Eventide Asset Management, LLC is a Boston-based Registered Investment Advisor and serves as the Advisor to Eventide Mutual Funds. Founded in 2008 with a vision to provide high performance values-based investments for individuals, financial advisors, and institutions, Eventide has become a leader in faith-based and socially responsible investing. Eventide is the Advisor to the Eventide Gilead Fund, the Eventide Healthcare & Life Sciences Fund, and the Eventide Multi-Asset Income Fund, and manages more than $1.6 billion in net assets.
Martin Wildy is portfolio manager of its newest fund, the Eventide Multi-Asset Income Fund. Martin has more than 10 years of experience as a portfolio manager and analyst, building sustainable portfolios, and researching companies in the tech, banking, real estate, and other sectors. His fund actively invests in income categories such as green bonds, “yieldcos”, REITs and MLPs.
I spoke with Martin on June 24.
You have managed the Eventide Multi-Asset Income Fund since its inception on July 15, 2015. The mission of the fund is to seek current income while maintaining the potential for capital appreciation. Can you elaborate on that mission and what led you to create the fund?
The fund fits within the multi-asset income category. Other firms have launched a number of funds in this growing category.
The objective of these types of funds is threefold. First, to distribute an attractive level of income to shareholders, so investors who are looking to take distributions are able to generate income on a periodic basis. Second, to allow that income stream to grow over time. The final goal is to allow for long-term capital appreciation of the investment.
The objective in launching the fund was to meet those demands. Demographically, many people are transitioning from the accumulation to the distribution phase, and it makes sense for those who are taking distributions to have an investment strategy that is better aligned with their goals. Our goal is to generate income that helps match that liability stream. The challenge in today’s environment is that traditional savings vehicles – CDs, government bonds, money-market funds or the dividends on the S&P 500 – are quite low. We have the ability, through the multi-asset structure of the fund, to expand the opportunity set of income-producing securities to try and meet those three objectives.
One thing that is unique about this fund and how we differ from some of our peers is that we employ a value-based or socially responsible overlay to all of our investments. We focus on investing in companies that we view as leaders within their industries with regard to a number of external and internal stakeholders, such as its customers, employees, employee-supply chain, environment, community and society as a whole.
The fund has returned 6.64% this year, as of June 22. That compares to 2.24% for its Morningstar benchmark, the MSCI world-allocation Index, which placed it in the 8th percentile of its peer group. Eventide uses its own benchmark, which is a multi-asset income blend of 60% MSCI All Country World Index (net) and 40% Barcap Aggregate Bond Index. That index returned 2.95% as of June 22. The fund’s performance also compares favorably to 3.14% for the S&P 500. What decisions did you make that led to that outperformance?
As a small, growing fund, we have had the benefit of additional cash coming in on a regular basis. There was a lot of volatility in the income space in the second half of last year and early this year. We have been selective as we put new capital to work and tried to buy securities when they were on sale. Part of it is the benefit of being a young, growing fund and having inflows that we are able to put to work on an ongoing basis.
We have also benefited, as have other multi-asset income funds, from a relatively benign interest rate environment. Many investors were worried that income securities were going to be negatively affected by the rate-increase cycle that the Fed embarked on in December. Because of slowdowns in the economic data recently, as well as concerns surrounding the Brexit, it looks like that is on hold for quite some time. Through this year, we have seen many of the concerns regarding higher interest rates dissipate. This has been a benefit for all types of income-producing securities.
In addition, we have invested in areas that were under very heavy selling pressure earlier in the year. We were buying into these categories as they were selling off. We had some good stock selection, and it benefited the fund as markets and those names recovered.
You are coming up on the first anniversary of your fund. Is there anything else you want to add about how the market environment has helped or hurt you during this early phase?
The biggest challenge has been, in a very low interest rate environment, to achieve a level of yield that our shareholders would deem to be attractive. We want to balance adding securities that have higher yields with being aware of the risk of reaching too far for high yield. There is an old saying that more money has been lost reaching for yield than at the point of a gun. When investors start to push too far on the yield lever and stick their necks out, they can end up taking on some unintended risks. That can leave you open to a lot of volatility, and in a very low yield environment it is a risk that we have to manage on a daily basis.
There aren’t plentiful sources of yield. It is a relatively efficient market in the sense that if something offers a very high yield there is probably a reason for that. Investors need to be wary of that temptation.
As I mentioned, we have been aided by low interest rates and the realization of markets that the interest rate path that investors had been concerned about – in terms of future rate hikes – has not materialized. A lot of the fear that had been priced into income-producing securities has come off. That has benefited our fund as well as other income focused funds.
According to the latest data from Morningstar, your fund holds approximately 36% in U.S. stocks, 23% in non-U.S. stocks and 24% in fixed income. What is your overall approach to asset allocation within your fund?
Our overall approach is to start with a top-down assessment of the different income-producing asset classes. We use a relative-valuation framework, specifically comparing asset classes relative to their own valuation history. An example is REITs; we look at how REITs are priced relative to net-asset value, relative to NAV, if they are trading at a premium or a discount, what that has looked like historically and on an FFO [funds from operations] -multiple basis. We look at how REITs are priced today and how they have been priced historically. We compare valuations across different categories and do that using a lot of different valuation measures, including looking at relative-yield opportunities.
We want to find pockets of opportunity where asset classes are trading at an attractive level relative to their own history, as well as relative to other income-producing asset classes within the broader opportunities set. The focus of the fund will lead to a greater allocation to asset classes where we are seeing relative value. We will underweight areas where we see less opportunity from a valuation perspective and where we think assets are more fully priced.
Going back to the mission of your fund, where are you looking for income in this low-yield environment?
In this environment, we are finding pockets of opportunity in certain areas of the MLP asset class. Some industrial sectors offer opportunity. We are also buying some convertible bonds – “converts.” Yieldcos have also been an area of interest.
Earlier this year we had a couple of examples of converts that sold off very dramatically. They basically were “busted.” We were not buying them for the value of the conversion. We were buying them because they had an attractive yield to maturity, as a corporate-bond surrogate.
There is also opportunity, as volatility spikes, to generate some premium income by writing options against positions in the portfolio – a covered-call strategy. Let’s say we have some securities that we think are relatively fully valued. We want to hold them at the current levels, but if they appreciate another 5% to 10%, we would be comfortable letting them go. We can write a call option with a strike price that is 5% to 10% above the current market price, and we collect a premium for doing that. The annualized yield from some of the premiums can be fairly attractive.
The other thing that we do with options is we write puts, cash-secured puts, where we keep the cash in a separate collateral account. We do that when there are names that we’ve been watching and we like the asset profile of the company. We may like the company from a management standpoint, from an ESG [environment, sustainability and governance] standpoint but we aren’t willing to pay current market prices. If that stock or security were 10% lower, we may be interested in taking a position. We can write a put option that’s 10% below the current market price, so the strike would be at a discount to the market price, and we will receive a premium. If the stock sells off, we’ll be obligated to buy it at that lower level. Presumably, since we like the company, that is a good thing. But if it doesn’t sell off we won’t buy it, but we get to keep the premium.
We have some exposure in a reinsurance fund managed by Stoneridge. It invests in catastrophe bonds and quota shares, which are slices of a reinsurer’s risk book. Having diversified exposure to insurance risk is something that’s non-correlated with financial markets. A lot of times natural disasters are also uncorrelated with each other. If you have diversified exposure to these assets, you are generating income and getting some additional diversification for the fund.
When I put the portfolio together, I’m always thinking about these different sources of income, whether it’s on the fixed-income side, in preferred stocks or in converts. On the equity side, we are trying to make sure we have diverse sources of income and are not too reliant on any specific category.
You mentioned “yieldcos,” which I realize have taken a bit of a hit lately. First off, can you define what you mean by yieldcos for the benefit of our readers? What is your allocation to them and what excites you about them?
I think of them as clean-energy MLPs. You typically have a contracted asset, such as a power-producing facility, a windfarm or a solar-power plant. It could be a hydroelectric power facility. Yieldcos typically don’t have any exposure to oil- or coal-generating power plants, but it can also include new or more efficient natural-gas-fired power plants.
Most investors may not understand yieldcos and that the projects that they own almost always have very long-term power-purchase agreements. Those agreements are, in many cases, 20 or 25 years in length. The counterparty may be a government entity, a regulated utility or some other typicaly high-quality counterparty.
You’ve got a contracted cash-flow stream coming from those power plants. Often there is not a lot of risk to the yieldcos in terms of power-price fluctuation because the contracts specify a megawatt per hour rate. There is some variability from quarter to quarter of how much power those assets generate. If you think about a windfarm, there are seasonal variations in wind and some quarters are windier than others.
However, over very long periods of time those cash flow streams are fairly predictable. If you have a number of different yieldcos, all with differing asset profiles in terms of the type of power plants they own and geographic exposures, you are diversifying that risk away. The risk of any quarter being weak due to winds in a certain part of the country is minimized.
Those contracted cash flows are relatively attractive. In this environment, many of those yieldcos are paying dividends that are relatively attractive and sustainable.
All yieldcos are not equal, so you have to do your homework. You have to be vigilant in terms of which ones are more likely to be able to sustain and hopefully increase their dividends. But it’s certainly an asset class that is relatively new, under-followed, somewhat misunderstood and tends to trade in lockstep with MLPs and the price of oil. Fundamentally, the cash-flow generating characteristics of these power plants has nothing to do with the price of oil. There are opportunities when yieldcos are on sale at attractive prices, as long as you understand what you are buying and the structure of these assets that these yieldcos own.
Is there anything in particular that investors need to be careful about with regard to yieldcos?
Most of yieldcos have a sponsoring entity, an affiliated company that is developing the projects and then giving the yieldcos the right of first offer (ROFO) to purchase these assets. This ROFO portfolio, as it’s known, is what gives the yieldco growth opportunity. As part of your due diligence, you have to assess the health of the affiliated sponsor company. I don’t call it a parent because they don’t own the yieldco. It’s not a subsidiary. But you should understand the health of that company and also what their ROFO pipeline looks like.
You should also be aware when yieldcos first became public, they were relatively expensive. Management was talking about very high rates of dividend growth and that was the primary focus in communications to investors. The way that yieldcos are able to grow their dividend stream in the future is to continue to acquire new projects. You need to be aware that if the capital markets are not cooperating and the yieldcos are trading at low price levels, it’s not an economically sound decision for them to go out raise a lot of capital at unattractive prices. They can be in a position where they are not able to raise assets to go and buy these additional power pants through the ROFO pipeline and that compromises their ability to grow dividends in the future.
You need to make an assessment on the likelihood that they’ll be able to continue to grow and buy assets in the future. You have to be comfortable from a valuation standpoint. You’ve got to ask yourself what if this yieldco is no longer able to issue capital and to go out and acquire additional assets? Am I comfortable with the price I’m paying for just the portfolio as it currently stands without any future growth?
My exposure to yieldcos is currently approximately 10% of the fund.
What is your overall exposure to MLPs and where do you see safety among them?
MLPs are another area that has sold off, although you’ve seen some recovery recently. The old premise with MLPs and what many investors bought into was that they are stable infrastructure companies that are never going to cut their dividends. They are only going to increase their dividends. Then you had some high-profile examples, Kinder Morgan being the largest one, where they did exactly that; they cut their dividends. Many investors have become much more skeptical about the space, and rightfully so.
A number of MLPs have counterparty risk through some of the exploration and production companies that are under a lot of stress because oil prices are lower. However, there are a number of very high-quality MLPs that have done a good job of insulating their portfolio from commodity-price fluctuations and risk, as well as from volume-pricing risk. Those MLPs sold off with the asset class. If you look at the biggest holders of high-quality MLPs, they tend to be ETFs and leveraged closed-end funds, which in times of pressure can be forced sellers.
For very high-quality MLPs, when the whole category is under stress, it’s a really good time for investors to pick up those names. You are not going to get the 10%-plus yield that you get from the MLPs that are under distress, but you are still getting relatively attractive yields in the 5% to 6% range. In a low-income environment, a yield in this range is stable and should continue to grow is attractive.
I have a little bit less than 5% of the fund allocated to MLPs.
How is the fund positioned relative to interest-rate risk – especially if rates rise?
If you look at where the 10-year Treasury is trading today and the yield levels that you are able to get in a number of asset classes, in many cases investors are already pricing in a higher interest rate regime. This is because many of these income-producing assets are already offering attractive spreads relative to Treasury bonds, for example, when you compare spreads today to their historical averages. In many cases, there is an opportunity to buy into some of these asset classes and be compensated for that risk, because there’s enough of a cushion. You are already being compensated for higher interest rates were that to occur.
With some of the global developments that we’ve seen recently, the likelihood is that it’s going to take longer for interest rates to rise. I would be surprised to see rates spike significantly higher in the short term.
Read more articles by Robert Huebscher
Eventide Asset Management, LLC is a Boston-based Registered Investment Advisor and serves as the Advisor to Eventide Mutual Funds. Founded in 2008 with a vision to provide high performance values-based investments for individuals, financial advisors, and institutions, Eventide has become a leader in faith-based and socially responsible investing. Eventide is the Advisor to the Eventide Gilead Fund, the Eventide Healthcare & Life Sciences Fund, and the Eventide Multi-Asset Income Fund, and manages more than $1.6 billion in net assets.
