Fund Manager commentary - Henderson Alternative Strategies Trust

24/06/2019

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Market commentary – May 2019

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.

Global equity markets struggled in May, falling 5.9% in US dollar terms, though a weaker pound cushioned sterling investors for whom the decline was only 2.8%. UK equities outperformed other regional markets as emerging market and US stocks were most affected. The technology and energy sectors led the sell-off globally, with real estate and utilities asserting their defensive characteristics.

Global sovereign bond markets saw yields drop significantly with the US 10-year Treasury yield leading the way and the 10-year German bund yield dropping to a historic low of -0.2%. The sovereign moves buoyed investment grade credit but high yield bonds fell to a small loss as credit spreads widened. Emerging market debt made small positive returns in both hard and local currency assets. Oil was the most notable mover in a broadly weaker commodity complex and the rallying Japanese yen proved its safe haven characteristics.

The US-China trade conflict continued to escalate during May with Huawei, the telecommunications infrastructure provider, finding itself at the centre of security concerns. The dispute has widened from focusing on trade imbalances to technological and information issues with, worryingly, trade tariffs also being mooted against Mexico. As Mexico is integral to numerous US supply chains, the consequences could be wide ranging.

The political impasse over Brexit led to Prime Minister Theresa May announcing that she would step down in June, following a rebellion in the Conservative Party over proposed concessions to gain Labour Party support for her Withdrawal Agreement. The potential for a confirmatory referendum saw Tory support quickly leak away, leaving May with little option but to announce her departure and kick off a leadership election. Sterling again proved the shock absorber for political uncertainty, falling sharply against other major currencies.

Performance and activity


Over the month of April the fund’s Net Asset Value (NAV) gained 1.3% whilst the share price fell 1.4%.  Over the same period the Company’s Association of Investment Companies (AIC) Flexible Investment peer group lost 1.4% in share price terms (Source:Morningstar). The FTSE World Index, which the Company aims to outperform over the long-term, returned -2.5%. A relative outperformance of 1.1% in share price terms (Source:Bloomberg) and 3.8% in NAV terms.     
The best performing sector during the period was private equity. The best performing position during the period was Safeguard Scientifics Inc (“Safeguard”), a listed private equity investor in the US.  During the period Safeguard continued its liquidation process, selling Transactis, a payment technology business to Mastercard.  The investment in Transactis achieved a 3.9x cash-on-cash return and 39% IRR.  We believe that Safeguard is close to having the necessary liquidity to repay its outstanding debt and begin returning cash to shareholders.  On a negative note, Riverstone Energy Limited continued to detract from performance.  The oil price fell 11.4% in USD terms during the month, impacting performance. 
The second largest contribution came from the property sector.  Both Urban Logistics REIT(“Urban Logistics”) and Summit Properties performed strongly, rising 9.4% and 7.1% respectively.  Urban Logistics released a strong set of results late in the month with the net asset value up 12.6% in the year.  Summit Properties share price appreciated steadily throughout the month as the market recognised value in the shares, which trade on a significant discount.          
The weakest parts of the portfolio were those with the greatest market correlation.  The Sloane Robinson Emerging Market Fund followed emerging markets lower during May, detracting 23 basis points from performance.  Similarly our position in Euro Stoxx 2022 dividend futures fell as equity markets retreated.   
Within the hedge fund sleeve, the performance of the underlying funds reflected recent history.  That is, the BlackRock European Fund and Sagil American Latin American Fund continued to perform strongly but May was another difficult month for the Majedie Tortoise Fund (“Tortoise”).  Tortoise has a contrarian, value style of investing and in recent years this style has significantly underperformed.  We continue to have faith in the Tortoise team and believe that the fund provides exposure to many unloved sectors which could perform strongly if market dynamics change.  Positively, Majedie have recognised the period of underperformance and have reacted by reducing the headline fee and reducing the lead managers’ responsibilities to purely focus on the Tortoise fund.
At the beginning of May a sell-side note was released on Burford Capital with a sell recommendation, which put pressure on the share price.  We took the opportunity to increase our position.  We disagree with the main points raised in the sell-side note suggesting that Burford overstates returns.  After recovering during the month, rallying 14.5% from the share price low to the end of the month, the share price has again come under pressure in June given Neil Woodford’s presence on the shareholder register.
We increased our position in Safeguard Scientifics on the back of the Transactis announcement as we believe the share price reaction was muted given the strength of the exit.
Last of all we opened a small position in Deutsche Wohnen, a German residential property owner and developer.  The position was opened in small size given political risks around rent controls.  However, we believe that the long-term outlook for residential property in Berlin remains strong driven by the lack of supply.  We have increased our position in June on the back of share price weakness.
During the period we continued to reduce Summit Properties and Harbourvest Global Private Equity after periods of strong performance.


Outlook


Since falling sharply in May, world equity markets have recovered strongly.  Two key reasons are apparent. First, central banks have become more dovish, suggesting that financial conditions will remain favourable.  This has driven a sharp re-pricing of interest rates and increased the attractiveness of equities.  Second, recent comments from Trump and Xi suggest that they will meet at the G-20 Summit at the end of June which has spurred hopes for a trade war truce.

We believe that after the sharp rally in the first half of 2019 that returns will be muted in the second half.  The markets are pricing in significant action by world central banks leaving little room for markets to be surprised on the upside.  Whilst it is positive that Xi and Trump are meeting in person we are not convinced that we are past trade war volatility in the markets.  Last of all we also note that world economies have weakened in 2019 and this has been reflected in earnings estimates.   

Glossary

Volatility: The rate and extent at which the price of a portfoliosecurity 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.

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.

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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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.

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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.
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  • 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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