The coronavirus pandemic has brought adversity for Tavistock Investments PLC (LON:TAVI), like most companies, but it has proven the resilience of its operations and highlighted the attractions of its protected fund products.
“The only real downside for us,” says chief executive Brian Raven, “has been the inability of our financial advisers to meet clients, especially new ones, face to face.”
This effect from the pandemic on the advisory business has been the main drag on the group’s turnover in recent months, with new business roughly halved year-on-year in March, the last month of its previous financial year, and April.
Trading has, however, remained profitable for the group as a whole during the coronavirus lockdown period, underpinned by trading from the investment management arm and helped by cost-cutting, voluntary salary waivers and use of the government's furlough scheme.
“New business levels have begun to improve and it’s got the stage where they were able to meet in the garden and as of this week they can meet advisers inside if they wish. That’s a big step forward," says Raven.
Tavistock's most eye-catching source of strength during the coronavirus crisis has been its ACUMEN protection portfolios.
They have seen strong demand from many existing and new clients since their launched just over two years ago and shown their worth between January and March with falls of less than 5% compared to the 24% drop for the FTSE 100.
How the funds work
These products, where Morgan Stanley provides the algorithm and oversight, and Tavistock’s asset management team manages the investable assets, are designed to shield investors from sudden and sustained falls in market values.
A third protection portfolio, where the investable portion is focused on ESG assets, was launched in December but the algorithm works the same for all three.
Each day the algorithm determines the defined percentage of the portfolio that is investable and a percentage that needs to be held in cash. Two of the portfolios, including the ESG option, offer 90% protection, while one offers 85%. As markets become more volatile the investable proportion reduces, and when volatility reduces the reverse happens.
Employing Morgan Stanley’s protection instrument, which is in the form of a rolling put option that guarantees 90% of the highest ever net asset value of the investment, means that as market volatility rises the algorithm reduces the sum of money that is held in investable assets and increases the proportion held in cash.
So, for example in February, in the ESG portfolio for every £100 invested, around £93 out of £100 is invested, the rest is in cash, and just over £1 buys the put option. But by late March and early April as the volatility was sky-high, the £93 fell to around £11. In recent weeks, the £11 has climbed nearer £50.
While Tavistock has a high net worth business, Tavistock Private Client, the vast majority of the groups 180 or so individual advisors look after clients who are not super-rich, covering a wide base of people who have less than £250,000 of investment assets.
“People are panic-stricken by what happened in March and April and in many cases are not in a position that this sort of thing could happen again. So there’s a strong interest in the protection element,” quoth Raven.
“While a protected funds will never outperform an unprotected fund because of the cost of buying the put option, they do function as a bond surrogate in your portfolio. The bond markets are in some considerable difficulty, so as a simple surrogate there’s been demand.
“Also, for people nearing or post-retirement, rather than drawing down their pension and having money sitting in cash, which with interest rates where they are it means you’re losing money, these portfolios are targeting 4% a year in a good market with limited downside.”
The investment management business, while it’s around a quarter of revenues, provides Tavistock with a form of protection also, and allows Raven and his management team a cushion while they work on a cost review of the group as it adapts to the emerging shape of the financial services industry.
Ahead of the group’s full-year results in mid-July, Raven is sanguine.
“It’s a tread-carefully year, this one,” he says. “But looking forward, we’re developing relationships with other companies and we will probably over time make more acquisitions, but I always describe us as fussy as we look at lots but don’t make many.
“And also it’s a case of let’s see how popular the protected funds become outside of our own group as we’re only getting to the point now of promoting them to other firms so we need to see how much interest we get.”
“Overall, subject to there not being an uptick in the virus, I would anticipate new business levels will return to normal probably in the next three months. So overall I think we will emerge from it in pretty good shape.”