Economy and Strategy

2018 is a year that many investors will be glad to see the back of.  Wherever you were invested you, are likely to have lost funds.


Market Return
FTSE 100 -12.48%
FTA All Share -12.95%
S&P 500 -6.24%
UK Property 7.45%
UK 10 yr gilts 10.0%
US 10 yr treasuries -9.9%

Source: MSCI/Investors Chronicle/FT/Keills

It wasn’t just the amount lost that caused angst among investors, but also the at times, stomach-churning gyrations of the markets, which compounded the uneasiness.  Market volatility has continued into the New Year, with swings of over 3% up and down.  Investors seeking safety couldn’t find it in the bond markets either.  Despite the beginning of Quantitative Tightening in the USA, the benchmark 10 year bond yield fell from 3% at the start of 2018 to 2.6% at the end.  Investors were worrying about growth.  All in it’s a roller coaster of a ride.

As we go to press, the USA has moved into its longest ever period of Government shut down.  President Trump is attempting to unblock the financial levers which will enable him to deliver on one of his election pledges, the USA/Mexico wall.  We suspect that as time goes on and the Democrats are seen as preventing his ambitions, Trump may break with convention and use his mandate to exercise executive powers.

The UK is still dominated by Brexit talks and with the Prime Minister now having survived 2 votes of no confidence, one of her leadership of the party and  the other of her Government in Parliament, we suspect that we are close to the endgame; a hard Brexit.  Politicians of all hues have voiced their wish for this to be avoided but, the reality is that the Withdrawal Agreement, put before parliament for a “meaningful vote”, received a record vote against any Government in history.  Full Stop.

For the UK Government to effect a different withdrawal agreement requires someone to come up with an alternative deal in the first place and then run this past Parliament, then take it to Brussels to get 27 other countries to accept the new deal and return with an agreed form of words to be voted on.  Some are saying that a May tweaked deal will be passed on the 29th January but we can’t see a swing of over 100 members to achieve this.  We feel that the rifts are simply too great and that MP’s will simply let happen what they have already put into law, the exit of the UK from the EU on 29th March.


Books will be written about this by those more qualified than us to do so, but as we see it, the UK is at an impasse, with the danger of turning right politically through a hard Brexit, and as a result, will probably face some un-palatable consequences for much of the population.  We also believe that the country is not ready to accept Corbyn’s Labour as a Government.  Either way, we predict a strong chance that both Corbyn and May will be out of their jobs within 12 months.  We may be short sighted, but we do not get the impression current leadership are looking further than one move ahead.


Markets love predictability and hate uncertainty, particularly when we are in uncharted territory. Currently, looking at UK markets, whether it be bonds, equities or property, there is quite a lot of negativity baked into market levels.  Bond yields are almost definitely pricing-in some form of recession (remember those?).  UK equities are cheap and throwing off dividend income of 4% to 5% from strong companies.  In 2018, dividends increased by around 5% to £99.8 billion, a record level.  A further growth of 4% is expected for 2019.  That’s an attractive return.


UK real estate is delivering a rental yield of 4.90%, about the same as equities, although rents are barely growing (+0.71% rental growth according to MSCI over 2018). With many businesses continuing to postpone any business decisions until the Brexit outcome is known, demand from UK businesses for property is probably being suppressed.  Equally, there are a number of EU facing businesses which are required by business continuity concerns, to provide for part of their operations to be located in the EU.  Hence for office users, there has been a substantial uptake in demand in Paris, Dublin, Frankfurt and Munich.


Another consequence of unfinished Brexit business is the need to protect supply pipelines of various goods.  The property impact of this has been a more intensive use of warehouses and some anecdotal evidence suggests warehouses being at 90% capacity, essentially full.  This may induce a spate of warehouse construction but don’t hold your breath.  We estimate a minimum two year construction period to satisfy this excess demand by which time the supply chain may have fixed itself.  Technology has leapt ahead over the last 20 years in warehousing and procurement.  We suspect that provided an initial hiatus can be overcome, that the 90% capacity utilisation simply means expensive real estate is being used more efficiently and we expect that in the longer term, demand will fall back.


The Royal Institute of Chartered Surveyors issued a warning to its valuation members to take care when valuing retail property.  Members were asked to take all available information into account.  The issue postulated by RICS is that falling rents, falling high street sales, increasing internet penetration, anchor tenants burdened by debt failing in major shopping centres and a growing tendency to consider Company Voluntary Arrangements, all point to further pressure on rents.


Our focus continues on the longer term. We aim to select properties which will have, or are expected to, benefit from longer term demand, independent of the actual length of the lease in place.  We refer to this as the “natural home”.  With cyclical rental growth being next to nil, our strategy is to buy assets where rents are contracted to increase by modest minimum every year.


Keills Limited and its subsidiary company Magarch Limited are both authorised and regulated by the Financial Conduct Authority.  Keills is a fund manager of unauthorised Alternative Investment Funds (AIF) and following the introduction of Alternative Fund Managers’ Directive, registered as a small registered UK AIFM with the FCA in 2016.  A small registered AIFM is restricted in the size and type of funds it can manage, with a limit on funds under management of £100 million.

In May 2018, Keills took the decision to apply to the FCA to become a full scope AIFM, allowing it to manage funds in excess of £100 million.  The 6 month process involved an arduous review of Keills, its people, processes and funds managed (current and forecast).  It also required a significant uplift in regulatory capital being made available to satisfy the FCA requirements.  We are pleased to report that on 7 November 2018, Keills received confirmation from the FCA that it is permitted as a full scope AIFM to manage unauthorised Alternative Investment Funds under FRN 814513.  This is positive news for Keills and its clients, allowing all funds under management to grow and to do so within a regulatory framework.