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capital letter autumn 2016



quarter in numbers

31 80s Pound slides to 31-year low vs USD

Deutsche Bank shares fall to lowest level since mid-1980s



The US Fed keeps its benchmark interest rate unchanged for the sixth straight meeting

Central banks cut their gold purchases by 40% in comparison to the same period last year

md intro... A warm welcome to the new Creechurch Private Wealth newsletter. Every quarter, we’ll be bringing you the latest in the investment arena and, more importantly, our insights and those of our network. Since Creechurch Private Wealth was established 12 months ago, I have been travelling nationally and internationally to fully understand what clients are looking for in wealth management. It is clear that as the marketplace continues to evolve, demand for a client-focused investment business remains. Looking ahead, we are aiming to have our UK license in place next year. In the meantime, we will continue to introduce clients to our sister company Creechurch Capital, regulated in the Isle of Man. In this edition, we’ll be bringing you insights from our expert investment team at Creechurch Capital and from LendInvest – a leading London- based fintech company that Creechurch Capital supported from LendInvest’s very early days. At the core of our success is the ability to be attuned to the heartbeat of the industry, and subsequently, make relevant introductions. In line with this, we introduce an innovative new bond on the final page on this issue, which was advised by our fund consultancy, Old Park Lane. Not only is this an attractive opportunity, it also heralds another emerging investment class. It is without doubt an exciting time for Creechurch Private Wealth, and if I can be of any assistance or you have feedback to share, do get in touch.

Yours sincerely Joseph Samuel Managing Director

investment insights An extract from our Portfolio Manager’s commentary* - Miles Ashworth, Portfolio Manager at Creechurch Capital

Fixed Income: the danger of negative/low ‘safe haven’ sovereign yields We could end up with a paradoxical environment where the yields on core government debt returns represent riskier investments than non-core country bonds or higher yielding credit due to the impact of high negative skew (a common characteristic of risky assets including equity), which can mean a greater chance of extremely negative outcomes. The low or negative yield means that returns are almost entirely dependent on variations in the asset’s yield and these variations are increased by the fact that duration automatically increases as bond yields fall. Investors need to consider skew (the asymmetry of returns) and kurtosis (probability of extreme outcomes) to get a stronger understanding of the range of potential return outcomes, as volatility can understate the risk for these s upposedly ‘safe haven’ assets. Partly a reflection of post-Brexit uncertainty, the weak outlook for growth and interest rate expectation, but it’s puzzling to see 30 year Gilt yields at c.1.39% - a figure interestingly you could have picked up on 10 year Gilts prior to UK’s EU referendum. You can find similar situations across developed market sovereign debt with c. $10t of Sovereign debt now pricing a negative yield and ‘promising’ a negative nominal return. The true return is eroded further by inflation and this could become a problem if economies ever get close to their respective inflation targets or catastrophic in a low probability hyperinflation type environment. We have had warnings in the recent past in the form of bond market tantrums where yields have spiked sharply in response to changing market conditions. Firstly, the US ‘taper

tantrum’ back in 2013 when the US Fed turned off one of their quantitative easing programmes, where bond yields increased dramatically in a short space of time. More recently we had the Bund tantrum in 2015 where 10 year yields jumped from 0.16% to nearly 1% in the space of six weeks, sparked by inflationary fears and a stark warning of how disorderly the core government bond market could get. If we go back to the 10-year Gilt as an example, with a current yield around 68bps or a 10 year cumulative return of 6.8%, there is nothing that can enhance the prospective return. It’s worrying to think that core government bonds are the bedrock of a fragile investment environment. Often set as the benchmark for the risk free return that comprises part of the return for all ‘risky assets’. The possibility of volatile price movements or a disorderly unwind of artificially compressed bond yields, should be enough in itself to make investors question core sovereign bonds as risk free or safe haven assets when priced at such extreme valuations. The ramifications extend far beyond the sovereign bond complex too, as bond king William ‘Bill’ Gross highlighted ‘the primary problem lies with zero/negative interest rates; that not only do they fail to provide an easing cushion should recession come knocking at the door, but they destroy capitalism’s business models – those dependant on yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending... Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield... negative yielding bonds are not assets – they are liabilities’ and who are we to argue. *Full commentary is available on request.

our guest columnist The rise of alternative lending Christian Faes, Co-Founder & CEO, LendInvest. There weren’t many good things to emerge from the 2008 financial crisis for the global investment community. But the rise of alternative forms of finance has certainly been a highlight. Non-bank lending in particular has flourished, especially in the UK. With its roots in filling critical funding gaps and making the existing forms of financial services better, it has captured the public zeitgeist and taken hold. One especially buoyant market for non-bank lenders is the provision of finance to property investors and developers. Banks and building societies were once the backbone of property finance for investors and developers, but their share of the market has shrunk by more than a fifth since 2008. For many banks, new capital adequacy requirements and the rapidly increasing cost of compliance has translated into lower property lending volumes and cumbersome processes. Not to mention serious issues with legacy loan books that were ramped up, lending into the last cycle. For others, the memories of the credit crunch left them with little appetite or insufficient nerve to do business with property investors and housebuilders, perceived to be too high risk with too low a reward. Consequently, the worst hit are the small and medium sized property investment and development companies, to whom the cost of lending remains prohibitively high.

Although insurance companies have emerged as a new source of post-crash capital (now accounting for over 10 per cent of UK property lending) the huge amount of capital such institutions need to deploy has meant that they usually only provide large loans, financing high value projects. The baton has fallen to “alternative” or “non-bank” sources - those lenders uniformly more technology-enabled and less burdened by capital constraints and lending costs than their traditional counterparts. Progress is certainly being made. From negligible amounts in 2011, these alternative lenders now account for 14 per cent of all UK development loans – in particular, fulfilling a sizeable segment of the demand for smaller loan sizes. But demand remains high. As a country, the UK habitually fails to achieve new housebuilding targets. While this demand and supply imbalance persists, conditions remain favourable for alternative lenders in this space. But not only for borrowers has non-bank lending risen in prominence in recent years. Where yields offered from fixed income investing have floundered and equities have remained unnervingly volatile, alternative lending strategies are becoming an ever-present component of a forward-thinking investor’s portfolio.

The rise of alternative lending - continued... We founded our alternative lending business, (originally called Montello) at the height of the financial crisis to supply direct lending strategies in the UK real estate sector. We wanted to create a good product for borrowers, and an investment asset class for investors to invest in our loans. The climate demanded that business growth was slow and fundraising challenging. However, by late 2012 we had launched two discretionary managed funds for private clients and small institutions to satisfy demand for the UK real estate lending market from our fast-growing, international investor base. As the company expanded, we explored and developed new access points for investors into real estate debt, following which the company LendInvest was founded in 2013. Today, we have total assets under management of £350m and investors can access this asset class via our in-house funds offering. The Real Estate Opportunity Fund manages over £55 million on behalf of investors who have consistently returned between 7 and 10% per annum to investors since inception. This Luxembourg-domiciled SICAV is an actively managed fund which invests in property-backed lending and has invested to date in more than 60 property loans worth in the region of £100 million. Alternatively investors can access the lending market through the LendInvest Online Investment Platform which provides individual investors with the opportunity to build their own portfolio of secured loans, providing a hands-on investment experience and currently manages over £100 million of assets. By virtue of its diversifying effect, alternative finance is becoming a firmly set fixture in the standard wealth management portfolio. It challenges the disappointments of the fixed income market and the inconsistency of equities, and the best alternative lending managers are delivering consistently competitive yields to a growing client roster. Creechurch was an early adopter of alternative finance investment strategies. With a reputation for being quick to respond to market dynamics, the team at Creechurch were among the first to identify the opportunities as they stood. The team has been a great supporter too of

LendInvest and our funds in recent years, feeding back client responses to the strategies we have on offer, and helping us to construct an investment product that is both responsive and capitalises on market opportunities. The UK’s looming departure from the European Union threatens to create more uncertainty in investment and business markets over the months to come. It is our view that the UK real estate market is fundamentally strong and profoundly resilient and supplies an ideal backdrop for increased alternative lending activity. UK property has weathered storms as great as the ones that the most ardent Europhiles would predict will occur when Article 50 is eventually triggered. Incorporating it into a well-diversified investment plan with direct lending strategies from proven fund managers stands to bear a favourable outcome for any investor. Whilst we still face uncertainty on many levels, what is certain is that the alternative finance industry now has sufficient momentum to withstand these issues. The alternative finance industry and its lenders are well placed to continue making an impact on the UK lending landscape when it comes to property.

in the news Here’s a round-up of the headlines from the team...

Creechurch shortlisted for Best International Discretionary Fund Manager at the International Investment Awards Creechurch Capital was shortlisted for the Best International Discretionary Fund Manager at the International Investment Awards this October. The organisers of the awards have commented on the record-breaking number of entries this year and Creechurch are therefore delighted to receive a shortlist place. Mary Brady, Chief Operating Officer at Creechurch Capital, said:

“We’ve had some real success at awards over the past six years. The calibre of Creechurch’s fellow shortlistees was exceptional – what great company. This shortlist is testament to the quality service we offer our clients and the team is thrilled to be recognised.”

UK business magazine, Insider, looked to John Greenwood, CEO of Creechurch Capital, for advice for investors as it published its 2016 rich list When we meet people who have been successful in business, they are financially savvy but time poor and looking for someone to protect or even enhance the wealth they’ve built from their hard work. Regardless of any personal objectives, taking a long-term view on wealth management is always favourable due to movement in the markets. Removing emotion from any investment decision is paramount. That’s why financial planning should be considered as soon as someone is earning a good salary. The motivation to start managing your money should increase in proportion to the wealth you accumulate. “Every investor has an appetite for risk and we enjoy working with entrepreneurs and business owners who are often open to hearing about interesting or niche investment options to diversify their portfolio. This can range from passion investments such as art or cars to fairly unique opportunities like a niche pocket of opportunity in the property sector.”

OPL - associated consultancy business of Creechurch Private Wealth, introduces the Synthesis Corporate Bond With interest rates remaining at, or setting new historic lows, the demand for secure streams of income is as strong as ever. Despite this, the continued shrinking of bank balance sheets means that capital remains scarce. It is against this environment that the retail bond market provides a mechanism to bring these two groups together for mutual benefit. OPL has worked with a team of bond specialists to develop a solution that perfectly addresses the needs of the market. Put simply, investors want liquidity, security and a guaranteed return, while business needs capital. As such, a collateralised investment can provide the solution. Orders are currently being taken for the Synthesis investment grade (A+) one-year retail bond. The bond pays a coupon of 5% (in USD) and closes on the 28th October 2016.


Synthesis Ltd is a Luxembourg based asset management company with an extensive track record in finance and as such, this bond will be used to finance the trade delivery activities of SMEs within the commodities sector. Regardless of what’s going on in the economy, this profile of business is thriving and will always need access to finance. There is no commodity price risk. To combat illiquidity, the bond comes with a one-year term, is fully tradable on the secondary market, and will be listed on the Luxembourg Stock Exchange. To combat associated risks every borrower has to be pre-approved by Synthesis Trade Finance and also pass full KYC from Citibank. What’s more, the bond is secured on a diverse pool of trade finance loans, with a portfolio designed to return a potential yield that is considerably in excess of the coupon after any defaults. Each loan has either credit insurance or a bank letter of credit in place, meaning investors can be reassured.


CONTACT US Tel: +44 (0) 20 7529 4060 Email: LONDON 7 Old Park Lane, London W1K 1QR

MANCHESTER Blackfriars House, Parsonage, Manchester M3 2JA

Creechurch Private Wealth Limited a company registered in the United Kingdom, company no. 9597633. Registered office: 7 Old Park Lane, London W1K 1QR. Creechurch Capital Limited is licensed by the Isle of Man Financial Services Authority and registered in the Isle of Man, number 5267V. Registered Address: Knox House , 16-18 Finch Road, Douglas, Isle of Man, IM1 2PT.

Creechurch Private Wealth