July 2025

“Rent seeking:  the practice of manipulating public policy as a strategy for inflating profits.”  
“…all the while, Fannie Mae continued to serve our mission – affordability, liquidity and stability.  We achieved all our main HUD affordable housing goals…”  CEO’s letter 2006 Annual Report

The mix of politics and finance makes a terrible cocktail and recently we’ve witnessed the consequences of uneconomic decisions unravelling because of a changed political or economic environment or simple customer disinterest in certain products. The term rent seeking has been around for decades, but the practice is as old as time.  Of course, in recent times no public intervention into banking exploded more spectacularly than the policy goal of extending house ownership via sub-prime mortgages backed by Government Sponsored Enterprises (GSEs) like Fannie Mae.  These organizations, with shareholders owning the profits and taxpayers owning the losses are a rent seeker’s dream, but crazy as it now seems they were all given targets of affordable housing mortgages to hit.  While those targets were hit, the outcome for the lenders, homeowners, and the taxpayer eventually were globally disastrous when the bubble collapsed.

So, it was a bit surprising early in July to hear finance officials on both sides of the Atlantic talking about the need to stimulate housing markets by encouraging intermediaries to lend more aggressively.  There is talk of reprivatizing the GSEs with the taxpayer remaining on the hook for excess losses as well.  So, with the biggest financial crisis in almost a century still within recent memory, politicians once again reach for the finance salve to bolster tepid economic growth with readily available, cheap mortgages.  Will this end up in the same place as the last time?  Very unlikely in the short term, but bankers should be mindful that while you might appear to be the good citizen today in doing your part to support the housing market, when things go south you will be wearing 100% of the blame.

Risk markets continued their slow climb higher in July while rates moved within a range on mixed economic data and constructive earnings reports in key sectors.  Of note, the UK’s fiscal position showed rapid deterioration, a factor which had limited market impact in during the month but led to considerable increased anxiety about what the Autumn budget will bring with respect to higher taxes.

European banks continued to perform as strong earnings and continued M&A talk supported equities, while credit markets were more restrained given how well spreads have performed in the past year.  The exception to this has been in individual securities subject to some form of corporate action – either acquisition, or asset disposal or refinancing – where there has been considerable outperformance on favourable news.  It’s been our exposure to such names that has resulted in the fund’s results this year and this continued in July with A shares +1.92%.  This was driven by credit contributing 225bps over the month, while equities returned -4bps on a gross basis.  Looking ahead we expect August to be calm, in line with recent months, and the run into yearend has the potential to be eventful and heavy with potential market-moving events.  We have been harvesting positions and will look to go in the Autumn with maximum flexibility in our portfolio.