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.
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.
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.
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.