When the markets are volatile, where would you typically invest if you wanted less volatility and higher returns than the stock markets? The traditional answer to this is government bonds. However, bonds no longer fulfill their traditional role as a balanced portfolio risk diversifier, says Nick Downing, founder and CEO of Overberg Asset Management. Downing suggests that investors should consider a mix of alternative asset classes for their global portfolio, and has identified six classes and investment vehicles of choice to balance equity portfolios. These are renewable energy, infrastructure, private equity, secured loans, absolute returns and a rather unusual asset, music royalties. He told BizNews about the company that Overberg has chosen as an investment vehicle that captures the appetite for streaming services. If the market gives you volatility, music royalties can be music to your ears to find balance in your portfolio with a company called BHMacro. – Linda van Tilburg
No consolation from bond markets for investors
It’s been a very, very difficult year for investors around the world. Traditionally, when things get tough, there is some comfort and support from the bond markets. Therefore, there is usually an inverse correlation between stocks and bonds. When economic growth slows, when incomes are under pressure, bonds tend to do well because when a recession hits, interest rates go down, bond yields go down, bond prices go up. In a balanced portfolio, bonds tend to offer plenty of leverage when equity markets weaken. What we’ve seen over the last 12 months or so, maybe even longer, has been the threat of rising inflation, essentially the highest inflation we’ve seen in over 40 years. Bond prices have done the exact opposite of what we were hoping for. So as inflation rises, interest rates rise, bond yields also start to rise, and bond prices are actually very bad. Even blue chip bonds, i.e. G7 government bond yields, have risen so much that bond portfolios have underperformed even the weak equity markets we’ve seen to date. So that traditional 60-40 split that you get between bonds and stocks doesn’t work anymore, or hasn’t worked, at least lately. That doesn’t mean there won’t be in the future. That’s why it’s important to find alternatives to reduce risk and balance both.
It’s time for different asset classes
We have extensive experience in investing in investment funds, investment companies listed on the London Stock Exchange, and we have been doing so for 20 years. We have an in-depth knowledge of different asset classes with access to many of them. A fairly simple technique, different asset classes that we can alternative asset classes. The ones that come to mind are absolute return strategies, renewables, infrastructure, specialist credit, private equity and, very interestingly, we’ve recently gained access to music royalties, which are doing fantastically well with the rise of streaming music.
Music is not tied to the economic cycle, and streaming is growing
With music royalties, there are many different players in the music industry. These players own the copyright to the music they post. It can be songwriters, it can be the singers themselves, often very different songwriters, producers, marketing agents and so on. So this company that we are investing in is called Hipgnosis Songs Fund. It is listed on the London Stock Exchange. It has been listed since 2018. Over the past four years, they’ve been frantically buying up music royalties from songwriters and publishers because it’s such an exciting investment opportunity. They own numerous catalogs, rights, more than 100 different music catalogs. That’s over 65,000 different recorded songs, and they make money every time one of those songs is played on the radio, used in a movie, in an ad. But about 40% of their revenue comes from streaming. With Spotify and Amazon and iTunes Tick Tock tunes being very popular with Gen Z, they make money every time someone streams one of these songs. The flow is expected to grow by 9% per year for the next ten years. By 2030, the industry will be worth more than $100 billion. The joy of music is that it is completely unrelated to this economic cycle. So the economic cycle traditionally goes through ups and downs, but no matter where we are, people will always be listening to music.
Approaching tailwinds and taking advantage of rising inflation and energy prices
We scaled a company called Green Coats UK Wind, the largest renewable energy company listed on the London Stock Exchange. It has a market capitalization of just under £3bn. He specializes in wind protection in the UK, onshore and offshore. What we really like about it is that it scores a lot on the ESG scorecard. This is a huge topic that we have identified for at least the next ten years, global decarbonization. So that’s one advantage. Another advantage is the link to inflation. Many government energy contracts and pricing are linked to inflation. If inflation rises, the rate of inflation is public enemy number one for global investors at the moment, then the contracts increase in value accordingly. There are levers to influence inflation. There’s also of course leverage on energy prices, and with the oil and energy shock that we’ve had as a result of Russia’s invasion of Ukraine, we’ve had incredible increases in energy prices across the spectrum, and of course electricity is part of that as well. . Green Tax pays a dividend yield of 5%. It is incredibly durable. People will always need electricity, and this is a hedge against inflation. In fact, if inflation were to increase by half a percent, Green Coats’ net asset value would increase even more than that. Therefore, it contributes to the rise in inflation.
How to turn off the lights with “dumb technology”
Therefore, HG capital invests in companies that provide business-critical software. One of the most important areas is regulatory compliance. It’s also in medicine, engineering, accounting, business, resource management, all these fields, and it’s what they call dumb technology. There’s nothing particularly exciting or sexy about it. It’s not like Tesla, electric cars, and those stocks that are in the stratospheric market, but maybe very overvalued. Such a stupid technique. Every time they bring in a customer, they get a monthly annual subscription to their software. With software as a service, they’ve had incredible success over the last 20 years, 15% annualized returns over 20 years, and then over ten years, because the market was even better, it’s about 17%. So, they have already put out the lights. They have a huge scale. They offer incredible deals. If they were actually a listed company and they bundled all this software as a service business and listed it, it would be the biggest IT company in Europe, but nobody really knows about it. They quietly go about this business in the background.
Secured loans targeting the biotech industry
Secured loans are specialized debt. This particular company I mentioned in the report is BioPharma Credit. They provide private loans secured by revenues, profits and cash flows, specializing in the biotech industry. Therefore, biotechnology is a fast-growing industry. It is very difficult to access the markets. As people get older and richer, they will be able to afford better diagnostics, better drugs. The biotech sector is indeed a breeding ground for new pharmaceuticals for big companies. They provide the technology; they provide new drugs for the pharmaceutical industry. How do these companies finance themselves or finance themselves in their capital structure? This is either through equity or through debt. And over the past couple of years, there has been a fairly serious move into the biotech sector. It was very exciting during COVID, but now that COVID is no longer a threat, investors and markets have looked elsewhere. Therefore, it does not make sense for these biotech companies to raise equity financing. They would prefer to get credit financing, and this is a real opportunity for a company like BioPharma Credit, which specializes in credit financing for these biotech companies. This is an incredible return for investors. BioPharma Credit has a dividend yield of 7%. It also trades at a 7.5% discount to net asset value when they borrow money through secured credit agreements with these companies.
An absolute comeback vehicle called the BH Macro that rises in troubled times
BH Macro provides investors with a unique opportunity to access Brevan Howard’s core funds. It has been closed to investors for years and years and years, but investors can buy BH Macro and gain access indirectly. BHMacro is listed on the London Stock Exchange. It thrives on turbulence and volatility in the market, so typically when markets are falling, BHMacro performs incredibly well. So, just to give you an idea of its track record since the company was incorporated in 2007. Whenever there is a big crash or bear market, BHMacro does very well. So in 2007, 2008, and then in 2009, the global financial crisis BHMacro in 2008 net asset value increased by 28%, the following year by 18%. The next major systemic risk event in global markets was the sovereign debt crisis in Europe in 2011. Remember, at the time, everyone thought the Eurozone was going to break up, and the markets did very badly because of it. BHMacro managed to return 12%. Again in 2018, BHMacro is up 12%. In 2020 it is back again by more than 20% and this year, while all markets were down due to rising inflation, energy supply shocks, Russian invasion, interest rate hikes, etc., and etc. What we’re getting from macro is a very, very good return of 14% per year to date.
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