​Macro Backdrop

Unless otherwise stated, returns are MSCI Indices expressed in local currency terms. The return for the UK equity market uses the FTSE All Share Index in local currency terms. 

January saw global assets rebound from year-end lows as dovish messaging from the Federal Reserve (Fed) and encouraging US-China trade developments helped lift investor sentiment. Equity markets gained globally and the FTSE World Total Return Index returned 4.4% in sterling terms. The US and emerging markets led the rebound with the UK lagging due to a strengthening sterling. All sectors were up, with cyclical sectors generally outperforming defensive areas.

Government bond yields fell (prices rose) globally even as riskier assets outperformed. European bonds outperformed their US counterparts as economic data pointed to a slowdown in the eurozone. Corporate bonds posted strong returns, especially US dollar high yield bonds which benefited from a sharp rise in the oil price. In emerging markets, both US dollar-denominated and local currency debt performed well, boosted by a more dovish Fed and a weaker US dollar. Within commodities, energy performance was particularly strong, driven by a rebound in the oil price. Major currencies were little changed, with the exception of a sterling rally due to greater optimism that the UK would avoid a disorderly Brexit.

At the end of January, the Fed signalled its intention to pause its interest rate hiking cycle in the face of elevated global uncertainties. Downside risks from slowing growth outside of the US, Brexit, trade negotiations and the effects of the five-week US government shutdown were cited as reasons. The Fed also announced that it would not be reducing the bond holdings on its balance sheet by as much as previously expected. This perceived signalling of easier future financial conditions was seen as the main catalyst for the more positive sentiment in financial markets.

Equity markets were further buoyed by President Trump’s announcement that he would meet with Chinese president Xi Jinping in February in an effort to break an impasse in trade negotiations. Equities in Asia and Europe were some of the key winners of this renewed optimism as a potential trade deal could strongly benefit their more export-driven markets. The negative impacts of the trade tensions on business activity have been noted by companies across the world. In the US, despite the final-quarter earnings season being broadly positive, several large corporations (such as Apple and Amazon) mentioned concerns about global economic headwinds and trade tensions in particular.

The sustained trend of declining unemployment and rising payrolls in the US pointed to further economic growth while inflation pressures remained subdued. However, consumer confidence showed signs of deteriorating, likely related to the longest partial government shutdown in US history. Economic data from China and Europe was less encouraging and pointed to slowing global growth. Italy showed two consecutive quarters of economic contraction and slid into a recession. This prompted the European Central Bank (ECB) to state that risks around the eurozone growth outlook had moved to the downside.

Fund performance

Over the month of January the fund’s Net Asset Value (NAV) gained 2.0% whilst the share price return was 2.1%.  Over the same period the Company’s 11-strong Association of Investment Companies (AIC) Flexible Investment peer group returned 1.6% in share price terms (Source:Morningstar). The FTSE World Index, which the Company aims to outperform over the long-term, returned 4.4%. A relative underperformance of 2.3% in share price terms (Source:Bloomberg) and 2.4% in NAV terms.

The best performing sector during the month was public equity, contributing 1.1%.  The Biotech Growth Trust PLC rallied strongly during the period, returning 11.1% and contributing 0.3% to performance.  Burford Capital PLC continued to rally, returning 10.9% and contributing 0.2% to performance.

The property sector provided strong returns in January.  During the period Summit Germany Ltd announced a strong uplift in the net market value of its property portfolio driven by continued strong demand for German commercial property.  The net asset value increased by over 50% and led to a 21.6% rally in the share price in EUR terms. The positon contributed 0.7% to performance.  Urban Logistics REIT PLC also performed well, rising 6.2%.

Private equity positions provided a flat contribution during the month.  Given the sector weight of almost 30% this is disappointing given the beta to listed markets that we would expect.  However, it needs to be remembered that a significant portion (around 60%) of the private equity investments are not in mainstream listed private equity investments.  The sector was also impacted by the strong rally in sterling.

The hedge fund sector provided a small contribution of 0.2% to performance.  Commodities detracted as the Bank of America Merrill Lynch Commodity Strategy fell 1.7% after rallying strongly in December.

During January we increased our listed private equity exposure by topping up investment in Princess Private Equity Holding Ltd.  We also initiated a new position in 3i Group PLC.  We believe 3i has an extremely attractive portfolio of direct investments that show strong growth, have relatively low leverage and are held at conservative multiples.  The position was built throughout the month and ended at 2.5%.  During the volatile fourth quarter 3i Group PLC fell heavily and traded below NAV briefly, a rare occurrence in recent years, and we used this opportunity to build a position at a good entry level.

We reduced positions in Polar Capital Global Financials Trust PLC, The Biotech Growth Trust PLC and both NB Distressed Debt Global and Extended Life shares.  With growth struggling globally with the exception of the US and interest rate rises unlikely to provide significant support we thought it a good time to reduce our financials exposure.  We have been disappointed with the performance of both The Biotech Growth Trust PLC and both share class of NB Distressed Debt Investment Fund Ltd and this was the prime rationale in our reduced holding.

Outlook

The bounce in asset prices in January has undone what looked almost like capitulation by the market in December 2018. While the bounce has been good for performance, higher valuations leave less room for future returns, especially when uncertainty remains elevated. We believe that economic data continues to weaken, earnings momentum remains poor and valuation multiples should be falling at this point in the cycle.  We expect volatility to remain elevated. As such investors need to remain nimble and look to rotate across the multi-asset spectrum as appropriate. This is, of course, harder than usual with most asset classes at elevated levels, but flexibility should allow the disciplined investor to outperform.

Glossary

Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment.

Bearish / Bear Market: A financial market in which the prices of securities are falling. A generally accepted definition is a fall of 20% or more in an index over at least a two-month period. The opposite of a bull market.

Bull Market: A financial market in which the prices of securities are rising, especially over a long time. The opposite of a bear market.

Gearing: A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes.

NAV: The total value of a fund’s assets less its liabilities.

IRR (internal rate of return): Is a metric used in budgeting to estimate the profitability of potential investments.