Global equity markets moved higher in September, reversing much of the fall in August. Global stock markets returned 2.1% in US dollar terms, and 1.1% for sterling investors. The export-oriented markets of Japan and Europe led the way, rising 5.9% and 3.7% respectively. Stock markets were led by the financial and energy sectors, while health care companies lagged. Markets saw a significant rotation in leadership as value stocks led the bounce.

 

With the exception of the UK, major 10-year sovereign bond yields were higher over the month, leading to negative returns. Corporate credit spreads were little changed, although US high yield and hard currency emerging market debt saw credit spreads narrow. Stronger emerging market currencies led to local currency emerging market debt performing positively. The pound strengthened against most major currencies, while the Japanese yen broadly weakened. The price of oil was little changed over the month, while gold declined due to the better risk sentiment.

 

Central banks were back at the forefront of investors’ minds in September as both the Federal Reserve (Fed) and European Central Bank (ECB) cut interest rates. The Fed also lowered its indications of where interest rates may go in the future but market participants still remain more pessimistic about the economic outlook. In contrast, the ECB launched a more comprehensive package of support, including restarting quantitative easing and bringing in deposit tiering to mitigate the impact of negative interest rates on banks. However, the raft of measures proved controversial with the decision far from unanimous and subsequently resulting in the resignation of an ECB board member.

 

Geopolitics remained in the headlines for a number of reasons. Attacks on important Saudi Arabian oil facilities caused a brief spike in the price of oil in the middle of the month. However, the surge had fully retreated by the end of the month as disruption proved to be smaller than initially feared. Trade conflict between the US and China continued to rumble on, with the strategies and aims of both sides continuing to lack clarity. The situation was further complicated by unrest in Hong Kong and related motions in the US Congress. Finally, the House of Representatives launched impeachment proceedings against President Trump. The move followed whistle-blower complaints about a telephone call with the Ukrainian President, where an investigation into a political rival was discussed by the President.

 

In the UK, Brexit remained at the centre of headlines. With prorogation (suspension) imminent, MPs passed legislation designed to prevent a no-deal exit at the end of October. Parliament was subsequently suspended for a short period before then being reconvened after the prorogation was found to be unlawful by the Supreme Court in a unanimous judgement. Following the reconvening of parliament, the government again failed in its calls for a general election. It waits to be seen how Prime Minister Johnson now deals with the requirement to seek an extension in the event of no deal being agreed following the EU summit in mid-October.

 

Performance and activity

Over August the fund’s Net Asset Value (NAV) fell 0.8%, the share price fell 1.3%, and the Company’s Association of Investment Companies (AIC) Flexible Investment peer group returned 1.3% in share price terms (source: Morningstar). The FTSE World Total Return Index, which the Company aims to outperform over the long-term, returned 1.1%.  The Company’s NAV is up 2.8% for the year at end September 2019.

The best performing sector over the month was public equity.  After falling sharply in August Burford Capital Ltd partially recovered in September.  Burford rose 17.8% during the month and contributed the majority of gains within the sector, contributing 0.2% to performance overall.  The property sector also performed well with Summit Properties Ltd rising 7.8% during the month on the back of strong interim results.

The Private Equity positions were the biggest detractors during September.  Three positions each detracted 0.3%.  Safeguard Scientifics Inc share price fell 5.2% during the month but remains up 31.6% for the year.  Riverstone Energy Ltd continued to struggle falling 15.5% during the month.  Small and mid-cap exploration and production companies have devalued sharply this year despite calmness in the oil price.  Investors are focused on seeing shale companies generating positive cash flow which is proving difficult for the sector in the current oil price environment.  Last of all our unlisted investment in Renewable Energy and Environmental Fund II, run by Zouk Capital released its June valuation which saw a small reduction in the carrying value.

During the month we consolidated our emerging market debt positions.  We sold out of our local currency exposure and invested the proceeds into the USD denominated short duration fund run by Ashmore effectively doubling our exposure.  The short duration fund was impacted heavily by the sell-off in Argentinian assets following the adverse primary election result.  We believe that this is a good time to add exposure.  As world growth continues to slow we also believe having USD, rather than local emerging market currency exposure makes sense.

After the Muddy Waters short attack on Burford Capital Ltd (“Burford”) we have dedicated a significant amount of time revisiting the investment case, aided by increased disclosure from Burford.  Whilst we are aware that the share price will remain volatile in the short term due to both enhanced scrutiny following the Muddy Waters report and Neil Woodford’s positon being transferred to BlackRock to be sold we continue to believe in the long term investment case.  We made a small further investment in September.

During September we opened a new position in an Australian listed solar park developer and operator.  The company is run by the same management team as the US Solar Fund which recently listed in the UK.  Unlike the UK-listed fund the Australian vehicle trades at a wide discount to NAV.  We believe that the similar strategies may lead the manager to combine the funds at some point leading to a closing of the Australian vehicles discount rate.  If we are wrong we are paid a 6.5% yield for an asset class that we favour run by a strong manager.

Glossary

Sovereign bond yield: the interest rate paid on a government (sovereign) bond.

Yield: The level of income on a security, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.

Quantitative easing (QE): An unconventional monetary policy used by central banks to stimulate the economy by boosting the amount of overall money in the banking system.

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