful a few years back. Even less safe has been moving risk from banks to the investment management community. While banks were prepared and able to deal with default through all its stages, I doubt the fund management side is.

When do you buy illiquid assets and how should you manage them? The second part of that question is honestly: explain exactly why you are buying illiquid assets, and be honest about your expectations: they are buy and hold to maturity conviction purchases. The "why buy illiquid assets" question is far easier – you buy them because of the investment characteristics they exhibit: for instance being de-correlated from financial assets (stocks and shares), because the yield on real assets greatly exceeds the miserable quantitative easing distorted returns on liquid assets, etc. The regulators aren't so keen on that kind of thing….

The bottom line is that investors can't live (actually, plan their retirements) on "liquid assets" when bonds are returning nothing and stocks are generally so overpriced. That's why I'm focussed on real de-correlated assets in the alternatives space. Sure, it's tough when most investors dismiss them because they are illiquid, aren't rated, are complex, etc, etc, but the smart ones..well they are the smart ones. Unfortunately, the regulations demand otherwise. 

Out of time, and back to the day job, which is selling an 8 percent+ aviation asset today!

Bill Blain

Shard Capital





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lain's Morning Porridge  -

"Every unresolved problem eventually creates something worse to solve it…" 

I switched on the television this morning and watched Naga sitting on the Brek-drek couch in Normandy, then a cutaway to a piper at the moment British Troops landed on Sword Beach. He was playing Highland Laddie, the same tune I wrote about on Monday, when D-Day piper Bill Millan played it as he and his commando colleagues stormed up the beach. Marvellous stuff.

Unfortunately, despite the BBC's being in France, it did not provide any insights as to why the Fiat Chrysler/Renault merger collapsed last night. President Macron was just along the road, so it's a shame Naga hadn't walked over to ask why? We know the French government and union board members voted against it… but they are only two of nine board members. Personally, I didn't understand the merger anyway…who drives a French car? Quel fromage as the French never say….

Elsewhere a credit downgrade while Trump escalates the Mexican standoff! The European Central Bank meets and has to work out how to bail out the Italian banks with more TLTROs (targetted longer-term refinancing operations) while castigating Italy for borrowing too much, and we are wondering what next..

Back in Blighty.. 

It's a tad cruel, but a few months ago I was at a meeting at the University Investment Management advisory group, and we were reviewing post-grad research proposals. One of them was a semi-serious proposal to analyze Neil Woodford's performance a fund manager; the aim would be to rate Woodford buy investments as reliable sell signals. Oh…how we giggled…

Woodford's tumble from grace may prove to be a systemic moment for the fund management industry. Other funds, set up to mimic Woodford, have also gated themselves. I would not like to be Hargreaves Lansdown or St James's when customers start to question fee arrangements and their roles directing them into Woodford funds.

The Investment Association is concerned about the reputational damage Woodford's done to the retail investment sector. (NSS Award on its way…) The FCA wants to know if Woodford broke rules capping investments in unlisted assets… Maybe not, but he clearly arbed them. It's worth remembering it was the gating of certain funds that presaged the last big crisis… just saying…

The crisis at Woodford was one of liquidity – the pace of withdrawals exceeded his ability to liquidate assets. Much the same thing happened to GAM last year when investor withdrawals following the dismissal of a fund manager effectively crushed its liquidity and removed GAM as a player.  

Both Gam and Woodford effectively made the same mistake: dressing up wholly illiquid assets as liquid ones, and that investments theoretically compliant with UCITS (Undertakings for Collective Investment in Transferable Securities) are liquid. Both of them were caught. Woodford had the extra issue that his investments were just plain bad. The liquidity illusion is a particularly dangerous one – listing a stock in Guernsey, or a bond on an obscure Danish exchange, does not make it liquid. But it might be enough to get the investor buying it to tick the box saying UCITS-compliant.

There are no liquidity guarantees - assets becomes impossible to sell under two scenarios: i) a general market shutdown, or ii) a whiff of scandal around the holder's name. For the last few months folk have been waiting for Woodford to crash. It became inevitable.

There is serious regulatory danger here – regulators are going to sniff around the Woodford wreckage and conclude current rules on investing in "illiquid" assets need to be tightened. They will congratulate themselves mightily when new rules effectively ban investments in anything except FTSE 100 stocks and bonds that can prove they are actively traded. They will hi-five themselves on a job-well-done making investment safer. 

Of course, they will also be closing financial markets to any but the largest borrowers, thus effectively killing growth across the economy. The over-hasty post-crisis regulation in 2009 did much the same thing – new bank capital rules forced banks to stop taking risk in their lending, which crushed property and development lending. Eventually we've seen new lenders emerge (and look how successful direct lending by crowd funding has been (US readers: sarcasm alert) – Lendy went into high-profile administration last week. 

SME lending is developing in some very interesting directions (including Shard's own SME lending fund, Shard Capital Partners), but removing banks from the lending markets was…unhelpful a few years back. Even less safe has been moving risk from banks to the investment management community. While banks were prepared and able to deal with default through all its stages, I doubt the fund management side is.

When do you buy illiquid assets and how should you manage them? The second part of that question is honestly: explain exactly why you are buying illiquid assets, and be honest about your expectations: they are buy and hold to maturity conviction purchases. The "why buy illiquid assets" question is far easier – you buy them because of the investment characteristics they exhibit: for instance being de-correlated from financial assets (stocks and shares), because the yield on real assets greatly exceeds the miserable quantitative easing distorted returns on liquid assets, etc. The regulators aren't so keen on that kind of thing….

The bottom line is that investors can't live (actually, plan their retirements) on "liquid assets" when bonds are returning nothing and stocks are generally so overpriced. That's why I'm focussed on real de-correlated assets in the alternatives space. Sure, it's tough when most investors dismiss them because they are illiquid, aren't rated, are complex, etc, etc, but the smart ones..well they are the smart ones. Unfortunately, the regulations demand otherwise. 

Out of time, and back to the day job, which is selling an 8 percent+ aviation asset today!

Bill Blain

Shard Capital



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