LetterOne LetterOne LetterOne

Market backdrop

2020 will be a year few people will easily forget. COVID-19 is leaving a lasting impact on all aspects of society: physical, psychological, social, and economic. In addition, it has had a significant impact on financial markets, which is worth reflecting on.

Financial markets are usually a step ahead of the real world. So, by the time the world went into lockdown and the global economy into a tailspin, equity markets had already lost 30% or more of their value. Then something interesting happened: a rapid shift of economic activity from the physical to the digital environment took place. Indeed, within a matter of weeks, we were working from home, communicating via Zoom, and buying everything online. So, value shifted from old economy companies, which trade on relatively low price/earnings multiples, to companies that are technology driven and trade on high price/earnings multiples. As a consequence, the S&P500, which is dominated by the latter type of companies, recovered to its pre COVID-19 level by mid-summer, despite US GDP falling more than 10% in that period. By the end of the year, when the first vaccines were approved, the index was up 16%. So, the value loss in the US equity market due to the overall drop in GDP was more than compensated by the shift of economic activity from bricks and mortar businesses to digital ones.


The above illustrates how at times of extreme stress, society often adapts quickly, develops and embraces new technologies, and generally boosts productivity.

Financial markets then present value the future gains from that improved productivity. The equity markets have also been helped by the announcements of stimulus packages by governments to help the economy recover. These measures are increasing inflation expectations and are pushing up bond yields. Financial analysts expect this will initially not affect the rise in equity markets much because the rising yields will coincide with increased economic activity. However, once this is all in the price, share prices will become more vulnerable. Consensus is this could materialise as of the second half of 2021.

Portfolio highlights

L1 Treasury’s mandate incorporates both liquidity and return objectives. Therefore, in its portfolio construction, L1 Treasury pursues a “barbell” strategy whereby a portfolio of cash and liquid securities is combined with higher-yielding, less liquid investments such as loans, funds, and real estate.

Our direct investments are predominantly credit investments, usually secured by real or financial assets. Geographically, these investments are in the UK, continental Europe, and the US.

The highest proportion of our direct investments is in UK-based financing businesses, namely:

  • We provide short to medium-term property finance to UK real estate developers and landlords through a partner firm, Octane Capital. Since its inception in 2017, when we partnered with Jonathan Samuels and his highly talented team in setting up the company, Octane Capital has extended more than 1,100 mortgage loans totalling over £850m. Over the last four years, the company has gone from strength to strength and is one of the leading firms active in the UK in bridge mortgages and specialty buy-to-let mortgages. During the last year, as the UK’s economy suffered from the effects of COVID-19, Octane Capital has increased its book of mortgages, helping borrowers to bridge this difficult period. We are very proud of what Jonathan and his team have achieved at www.octanecapital.co.uk and the contribution they have made to keep economic activity going.
    • We have also provided direct large loan financings to care homes and to the development of residential housing – two sectors where the UK Government would like to see more investments. Performance review L1 Treasury’s portfolio performed well in 2020, producing a return of 5.50% for the year, equivalent to 4.87% over one month LIBOR. All of our investment books showed positive performance, with the biggest contribution coming from our hedge fund investments and our bond portfolio. L1 Treasury’s return on assets was achieved while experiencing significant movements in its capital base: during the year, it accommodated $2.3bn of outflows in funds required by the other parts of the group and received $1.1bn returned funds from group companies. In order to manage these capital flows, L1 Treasury maintains substantial amounts of liquidity in cash and money market funds supplemented by committed borrowing facilities to ensure sufficient funds are available at all times for strategic investment opportunities.

Total assets under management stood at $4.25bn at the end of 2020, down from $5.2bn at the end of 2019.

Other activities

L1 Treasury often collaborates with other business units of the group in identifying, structuring, and executing investments either for its own portfolio or for the portfolio of another business unit.

L1 Treasury’s highly experienced global team

The L1 Treasury team is international, with employees of 12 different nationalities. The team is highly experienced and contains all the specialities that would be found in an institutional asset management company, from risk management and investment professionals to technology and infrastructure experts.

The CIO of L1 Treasury is responsible for implementing the investment strategy within the risk limits and parameters set by its Investment and Risk Committee. The committee consists of executives of the L1 group as well as non-executives.

Find out more at: www.letterone.com/our-businesses/l1-Treasury/