The banking sector has been forced by the regulator to suspend dividend payments and support the economy through this period.
Investors have again been scarred by the experience of 2008 and valuations have been impacted.
However, we are encouraged by the improvements in capital and liquidity in the entire banking system, as well as cautious lending behaviour.
We have significantly added to Paragon, a buy-to-let mortgage lender, in recent weeks, as we feel investor concerns reflect the performance of the group a decade ago when it was left exposed by its reliance on wholesale funding.
In recent years, Paragon has received a banking licence, removing this flaw in the business model, and had a much better positioned lending book entering this downturn than in the last.
Another financial holding we have added to significantly over the crisis has been Legal & General.
We are highly encouraged the board has chosen to pay its final dividend in the face of a regulatory recommendation for insurance company boards not to pay dividends unless they are certain policyholders are protected.
Its solvency capital remains robust and it can fully support the real economy throughout the current period.
Tapping into alternative income sources
As a multi-asset fund, we also have the ability to invest into other asset classes where there are some enticing income streams still available to investors.
For example, the TwentyFour Income Fund is an investment trust with a portfolio of investments in residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and collateralised loan obligations, managed by a highly respected manager.
The fund has seen its capital value fall in recent weeks, as spreads have widened in this area, and the yield on purchase of the fund was 7.2 per cent.
The economic impact of Covid-19 will remain uncertain until the various global restrictions to curb its spread have been lifted.
We are encouraged the measures taken thus far are having the desired effect. Daily death statistics have fallen globally and countries are gradually reopening for business.
We are considering the effect on the yield for this year under two scenarios.
In the first, we assume all companies that have already announced dividend cuts pay nothing for the entirety of the fund’s 2020-2021 financial year, as well as taking a prudent view on certain cyclical companies that have not yet given guidance on dividends.