Fund Manager commentary - Henderson Alternative Strategies Trust

29/03/2019

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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. 

Equity markets continued their strong start to the year through February, with global stocks rising 2.7% in US dollar terms and by 1.6% for sterling investors. Chinese stocks surged over 10%, while eurozone shares were the best performer among developed markets. Negative returns from Latin America were a drag on the broader emerging market index. The technology and industrial sectors were the strongest performing areas of the market as quality stocks outperformed other styles.

Major government bond market yields were broadly higher (prices lower), with UK gilt yields rising the most. Corporate bonds delivered positive returns as credit spreads continued to narrow. Within emerging market debt, hard currency bonds delivered positive returns while the local currency equivalent struggled. In commodities, both energy and industrial metals performed strongly but gold was slightly lower. Sterling was generally stronger against other major currencies, while the Japanese yen was broadly weaker.

Trade negotiations between the US and China appeared to be making progress over February as President Trump delayed the tariff increases that were due to come into effect in March. Risk assets remain very sensitive to the trade tensions with the positive news proving a significant boost for Chinese stock market indices, in particular. Given the complicated issues behind the conflict – trade deficits and intellectual property rights – markets are likely to keep a close eye on the developments going forward. Investors must also be wary of the other areas of trade that the US government is looking at, including the national security investigation into auto imports.

In the UK, the pound was volatile as perceptions mounted that the UK government was being forced towards a softer form of Brexit, with a delay beyond the 29 March 2019 deadline also looking likely. Sterling ended up stronger against most major currencies and gilt yields rose. Business confidence continues to be affected by the uncertainty about the future operating environment but wage growth continues to accelerate and retail sales remain strong.

In the eurozone and Japan, we saw economic growth stalling as figures were released for the final quarter of 2018. Italy slipped into a technical recession and Germany narrowly avoided one. In contrast, US growth exceeded expectations as figures suggested that the economy expanded over 3% in real terms over the previous 12 months. The rate of growth is expected to moderate but the US continues to run at a very different pace to other developed economies. Global growth is expected to get a boost from ongoing Chinese stimulus measures filtering out into other economies.

Performance and activity 

Fund performance 

Over the month of February the fund’s Net Asset Value (NAV) lost 1.2% whilst the share price return was 3.3%.  Over the same period the Company’s Association of Investment Companies (AIC) Flexible Investment peer group returned 0.9% in share price terms (Source:Morningstar). The FTSE World Index, which the Company aims to outperform over the long-term, returned 1.6%. A relative outperformance of 1.7% in share price terms (Source:Bloomberg) and -2.8% in NAV terms.      

The best performing sector during the month was the public equity sector. Our position in Worldwide Healthcare Trust PLC rallied with equity markets returning 2.9% contributing 0.1% to performance. KLS Sloane Robinson Emerging Markets Fund was the next largest contributor and benefited as emerging market risk asset rallied on the prospect of a US/China trade deal and dovish tilt by the Federal Reserve Board has taken. The fund was up 2.6% over February and contributed 0.1%to performance. The manager had a tough time through Q4 2018 with some idiosyncratic issues hurting fund performance relative to the benchmark. These positions were neutralised and performance has been strong year to date. 

The hedge fund sector and commodities sector both generated positive returns. Sagil Latin American Opportunities Fund and Blackrock European Hedge Fund caught a significant amount of the equity upside in their respective markets through the period contributing 0.1% and 0.2%. The BofAML commodity strategy continued to perform well and returned 2.9% contributing 0.1% to performance. 

Property was the worst performing sector detracting 1.5% from performance. Two holdings account for the majority of this, Summit Properties Ltd and Ceiba Investment Ltd. Summit Properties detracted 1.1% on poor news-flow. The stock fell 21% in February. Summit Properties now trades a significant discount to NAV and has risen 14% since the end of February. We lightened the position through the month but have not completely sold out as we still believe there is significant value in holding the name.

The private equity sector contribution was flat for the period. The two largest movers were Safeguard Scientifics Inc and Baring Vostok Investments PCC Ltd. Safeguard Scientifics Inc had a positive contribution of 0.4% as it released good end of year results and announced the hiring of advisors that would be looking at avenues for a portfolio sale at a significant premium to the share price. Baring Vostok Investments PCC Ltd was the largest detractor in the sector -0.2% as news was announced that four of their employees, including Co-Founder Mike Calvey had been detained by Russian authorities. Baring Vostok believe that the situation relates to an ongoing commercial dispute between shareholders of Orient Bank. Baring Vostok have a reputation for conducting business cleanly and many high profile individuals have come out in support of Mike Calvey. The underlying businesses continue to operate and we believe that they are performing strongly, we also believe that this performance will not be reflected in the share price until late April when the Annual Report and Accounts will be released. 

Within the Credit Sector we reduced our exposure to NB Distressed Debt Investment Fund Ltd as they are undergoing a buy back which provided good opportunities to lighten the position as we believe the realisation process may take a significant amount of time.   

Outlook

The pause in interest rate rises from the US Federal Reserve and expectations of stimulus from China continue to buoy financial assets. We are inclined to take profits during the current rally given that the economic cycle is very mature and that, in our view, uncertainty matters more in a quantitative tightening environment. Inflation pressures continue to build in the US and we have concerns that further interest rate increases may get priced into bond markets. However, we think that corporate bonds have priced in more of these risks than sovereign bonds and equities, and therefore offer attractive returns relative to other asset classes. We prefer diversifiers such as gold and to hold cash, over sovereign bonds, when we reduce our exposure to riskier assets. We think markets are likely to remain volatile in 2019 and that the flexibility to take advantage of mis-pricings when they occur will be key to delivering consistent returns.


Glossary

Quantitative tightening: is a contractionary monetary policy applied by a central bank to decrease the amount of money supply within the economy.

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.


These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Important information

Please read the following important information regarding funds related to this article.

Henderson Alternative Strategies Trust plc

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Specific risks

  • Active management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • This trust is suitable to be used as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this trust.
  • The trust may have a particularly concentrated portfolio (low number of holdings) relative to its investment universe and an adverse event impacting only a small number of holdings can create significant volatility or losses for the trust.
  • The trust could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the trust.
  • The return on your investment is directly related to the prevailing market price of the trust’s shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the trust. As a result losses (or gains) may be higher or lower than those of the trust’s assets.
  • Global portfolios may include some exposure to Emerging Markets, which tend to be less stable than more established markets and can be affected by local political and economic conditions, reliability of trading systems, buying and selling practices and financial reporting standards.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Where the trust invests in assets which are denominated in currencies other than the base currency then currency exchange rate movements may cause the value of investments to fall as well as rise.
  • The trust may use gearing as part of its investment strategy. If the trust utilises its ability to gear, the profits and losses incured by the trust can be greater than those of a trust that does not use gearing.
  • In certain circumstances the investment manager may not be able to sell investments from the trust's portfolio. This could have a negative impact on the overall performance of the trust.

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