An update from the manager, Nalaka De Silva
In this podcast we are joined by Nalaka De Silva, manager of Aberdeen Diversified Income and Growth Trust. Here he discusses the recent strategic review of the Trust and how the strategy will evolve going forward.
Recorded on 16 November 2020.
Discrete performance (%)
|LIBOR + 5.5%||5.8||6.3||6.2|
A Including current year revenue. Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: Aberdeen Asset Managers Limited, Lipper and Morningstar. Past performance is not a guide to future results.
Interviewer: Hello, and welcome to the latest in the Aberdeen Standard Investment Trust podcast series. With me today is Nalaka De Silva Head of Private Market solutions and manager on the Aberdeen Diversified Income and Growth trust. We're going to be talking about the recent strategic review of the trust and how the strategy will evolve going forward. Welcome Nalaka, could we start with a brief introduction to the strategy and what you're trying to achieve with it?
Nalaka: Oh, hi. Thank you very much for having me. So the Aberdeen Diversified Income and Growth, Investment Trust is really there to provide a stable income and capital appreciation through a globally diversified multi asset portfolio. And we try to do that by investing in a range of assets that are less correlated to equity markets to provide that stable income and long term growth potential.
Interviewer: The Board recently undertook a strategic review on the trust. Can you talk me through the announcement from a few weeks ago and what it sets out?
Nalaka: So as I mentioned, the strategic review is really there to do two things, one, as a portfolio that spans across public and private markets, look at how we can create a portfolio that's going to be resilient in fairly uncertain times. And as you know, we've been going through a fairly volatile time for markets, still waiting to see how the US elections pan out from a policy standpoint and whether Mr Biden takes over, the Coronavirus and vaccine and how , will this continue to evolve over time. And, as a result, a portfolio like ADIG how will it react to those types of conditions going forward? So the review itself was to do two things one, could we de-risk the portfolio in a time of volatility? And how do we position ourselves to provide that stable income and growth? That required us to do a couple of things. One is look at the long term asset allocation of the portfolio, and look at how we structure our investments going forward. And finally, how do we implement in the near term?
Interviewer: Okay, and you've recently come in as lead fund manager on trust? Can you give us some insight into your background and also on ASI’s Private Markets capability?
Nalaka: Sure, so I'm responsible for private market solutions and I work with a range of clients from insurance companies to pension funds to wealth managers in building multi asset private market portfolios. I sit on the management group of broader private markets business, which is currently about £65 billion in size, as a result of the merger between Aberdeen Asset Management & Standard Life investments our platform is one of the largest private market vehicles or businesses in Europe. We have exposure to private equity infrastructure, real estate, credit and natural resources. And there’s about 230 people on the private market sides and real estate sides, working out of 21 locations globally. It gives us a fantastic platform to be able to provide investment content and access to arrange really exciting opportunities for clients.
Interviewer: Okay, and you've mentioned about how the Strategy has evolved and that markets will form a significant part of it. Could you just discuss that in a bit more detail, you know, how you're allocating between the different areas and that sort of thing? Sure.
Nalaka: So I think it starts to talk about a bit about what we did on the asset allocation changes in terms of looking at the portfolio and how it was previously positioned. We had a lot of exposure to equities, to fixed income in emerging markets and asset backed security space and a range of opportunities in what we described as special opportunities or special ops, which included things like aviation financing, shipping, music royalties, as well as private market investments, including kind of infrastructure and private equity. And looking at the portfolio today, and where we want to take it going forward it was to try and reduce risk in the portfolio in the near term. So that's taking equity risk off the table, in terms of volatility, and perhaps looking at where the emerging market exposure was taking us longer term. So what we've done is to reduce the exposure to equities, from roughly about 17%, down to 10% of the portfolio, we've taken 31% of emerging market debt and fixed income securities down to about 25%. And we're replacing that with private equity, infrastructure, real estate and credit assets on the private market size, and where we are and leading the special opportunities roughly the same around sort of 20%. So that will give a more stable portfolio going forward because of low volatility on the public market side. And where we were trying to enhance the yield of the funds will be accessing areas within the private markets, such as private credit and infrastructure, which are very stable, and cashflow generating parts of the market, where the income streams are identifiable and resilient.
Interviewer: And how are you accessing those investments? Are you are you making direct investments or you take a portfolio approach.
Nalaka: So we're taking portfolio approach to the overall portfolio is divided up into four segments, equity, credit, alternative and private markets. And within that, we're using the depth and breadth of ASI capabilities. So we have a very strong multi asset solutions team and currently expand upon their investment program within fixed income equities and credit assets, and also the diversified alternatives group. And on the private market sides so as I mentioned before, it's a big platform, investing across private equity infrastructure, real estate, credit and natural resources. So when we look at investing, we first work out where we want to target investments which markets would segment and the process of portfolio construction that takes place. And then from an implementation standpoint, we'll work with each investment teams or deal teams to execute in any one particular marketplace. So we will take direct investments and private markets, as well as investing through funds.
Interviewer: Okay, and stable, resilient dividends have obviously been a key priorities for the trust. Can you explain a little bit about how you're going to achieve that as it while also growing the NAV?
Nalaka: Sure, so the income is really important components of the portfolio. And I think it's important to perhaps distinguish in terms of the private market holdings, where that income is going to come from, and we have touched on infrastructure before the infrastructure has been building up in the portfolio, both on the public side and on the private side for some time, and we will continue to build on the core, that's investing in essential infrastructure, that supports the regional and domestic economies, things like schools, hospitals, transportation assets, energy generation, communication assets, these type of investments that's throw off a of a yield, that's very stable, and also has some form of inflation linkage, which will be helpful over the long term, and will build around that portfolio. And so the next place that we look for yield is private credit, investing or lending to businesses, where there'd be senior loans or asset backed securities or securities that are secured on the back of physical assets, where there's a high degree of protection for investors in uncertain times. And because the yield that we get from private assets is slightly higher than we would get on public assets because of the liquidity, that can generate a higher yield in the portfolio without taking a whole lot more risk. We will also get the growth coming through longer term from investments in private equity, the development of real estate assets, we're investing in mixed use and residential property assets globally, we're invested in timber, and agriculture and farmland assets. And so the growth aspects of the portfolio will be complemented from a core satellites built on the foundation of I guess, credit and infrastructure, and then private equity, real estate and natural resources around that.
Interviewer: And presumably, investing in these types of assets, create and bring the kind of unique range of risks. Can you talk a little bit about how you're managing those risks, you know, the key you have in place to look at that?
Nalaka: We look at risks on number level? So when we talk about the public and the private aspects, we look at the liquidity risk around an asset how liquid is an asset and how quickly can we sell it at the time that we want to. For private markets, it's a bit different we look at private markets as a long term hold of assets and sometimes we take time to put money into the investment, it takes time to be drawn down. You know, if we're building an asset, the time taken to plan consents, finally constructed assets until it becomes operational or stabilised, you know, takes a few years. so what we do is we try to balance that liquidity risk across the portfolio by having a range of investments at different stages. We also look at the types of risk we're taking on in the portfolio. So if we look at infrastructure, for example, these things will be typically linked to some sort of government concession on the social infrastructure sizes, schools, hospitals, transport assets, other assets might be kind of economically focused. So we look at energy. But the types of investments that we're looking for is to find an identifiable stream of revenue, which then gets distributed back to the funds, and ultimately back out to investors. And so when we build up a profile of all of the different investment types, and we've got a range of diversified alternative income sources within ADIG, we have got the likes of shipping, but areas that are in music royalties, for example, which is rather interesting fields. We've got litigation finance, which is financing court cases, and all of these providing, a cash flow back to the fund. We've also got the more traditional types of fixed income, so investing in emerging market bonds, where these are loans to governments or corporates in developing countries around the world which pay a relatively high yield. And then we've also got some lifted securities, which are backed by physical assets, called asset backed securities. And that's invested with a range of managers from commercial mortgage backed securities all the way through to different types of instruments that pay out the yield. So as we add all of those income together, that's what will prop up our dividend reserves, which will ultimately be paid out through the progressive dividend policy by the board.
Interviewer: Great. I mean, one of the benefits of the trust is clearly that it allows investors to be invested in investments if they're unable to access themselves. And can you talk a bit about how the trust can act as a diversifying for client portfolios and, and also perhaps why that's particularly important today?
Nalaka: Absolutely, I think, typically getting into particularly private markets is difficult because, one, they're not perfectly divisible, you can't invest through shares and buy, 1% of a private company, or invest in an infrastructure projects on a global basis. So having a vehicle which allows a broader audience of investors to be able to access these types of projects, or companies or assets through fund or directly make the investment trusts a really valuable vehicle for that. So you get access to things that are just not available physically or structurally can be accessed in normal forms. And then from a diversification standpoint, the range of assets that ADIG has, is quite a unique in a way. So it covers the full span of public and private, we've got risk buckets that are designed to generate returns and different points of the cycle at different points in the market. We have equities to do that, in the near term with a bit of a tilt to smaller companies, which are generating higher growth, and a bit of the tilt to infrastructure as well. Then we've got our fixed income and credit portfolios, which is diversified across a broad basket of underlying assets, whether it be government bonds, corporate bonds, and an asset backed securities. And you've got this really interesting space of alternative risk premia, as we describe it. And what we're going to be doing there is we're going to be selling down our listed infrastructure as we take on more private infrastructure, but still take on very interesting opportunities in terms of the likes of litigation finance, the music royalties, and other income generative stream which are less correlated to the equity markets. And then this big basket of private markets that we hope to grow with the portfolio in time to, including infrastructure projects, as I mentioned, private credit and exciting investments in private companies through a diversified basket of venture capital, private equity, natural resources and real estate. And that that diversification provides stability at times when markets are volatile. So not all of those assets move in the same direction. And when the world is correlated around particular times of the market, like we saw that through COVID and in 2018 or during the trade war and tech rhetoric that was going around at that point in time, and what we expect is while we will have some volatility, we will have a much smoother ride having a high proportion into these less correlated assets.
Interviewer: Great, and then just finally, what benefits have you seen from the recent phone repurchase.
Nalaka: The bond repurchase was something that the bulls are willing looking to do to provide more flexibility at the corporate level. So by taking the bonds, which are going out to 2031, and we're actually relatively expensive in terms of interest rates at about 6.25%, when there was quite a big interest charge in the fund. So one its providing more of a buffer, or more capacity to be able to provide that stable dividend, because we're not paying that expensive rate of interest. And because if the board decides that they're going to do share buybacks, which is an important part of discount management, as an investment trust, having that leverage covenants in place made it very difficult to do that. So just provide them more flexibility in discount management control and providing the propensity for a progressive dividend.
Interviewer: Great. Okay, thank you so much for those updates. And thank you to our listeners for tuning in. More details on the trust can be found at www.aberdeendiversified.co.uk. And please do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments and products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.