Combating volatility in volatile times
Volatility has plagued the UK’s investment markets, but Luke Madden, managing director of Wellesley, tells us how his firm is fighting back
IT’S NO SECRET THAT Brexit has weighed heavily on people’s investment portfolios. The FTSE 100 ended 2018 down 12.5 per cent – its biggest decline in a decade – amid continuing political uncertainty.
Meanwhile, savings accounts and cash ISAs continue to offer extremely low interest rates.
In order to earn inflation-beating returns, investors have to balance volatility, risk and reward and many have decided that fixed-income investments offer a happy medium.
“One of the attractions of fixed-income investments is that they offer greater protection relative to equities and currencies because on the whole the returns are less volatile as the interest component is fixed in advance,” explains Luke Madden, managing director of Wellesley.
“Consumers for many years now have been frustrated by the low interest rates offered by the banks and they’re looking for something more interesting.”
In terms of volatility there is a wide range. Cash savings are right at the bottom of the scale thanks to their Financial Services Compensation Scheme (FSCS) protection, while high-risk, high-reward equities are at the top end of the scale.
According to Madden, alternative finance investments fall somewhere in the middle of the volatility scale, although he is careful to point out that there are “different shades” of risk in alternative investments as well.
“You have a peer-to-peer investment which is typically sold on a target return basis so there is an element of volatility, albeit with a higher return than FSCS-protected products,” says Madden. “Then you have fixed-interest bonds which also benefit from a higher return than FSCS-protected products but have a lower element of volatility given the fixed interest rate element.”
Over the past few years, Wellesley has pivoted away from P2P lending to focus solely on fully regulated listed bonds. This is a move that was “very much driven by our customers,” Madden says.
“They really like fixed terms, fixed rates and the benefits of holding their investments in an ISA wrapper.”
In order to deliver the returns that its customers expect, Wellesley has taken a pro-active approach to its loan portfolio.
“First and foremost we look at the underlying fundamentals of the market and while Brexit can affect those fundamentals, we believe there is a very strong demand for real houses for real people at a sensible price,” says Madden. “We believe the most liquid and lowest risk part of the market is reasonably priced unit values, relative to the local market, so that’s what we are concentrating on.”
Despite Brexit uncertainty, Madden is confident that Wellesley can counter any short-term volatility without compromising on the quality of its loan portfolio. In fact, Madden says investor demand is “very strong” and getting stronger.
“If you look beyond Brexit and back to the fundamentals of what is happening in the economy there is still not enough supply to meet demand,” says Madden. “There is still a lack of quality UK housing and the government is still not meeting its own housing targets.
“In order to meet those targets you have to build houses and there is a raft of high-quality developers who are looking for funding from a trusted partner like Wellesley.”
With Brexit uncertainty destined to continue well into the second half of the year, this will be welcome news to investors everywhere.
