Global equities plunged 8.1% in US dollar terms over the course of February, though that performance was slightly better in sterling terms (down 5.5%). There were similarly large declines across developed markets, with emerging markets outperforming, but still down 5.3% in aggregate. At the sector level, energy and materials were the worst performers, falling 14% and 10% respectively. Communication services, health care and technology were the best performing areas, although they still fell sharply.

Government bond yields were significantly lower, leading to strong performance from most major sovereign bonds. The US Treasury market saw the largest repricing, with markets expecting at least two interest rate cuts by the end of April. Investment grade credit was higher despite credit spreads widening, but the more extreme moves in high yield and emerging market debt led to both asset classes being lower over the month. The oil price fell 10% and the price of gold was almost flat. Sterling and emerging market currencies were lower over the month as the Japanese yen affirmed its safe-haven status by strengthening slightly.

The spread of the novel coronavirus (COVID-19) led to significant repricing of risk across most asset classes. While the VIX ‘fear’ index rose to its highest level since 2015, investors sought the safety of government bonds, driving yields sharply lower. The 10-year US Treasury yield made a new record low, ending the month at 1.15%. UK gilt and German bund yields also moved back towards historic lows. Credit spreads moved sharply wider, with US high yield debt now offering yields on average 5% in excess of the equivalent government bond. Equity valuations fell back from their cycle highs but remained in expensive territory relative to history.

COVID-19 has subsequently spread around the globe, with stringent containment measures aimed at limiting its transmission deployed on a pan-global basis. The twin shocks to both global supply and demand will be immense, and remain an ongoing and profoundly challenging combination for policy makers to respond to.

Performance and activity

For February the Company’s Net Asset Value (NAV) fell 2.5%, and the share price fell by 3.3% . The FTSE World Total Return Index, which the Company aims to outperform over the long term, returned –5.5% in Sterling terms. The Company’s NAV has returned -2.1% on year to basis (vs. benchmark of -6% ).

As per the previous month, the best performing sector was Hedge Funds, with the BlackRock European Hedge Fund and Sagil Latin American Hedge Fund delivering strong relative contribution. The portfolio’s holding in the BoFA Merill Lynch Commodity Strategy helped deliver a positive return from our small weighting to this sector.

The portfolio’s exposure to public and private equity detracted from returns, with holdings selling off in line with the equity market move. Litigation funder Burford Capital and New Energy Solar were the largest detractors from performance. The Company’s Private Equity (“PE”) exposure comprises both listed and unlisted PE, and in the absence of material NAV data from the portfolio’s unlisted exposure, the portfolio’s holdings in listed PE all experienced falls, again in line with equity markets. The single biggest detractor in this space was Riverstone Energy, against a deteriorating energy price environment.

The Company released a circular during the month outlining a proposed new investment objective such that it would facilitate the realisation of the company’s assets, to be voted on at a General meeting, to be held on 25 March. Accordingly, portfolio activity in February was minimised following the January announcement.

Glossary
Sovereign bond yield: the interest rate paid on a government (sovereign) bond. In other words, it is the rate of interest at which a national government can borrow.

Investment grade credit: refers to the quality of a company’s credit.

Treasury yield: the return on investment, expressed as a percentage, on the US government’s debt obligations

Net asset value (NAV): The total value of a fund’s assets less its liabilities.

Credit spread: the difference in yield between a U.S. Treasury bond and another debt security of the same maturity but different credit quality.

Volatility Index (VIX): a real-time market index that represents the market’s expectation of 30-day forward-looking volatility.