TB Wise Multi-Asset Income fund manager commentary H1 2018-9

Written by Tony, 02 October 2018

The fund

Share classes

There are three share classes, A, B & W.

The A share is a legacy class with higher charges. There are very few residual holders.

The B share is the standard class. The numbers quoted in this report refer to B shares.

The W share is an institutional share class, available at present only for investments over £100m.


TB Wise Multi-Asset Income (shortened to TB Wise MAI for the rest of the report) was launched in October 2005. From the start, we adopted a remit which allows us to invest in the widest possible range of assets, in whatever proportions allow us to maximise the available opportunities. For this reason, the fund continues to reside in the IA Flexible sector.

The fund’s three aims are currently the same as they were when we launched it. These are:-

  • 1)To provide an attractive level of income. The word ‘attractive’ is too imprecise to be acceptable to regulators, so our official benchmark is to produce a higher income than the CBOE All-Companies index, which is a proxy for the UK stock market. To achieve this target, we need to achieve around 3.5% per annum dividend yield at present. However, we have always had a higher rate of return in mind. In 2005, a good building society account would have paid around 4.5% after tax, and we wanted to be able to match that level of yield, so that an income investor contemplating a switch from a building society account into the fund wouldn’t have to take a cut in income. We also wanted to offer retired people a level of income that would be sufficient to live on without having to eat into their capital.
  • 2)To increase income in line with inflation or better. This target is necessary to preserve the purchasing power of the income. We have hit this target over the last thirteen years.
  • 3)To increase capital in line with inflation. We have failed to hit this target because of the large capital drawdown which happened during the global Financial Crisis of 2007-9. We have easily hit the target since 2009, but have failed as yet to recoup the full extent of the prior losses.

As at August 31st, the fund yield was 5.3%. This means that we would expect someone who invested £ 100 on that day to receive £5.30 in quarterly instalments in the following year.

The team

TB Wise MAI is managed by a company called Wise Funds, which is one of the three trading companies within the Oak Investment Partnership (the others being Evenlode Investments and Wise Investment). Our team currently consists of three fund managers, myself (Tony Yarrow), Vincent Ropers and Philip Matthews, our office manager Jo Scavuzzo-Blake, and our business development manager John Newton. Jo and Philip are recent additions to our team. Jo moved over to us from a responsible position in another company within the Partnership. Philip is well known to many from his fund management roles at Schroders, and before that Jupiter, and has been a good friend of ours for many years. These two appointments have made our team much stronger, and our succession planning is now almost complete.

Fund size

As at August 31st, the fund size was £118,745,648.


Over the six months of this report, covering March to August 2018 inclusive, TB Wise Multi-Asset Income made a total return of 1.98%. Over this time we underperformed both our benchmarks, the CBOE UK All-Companies Index, up 5.23%, and the average fund in the IA Flexible sector, up 3.10%. Over the long term, the fund’s performance continues to beat both of these benchmarks by a substantial margin.

The rest of this report will look in detail at the reasons for the fund’s indifferent recent performance, which dates back to the end of May 2017.

The value style

As managers, we adopt the ‘value’ style of investment. This involves establishing an ‘investable universe’ of what we consider to be high-grade assets. For a fund which aims to pay a high income over a long period, the definition of a ‘high-grade asset’ is one which is capable of sustaining significant payments to holders over a long period, ideally increasing them as time goes on.

However, we don’t invest in all of the assets in our universe all the time. Long experience has led us to the conclusion that the financial markets are not efficient, whatever people may tell you. The theory goes that all available news is in the market, so everyone knows everything that’s relevant to them at all times. This may be true, but what appears to happen is that investors habitually allow themselves to be excessively influenced by certain items of news, while completely ignoring others. Fashions develop, which lead to certain assets being over-valued, and others undervalued. This division of assets into ‘overvalued’ and ‘undervalued’ is of course a subjective assessment on our part, because at any time, the market price of any asset is the ‘right’ price. However, we have found that over time we can make excess returns by avoiding assets which we consider overvalued, and investing only in assets which we consider give us a ‘margin of safety’ because market fashions allow us to buy them for less than what we believe they are worth. The value style directs us to buy, sell and rebuy the same assets as their market prices fluctuate.

This rotational style is harder to operate than would appear. For one thing, assets are only cheap when most experts believe they aren’t worth investing in, and investing at those prices involves believing that our analysis of the situation is more accurate than that of most others. Also, markets are full of ‘value traps’ – assets which appear to be cheap, but aren’t, often because of serious operational problems or excessive debt.

Though the style doesn’t change, the returns it gives aren’t linear. We tend to experience periods of extreme outperformance, followed by prolonged barren spells, such as the one we are currently in.

Economic backdrop

Recently, the world economy has been growing steadily at an aggregate level, though some countries, such as the US, have been growing strongly, while others, notably Turkey, Argentina and Venezuela, have not. A growing economy is always seen as positive for financial markets, but in fact the correlation between economic growth and rising markets is much lower than imagined. Additionally, a number of political, economic and market events have been unhelpful for the fund.

Tightening monetary policy

After the Great Financial Crisis of 2007-9, the world’s central banks attempted to return the financial system to health through policies known as QE and ZIRP. ZIRP, or the Zero Interest-Rate Policy, involved cutting interest rates to zero, and occasionally below zero. The result was to bail out heavily-indebted companies, individuals and governments, while making it pointless for savers to leave cash on deposit, thus forcing them to invest in the financial markets, pushing certain asset prices up. QE was a policy of buying government bonds in huge quantity, which raised prices in those markets and made it easy for governments to borrow cheaply.

Both these policies are starting to be reversed. Interest rates are now rising in the US and the UK, making investors more nervous of holding ‘risk assets’. Unfashionable assets, the ones the fund holds, are always considered ‘risky’, so the increased anxiety in the markets has been unhelpful for the fund.

Growth and momentum investing

A view often expressed is that as we are in an era of low economic growth, it makes sense to invest in the shares of companies which can grow faster than the economies they operate in, an example being the US technology sector. The performance of growth shares has been stellar for a number of years now. The trend is well-established. Index-tracking funds have to buy ever more growth shares as they represent an ever- increasing proportion of the indices they track, and momentum investors, who like to buy what’s going up, are happy to join the party. We are now in the type of market least favourable to value investors, where expensive shares grow ever more expensive, and cheap ones ever cheaper. The most extreme example of this type of market in our experience was 1999, which was a year of serious underperformance for our style. After 1999, value outperformed the overall market for seven consecutive years, and we hope that our investors’ patience will be rewarded this time, too.

Political headwinds

Three political developments in particular have made life difficult for investors in TB Wise MAI this year. These are:

Trade wars

Whatever your view of the 44th president, or his policies, there is no doubt that the trade war he has unleashed on China has had a depressing effect on shares across Asia, and in the mining sector, both of which the fund owns.


Our imminent withdrawal from the European Union has had two adverse consequences so far. Sterling, which started falling before the vote, continued to fall afterwards and has remained low, raising costs for all the UK’s importers, including the whole of the retail sector. Second, there is a sense of high uncertainty which has caused spending and investment decisions to be deferred across the economy. The UK stock market has been weaker than most others, and the poor returns are compounded for overseas investors by currency losses. As a result, overseas investors’ exposure to UK assets is at a historically low level.

As value investors, we are drawn to cheap markets, and the UK is now one of the cheapest, with some assets outstandingly cheap. We may possibly be now at the point of maximum Brexit uncertainty, and if a workable deal emerges from the negotiations one might expect a substantial rally in sterling and some UK assets. Any known outcome, however grim, would be an improvement on the current position of complete uncertainty. However, at the time of writing, we remain in a period of deep, and deepening gloom.

A Corbyn-led Labour Government

A Labour government is a matter of concern to financial markets if only because the UK has not had a left-wing government in living memory. Labour’s top team has no experience in government, and its policies appear well-meaning but very poorly thought-out.

Of particular concern for investors in TB Wise MAI is the commitment to re-nationalise the utility companies, accompanied by rhetoric in the media about fat-cat bosses, billions of gallons of water lost through leakage, etc. We continue to own Pennon and NG, whose share prices have undoubtedly been overshadowed by the prospect of a Labour administration.

With these background headwinds in mind, it is time to take a closer look at the fund.

Recent history

TB Wise MAI experienced a period of unusually strong performance between February 2016 and the end of May 2017, during which the accumulation price rose by around 50%. A re-rating of that magnitude was bound to raise a number of our holdings beyond our estimation of their fair value, and forced us to make changes. The market of mid-2017 lacked choice in genuine value ideas. We researched new sectors, including telecoms and utilities, and made new investments in BT, Vodafone, National Grid and Pennon. All of these stocks have fallen in price since we invested. We also added to some of our existing holdings, which continued to offer value.

Today’s market is very different to that of mid-2017. Now, we see a lot of value in the TB Wise MAI portfolio, to the point where we struggle to understand why the market values some of our holdings as harshly as it does.

As a rough, subjective guide, we sub-divide the portfolio into ‘very cheap’ ‘cheap’ ‘fair value’ ‘fully valued’ and ‘expensive’. Our current view is that 55.6% of the portfolio is very cheap, 18.5% cheap, and 14.1% ‘fair value’. With 4.7% of the fund in cash, only two of the three private equity trusts, comprising 5.9% of the fund, creep over into the ‘fully valued’ category, and there is nothing that we would consider ‘expensive’.

Investment trust discounts

The value in the portfolio is reflected in the discounts in some of our investment trust holdings. Four trusts, comprising around 15% of the value of the fund, are at significant discounts, as follows:- Aberdeen Asian Income, 10.8%, Ecofin Global Utilities and Infrastructure, 13.7%, Middlefield Canadian Income, 13.4%, Blackrock World Mining, 13.7%. (source Factset). The discount means that investors value the assets in the trust in aggregate at a price well below their individual market prices, which are already low. Three of these trusts have traded above their net asset values in the past, and all are well-established and well-managed, and they all pay dividends in excess of 4.0% of the share price. We have already commented on Asia and mining, which have been affected by the US/China trade war. The Canadian stock market, and the Middlefield trust that invests in it, have been held back by the as yet unresolved trade dispute between the US and Canada.


You might wonder why anyone would continue investing in Pennon, a water company, when a Labour government is going to renationalise it. Well, it isn’t quite that simple, in our view. Pennon is a combination of South-West Water and Bournemouth Water, and it has a rapidly-growing waste management company, Viridor. Despite Labour rhetoric, Pennon is well-managed. Like all water companies, Pennon is set performance targets by Ofwat, fined if it fails to meet them, and rewarded if it does. Pennon consistently beats its targets, exceeding 30 out of 32 in the most recent period. In the hot summer of 2018, the company imposed no usage restrictions, for the 22nd consecutive year.

Pennon has just made its proposals to Ofwat for the 2020-5 charging period. Their proposals are supported by 88% of the company’s users, as well as by the consumer group Waterfuture. The proposals include an average bill in 2024-5 which is less than 1% higher than in 2020-1, investment of £1bn to enhance services and protect the environment, and the issuance of £20m of the company’s shares to its customers. If Labour decides to re-nationalise Pennon, it will have to deal with significant local resistance. Also, it isn’t possible to re-nationalise Viridor, which wasn’t a national company in the first place. A government would first have to force Pennon to demerge Viridor. Then, it would have to pay shareholders the market rate for Pennon, otherwise no one would agree to sell, and once it was known that the government was effectively a forced buyer, the share price would go up.

The whole thing is a minefield. A Labour Government – disunited, inexperienced, and with perhaps only a slim majority, would be busy enough with Brexit, and in the end might stick to easier targets such as re-nationalising the railways, as their franchises expire, and reviving the NHS.


Around 14% of TB Wise MAI is in property. The property is all commercial property, all at present in the UK, and all held through direct investments in companies and investment trusts, and none through unit trusts, which we believe are inappropriate for such an illiquid asset class.

We look for agile managements, deep sector expertise, and where we can, we buy assets at big discounts to the net values of the property assets. Three of the fund’s holdings, Palace Capital, U&I and British Land are all priced at discounts of 30% or more to their net asset values, which we believe gives us something of a valuation cushion.


Investors dislike listed construction companies, which are seen as highly cyclical, badly managed, and over-indebted, with long-term contracts undertaken on fixed, wafer-thin margins, which regular become loss-making. TB Wise MAI holds four UK construction companies, worth a total of 8.3% of the fund.

The demise of Carillion earlier this year revealed false accounting, in addition to all the negatives mentioned above, and confirmed all the shortcomings of construction as a sector to invest in. However, Carillion is a positive for the remaining construction companies in at least two ways. First, its failure has removed a large competitor which often bid for work at uncompetitive rates in order to keep cash coming in. It has also allowed the remaining companies to refuse work on the old basis of low fixed prices, which they have all separately told us they are doing. The survivors now have more work at better margins.

Of the companies in which we invest, Henry Boot goes from strength to strength, with by far the largest property development book the company has ever had, and elevated levels of activity in Hallam Land, which sells permissioned plots to house builders. Telford Homes sells relatively cheap houses in unfashionable parts of London, has an enviable record of project delivery, and several years’ worth of orders in hand. Galliford Try experienced major delays on the Aberdeen ring road, exacerbated by the bankruptcy of Carillion, one of its two joint-venture partners. However, the project is nearly complete, there is the prospect of significant compensation, there are no other legacy contracts of that nature, and the housebuilding division, Linden Homes, and the urban regeneration company are both trading strongly.


The ‘financials’ sector is a broad church, including banks, wealth managers, fund managers, stock brokers, life and general insurers. It has been a rich vein of value ideas this year, and TB Wise MAI’s weighting to the sector has grown further after the period-end, from around 17.5% to a little over 19%.

Legal & General is the fund’s biggest holding, at 5.0%, increased further to 5.4% after the period end. L&G is the UK’s largest asset manager, and the world’s 15th largest, with nearly £1 trillion in assets under management. Despite charging extremely low fees, around 0.08% per annum on average, it makes a profit of 50% on its revenues from asset management. The international investment division has been growing at a compound rate of 22% per annum since 2014.

Legal & General is the UK and US market leader in the pension de-risking market, where the insurance company takes over the liabilities of a company’s final-salary pension scheme. This market is growing because, as interest rates rise, the transaction costs are becoming more affordable for companies wishing to lay off their pension liabilities. The first half of the year was quiet for this division, with less than £1bn of new deals, but the second half will be much busier, with possibly as much as £20bn, of which the £4.4bn buyout of the British Airways pension scheme, the UK’s largest ever transaction of this type, has already been announced. L&G also has a market-leading position in workplace pensions, achieved by charging extremely low fees. In the early stages, this division was unprofitable, but it broke even earlier this year. New money will flow in faster, as the contributions increase as a percentage of salaries (from 2% in the 2017-8 tax year to 8% in the 2019-20 tax year).

The reduction in life expectancy improvement means that L&G has been over-providing for liabilities, and will enable a release of capital during the second half of this year, of the order of £400m.

To us, L&G has all the characteristics of a growth stock – except the rating. The shares trade on a price-earnings ratio below ten times, and the dividend yield is 6.0%. For a global company, with a number of market-leading positions, this would appear to be anomalous.

The fund owns two specialist insurers, Chesnara and Randall & Quilter. Chesnara started out by buying closed life insurance companies – ones that no longer write new business, of which perhaps the best known is Save & Prosper. This is an exercise in paying the right price, followed by efficient administration and client service. As time has gone on, Chesnara has begun to invest overseas (Sweden and the Netherlands) and has begun to acquire companies which write new business, reducing the need to acquire new ones as the existing ones run off. The company would benefit from higher interest rates and is already benefitting from weaker sterling. Chesnara has a stable management team, deeply committed to the dividend, which has grown every year. Despite this, the shares, which have de-rated sharply over the last couple of months, trade around the level they reached in early 2014. The dividend yield is 5.7%.

Randall & Quilter is a general insurer with two niches. One buys closed books of general insurance, and the other acts as agent between insurance brokers and reinsurers. The latter company is a major beneficiary from Brexit. Randall & Quilter’s Maltese company has licences to deal in all 27 EU countries, as well as in the UK. EU companies who may not be able to trade in the UK after Brexit, and UK companies who may not be able to trade in the EU, are beating a path to their door. Unlike many TB Wise MAI’s companies, R&Q’s share price has traded strongly, up 64% so far in 2018. However, there is no need for us to take our profits in the shares, as the company’s profits are rising at least as fast as the share price.

Consumer-facing/retailers (12.5% of the portfolio)

All the companies in this sector face a tsunami of challenges, including the rising National Living Wage, the apprenticeship levy, weak sterling, high and rising business rates, difficult weather, and most of all, the rapidly accelerating online shopping revolution, which we underestimated. This sector has caused the most damage to TB Wise MAI’s share price over the last year. In addition to the above, some of our companies have been hit by one-off factors, from which we believe they will recover.

On the announcement of its merger with Asda, shares in Sainsbury rose by around 20%, and we sold them. The merger has to pass intense regulatory scrutiny, many powerful forces oppose it, and we won’t know for at least another year whether it’s going ahead. Today, the shares trade around 1% higher than where we sold them.

Shares in Photo-me slumped in early June following a profits warning relating to their photo-booths operation in Japan. The Japanese government expected all citizens to sign up to its new ID card scheme, but the card was linked to people’s bank accounts, which caused suspicion, and the scheme was not made compulsory. Photo-me had invested in extra booths in anticipation of demand which failed to materialise. However, management moved quickly to address the situation. New booths are being sourced from China at two-thirds of the original cost. Profits have rebounded quickly - the company told us recently that their profits in Japan are already higher than a year ago. Meanwhile, the laundry business is a growth driver. Free-standing laundries are sited in supermarket car parks. Supermarkets, desperate to retain/increase footfall, are lining up to sign deals. The laundries, especially popular in France, are hugely cash-generative and repay their capital cost quickly. Photo-me has net cash of £26m, and at its current share price pays a 6.8% dividend, which the company has told us it intends to increase. It’s hard to see what would make Amazon wish to compete in any of Photo-me’s markets.

Marston’s owns high-end out-of-town pub-restaurants, neighbourhood taverns, and a rapidly growing brewing business. The company is affected by all same pressures as other retailers, apart from internet shopping. The casual dining sector has become over-served, and there has been heavy discounting and a number of failures. Marstons’ out-of-town locations have insulated them from the worst of the cost pressures, and meanwhile the ‘wet’ pubs have had a tremendous summer with the hot weather and the World Cup. The brewing business goes from strength to strength. Marstons’ balance sheet contains an unusual amount of assets for a company of its size, at £2.3bn, and an unusual amount of debt, at £1.4bn. The debt may be the reason why the shares are trading at their current distressed levels below £1.00. The net asset value per share is around £1.40. Marstons’ interest cover (the amount of times interest payments are covered by profits) is the highest in their sector. At current prices, the dividend yield is 7.5%.

While it may be true that as consumers we increasingly prefer experiences to things, we don’t believe that retail is dead. We have already seen parts of retail become commoditised (Amazon, Sports Direct, etc), though there are issues over the way in which the companies treat their staff, and increasing congestion on the roads. We are already beginning to see what tomorrow’s successful retailer will look like. It’s a company that’s good at service, responsive to the needs of its clients, offering an intelligent fusion of online and physical delivery. Next appears to us to have the formula about right, while Halfords is moving in the right direction.


It isn’t possible to give an in-depth comment on all our portfolio holdings without making the manager’s report excessively long. However, we publish a full list of holdings on our website, and are always happy to reply to queries on any aspect of the fund, ideally by email.

The last sixteen months or so has been an uncomfortable period for the fund, during which the prices of many of the assets we own have come under pressure. As value-seeking investors, we now invest in some of the most unloved sectors in a very unloved UK stock market. To date, we have not been rewarded for doing so. We underestimated the pressure on retailers, and have been punished for it, and we may also have underestimated the threat from Mr Corbyn’s Labour party to the utility sector.

It is often said that we are in the late stages of a bull market in shares, but it would be ludicrous to suggest that there is a bull market in any of the assets the fund holds, with the possible exception of Randall & Quilter.

With good, cheap-looking assets, and a dividend yield well above 5.0% per annum, we remain cautiously optimistic about TB Wise MAI’s prospects for the year ahead.

Tony Yarrow

September 2018

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