Despite several negative news headlines, global equity markets made positive returns and sovereign bond yields rose (Source:Bloomberg). Japanese equities were the standout performer while Eurozone and emerging market stocks suffered modest losses. The technology sector lagged over the month but energy stocks continued to benefit from a rising oil price.
US Treasuries led global bond yields higher (and prices lower) and high yield debt generated positive returns. Emerging market debt posted strong returns across both hard and local currency bonds. Gold remained a drag within commodities as the US dollar remained strong on a trade-weighted basis (Source:Bloomberg).
September ended with a shock to markets after the Italian government made proposals for significantly more spending than expected when announcing the draft 2019 budget. In the near term, decisions by the credit rating agencies over whether to downgrade Italian bonds will be carefully watched all over Europe. Despite a significant sell-off in Italian assets, both equities and bonds were actually top performers over the month.
Financial markets took an escalation in China-US trade tensions in their stride. The US administration imposed 10% tariffs on a further $200 billion worth of Chinese imports and China responded with tariffs on $60 billion of US goods. Elsewhere, Japanese equities rallied strongly as Prime Minister Abe was re-confirmed as his party’s leader for another three years, retaining his pro-growth and reflation agenda. In the US, the Federal Reserve (Fed) moved interest rates up another 0.25% and increased its expectations for the level of interest rates in the longer term. This helped push US Treasury yields higher, but not enough for further US dollar appreciation.
Over the month of September the fund’s Net Asset Value (NAV) lost -0.5% whilst the share price return was flat. Over the same period the Company’s Association of Investment Companies AIC Flexible Investment peer group returned -0.5% in share price terms (Sounrce:Morningstar). The FTSE World Index, which the Company aims to outperform over the long-term, returned 0.3% (Source:Bloomberg).
The largest sector contribution came from Property and primarily our holding in Summit Germany Ltd (“Summit”) which contributed 0.2% over the month. Summit is a commercial real estate company that purchases and manages offices, retail, logistics and other commercial properties throughout Germany. During the month Summit released strong half-year results that highlighted good operating performance, attractive debt re-financings and a new acquisition of a Frankfurt-listed real estate company providing Summit greater economies of scale.
The Specialist Sector portion of the portfolio detracted 0.3% from performance. The largest contributor was Sigma Capital Group PLC (“Sigma”), which released good interim results during the period. Sigma returned 10% which equated to 0.2% contribution. Sigma’s interim results highlighted the fundamental change that the launch of the PRS REIT PLC , which it manages, has had on future growth prospects. We remain confident that private rental sector property benefits from many tailwinds in terms of a lack of housing affordability, a shortage of housing supply and significant government support. Sigma remain well-placed to benefit from these trends with the PRS REIT PLC providing significant capital for the company to be a lead player in a growing market.
On the negative side within the Specialist Sector allocation our exposure to financials cost the Company -0.2% in performance.
Within private equity, Safeguard Scientifics Inc (“Safeguard”) had a tough month down -9.8% resulting in a -0.3% drag on the NAV.
The share price fell as the market was underwhelmed by initial exits made in Safeguard’s liquidation process. After discussing the remaining portfolio with the CEO, we continue to believe Safeguard Scientifics Inc has fundamental value and expect to see the share price perform well as Safeguard continues to realise the rest of its portfolio. This weakness was largely offset by strong returns from our listed private equity holdings.
After a strong run in our infrastructure names post the John Laing infrastructure Fund Ltd bid, these names steadied over September. We continue to hold these names tactically, believing investors will re-allocate their proceeds from the John Laing takeover to other infrastructure investments.
At the time of writing, market volatility has increased significantly. We have used this volatility to top-up positions in both Worldwide Healthcare Trust PLC and Polar Capital Financials Trust PLC.
In addition we have established two new positions. First, we have undertaken significant work looking into litigation finance as an emerging asset class. The market sell-off in early October provided a good entry point for us to open a position in Burford Capital Ltd. Second, we see good value in Euro Stoxx 50 Dividend futures, believing we can generate double-digit returns with less volatility than equities.
Financial markets continue to face several challenges, including tightening monetary policy, trade tensions and populism. There has been a degree of re-pricing to reflect these risks but, in our view, share price valuations, particularly in the US remain elevated. We also believe that investors will have to adjust to greater volatility going forwards. At this stage of the market cycle, missteps by policy makers are likely to be more keenly felt. Global growth remains solid for now and this should support risk assets but we are becoming increasingly cautious. We remain vigilant and will look to react accordingly.