As we noted in our April commentary, financial markets’ reaction to the now well discussed COVID-19 sell-off seen in March has been driven by many factors, and amongst those, perhaps the biggest influence has been investor sentiment around the gradual lifting of lockdown restrictions, initially in Asia and then in Europe. It is with that backdrop that world equity markets continued their recovery, and May saw global equities rise 6.8%[1]. US equities, as measured by the S&P 500 rose similarly by 7.0%. Risk appetite for smaller companies and technology stocks was evident through the MSCI Word Small Cap index’ return, which rose by 9.4%, and the NASDAQ composite, which delivered a similar 9.2%[2]. The latter’s performance has been particularly pronounced in 2020, delivering year to date returns of 17.7%[3]. It is worth drawing attention to the extraordinary gains year-to-date seen in the so-called FAANG[4] stocks, which have delivered 34.2%[5], and their impact on many of the indices quoted above, should not be underestimated.

Sovereign fixed income markets have again been largely stable, with US yields again seeing little change in May (as measured by the Bloomberg Barclays US Treasury Total Return index[6]). European  10-year yields did however rise in May (from -0.59% to -0.4%, as measured by the generic Eurozone 10 year bond index (source Bloomberg)), following a range of fiscal measures proposed by Ursula von der Leyen, the European Commission president. Global High Yield bonds maintained the momentum we reported in April, rising by 5.1%[7]. Global investment grade bonds continued to perform well, with the spread between those and government bonds also tightening again (by just over 100bps)[8]  and continues to reflect the increased appetite for riskier assets noted above.

Global commodities in aggregate gained in May, with the Bloomberg Commodity index (total return) gaining 4.3% in Sterling terms[9]. Oil prices rebounded heavily with Brent crude up 39.8%, following more accommodative freedom of movement and resumption of light industry that had previously been unutilised during lockdown. In currency markets, ‘cable’ (the sterling/dollar rate) again saw little change. US dollar strength vs. sterling continues though to be a feature on a year-to-date basis and the S&P 500 index, whilst still negative in US dollar terms over the same period, actually still remains in positive territory (just) for UK based investors.

Markets remain sensitive to policy response but do seem to be looking through some of the widely reported COVID-19 outbreaks, more recently seen, for example, in Germany. Growth outlook remains weak, though and the longer term impact of rising debt at all levels (sovereign, corporate and household) has to remain front of mind, and this, coupled with most  investors’ belief in the inevitability of ‘mean reversion’ in long term performance of markets, may partially explain the small retrenchment seen in equities in June.

In terms of private markets, direct private equity investors have slowed their deal pace down and have tended to focus on existing portfolio companies. Net asset values have been impacted, and for the broad fund of fund portfolios, their Q1 impact appears to have been in the region of negative mid-teens, with some portfolios performing slightly better than that. The principle impact has been through the weakening of public comparable valuations, though in some cases (particularly those managers with physical retail and consumer businesses in their portfolios), there has of course been significant top-line impact. For end investors in listed private equity funds, the principle concern has been the slowdown of portfolio exit activity which is likely to have a greater impact on IRRs (internal rates of return) than it will on end MOICs (Multiples on Invested Capital) achieved.

Performance and activity

Over May the fund’s Net Asset Value (NAV) rose 3.8%, and the share price rose 9.4% (total return basis).  The Company’s Association of Investment Companies (AIC) Flexible Investment peer group returned 1.5% in share price terms. The FTSE World Total Return Index, which the Company aims to outperform over the long-term, returned, as noted above, 6.8% in sterling terms.  The Company’s NAV is down 6.2% for the year at end May 2020 (FTSE World Total Return, -2.6%)[10].

The best performing sectors for May were private equity and public equity, contributing, respectively, 1.1% and 1% to performance, and with all holdings positive for the month. Within the latter, our holding in the Worldwide Healthcare Trust led performance, followed by our Euro Stoxx dividend future strategy and 3i infrastructure. Our position in Burford Capital, gave back some of the gains we noted in April’s factsheet.

The main contributor to the private equity performance was through our holding in the listed Riverstone Energy. As our investors are well aware, Riverstone has been a disappointing long term position, performing poorly on negative sentiment on the sector, however we have made series of active decisions this year to stay with it, not wishing to capitulate at the very bottom as a number of investors have chosen to do. Riverstone has risen by 230% since its March low, helped by a £50m buyback programme announced on 1 May, of which about half has been deployed thus far and the board have said that they will hit their £50m target. There will come a time to sell, but it feels as if that time is not now.

The portfolio’s credit allocation performed well adding .77% to performance and was led by our holding in Ashmore’s Emerging Market Short Duration fund. Our hedge fund exposures all performed well with the principal contributor being the Blackrock European Hedge Fund.

In our April factsheet we noted our Board’s commitment to bring forward to shareholders a realisation investment policy. Notice of a general meeting for that realisation policy to be considered has now been given (for 3 July 2020) and we also note the board’s endorsement of that proposal. To reiterate our comment in the April factsheet, we are therefore not adding to any long-term horizon investment strategies or initiating any new positions until the outcome of the impending shareholder vote is known.

Glossary

Sovereign fixed income: fixed income instruments issued by the government

Yield: The level of income on a security, typically expressed as a percentage rate

High yield bonds: bonds that pay higher interest rates

Investment grade bonds: a bond with a rating that signifies a municipal or corporate bond presents a relatively low risk of default

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

Multiples on Invested Capital (MOICs): allows investors to measure how much value an investment has generated

[1] FTSE World Index, in Sterling and total return terms. Source, Bloomberg.

[2] All index returns in Sterling and total return terms. Source, Bloomberg.

[3] Using NASDAQ market close 24 June

[4] Acronym for the 5 largest US tech stocks (Facebook, Apple, Amazon, Netflix, Google (Alphabet))

[5] NYSE FANG+ total return index, in Sterling and total return terms, source, Bloomberg, using market close 24 June.

[6] Unhedged, USD terms, source Bloomberg

[7] Bloomberg Barclays Global High Yield Total Return Index unhedged

[8] Using the BarCap US Corporate High Yield YTW (Yield to Worst) –10 year treasury spread index. Source, Bloomberg.

[9] Source Bloomberg.

[10] Sources: Morningstar, Bloomberg, Janus Henderson.