Global equities remained volatile in November but ended up 1.5% in US dollar terms and 1.6% in sterling terms. Emerging markets led the way, followed by the US and Japan, whereas European and UK equities saw modest declines. Healthcare was the leading sector globally, followed by real estate and the newly revamped communications sector. The 22% decline in the price of oil meant that the energy sector was the largest faller.
Government bond yields were broadly lower (and prices higher) with US Treasuries seeing the largest fall among the major markets. Credit spreads (versus equivalent government bonds) widened over the month across both investment grade and high yield bond markets. Euro-denominated high yield debt was particularly affected as the spread widened over 0.7%. Hard currency emerging market debt suffered small losses but the local currency equivalent saw gains as the underlying exchange rates improved. Within commodities, industrial metals and agriculture rallied but the drag from the energy complex more than offset this. Major currencies were little changed.
Market volatility continued, with the on-going trade tensions and plunging oil price impacting both equity and fixed income markets. The Italian budget situation also remained a source of investor concern as Italian 10-year government bond yields moved back above 3.5%. Federal Reserve (Fed) Chair Powell gave a dovish signal to markets, commenting that interest rates are just below the level that many estimate to be ‘neutral’ –this suggests that there may not be as many hikes to come as some had thought. This buoyed equity investors and also resulted in a rally in US Treasuries. The end of November was dominated by speculation about the G-20 summit in Buenos Aires, in particular the meeting between Presidents’ Xi and Trump of China and the US, respectively. The announcement of a 90-day ceasefire on the further escalation of tariffs, as well as some other commitments, was well received by investors.
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.
Over the month of November the fund’s Net Asset Value (NAV) gained 0.5% whilst the share price return was 1.1%. Over the same period the Company’s Association of Investment Companies AIC Flexible Investment peer group returned -0.7% in share price terms (Source:Morningstar). The FTSE World Index, which the Company aims to outperform over the long-term, returned 1.4%.
As disclosed in the interim results we have reclassified our investments into six categories. These categories are private equity, public equity, credit, hedge funds, property and commodities. The private equity sector was the dominant driver of return in November. An update from Mantra Secondary Opportunities I (“Mantra”) highlighted that the position continues to perform strongly. During the second quarter Mantra’s TVPI (Total Value to Paid In) multiple expanded from 1.63x to 1.83x. We are further encouraged by the significant realisations taking place within Mantra’s portfolio. The DPI (distributed to paid in) multiple at the underlying level now stands at 0.5x. The position contributed 0.9% to performance. Riverstone Energy Ltd was the biggest detractor in the private equity sleeve as oil prices fell sharply during the month. Riverstone Energy Ltd fell 4.2% during the month and detracted 0.2% from NAV.
The public equity allocation within the portfolio added 0.2% to fund performance. Performance within the sleeve was primarily driven by the funds’ healthcare exposure with The Biotech Growth Trust plc and Worldwide Healthcare Trust PLC contributing 0.1% and 0.2% respectively.
The sector detracting the most from performance during the month was the commodity allocation. The BofaML Commodity strategy is the only current position in the commodity sleeve and detracted 0.4% during the period. The strategy takes long and short positions in commodity futures with the aim of generating attractive, uncorrelated returns. The strategy can be negatively impacted by supply shocks that cause spot prices to rise sharply. This is what happened in November in the natural gas market. Historically as fears over supply shortages recede the strategy tends to perform strongly. We have seen this reversion take place in December with the strategy up 5.8% at the time of writing (12th December).
Turnover in the portfolio was light during the month. We exited our position in Tetragon Financial Group Ltd (“Tetragon”) in full. The rationale behind closing this position was the fact that we see little sign of its sustained discount closing. The sale also reduced the fund’s exposure to leveraged credit sectors. Finally we have long held the view that the asset management business is held at an attractive valuation but we see little sign that it will be exited in the near term, realising this value.
We believe that the current market volatility will continue into 2019. In our minds 2017 was the exception rather than the rule and we believe 2019 will be much like 2018 with higher levels of volatility and lower returns. Whilst we note that valuations have fallen recently we observe that they are not cheap and we would expect them to fall as the economic cycle enters its latter stages and investors start to price in the next recession. We believe that investors will need to diversify and seek alternative sources of return going forward and that the fund is setup well to provide such exposure.