Market commentary – June 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 equities had a solid second quarter of 2019, continuing to bounce back from the sharp fall in the fourth quarter of 2018. The MSCI World Index rose 4% in US dollar terms, taking it to 17% year-to-date. The US and European stock markets led the way, with Japanese shares the biggest laggards, down 1.7% in Japanese yen terms. Stocks were led by the financial sector, followed by technology. Energy stocks struggled as the oil price slipped modestly.
Sovereign bond yields fell across all major markets, as the US 10-year Treasury yield dropped 0.4% to 2%. Both US investment grade credit and hard currency emerging market debt delivered over 4% over the three months, with high yield bonds also returning over 2%. The gold price rose 9% as the US dollar weakened against major currencies. Sterling was one of the worst performing developed market currencies.
The headlines were dominated by the on-going US-led trade tensions. Starting in North America, threats of trade tariffs were used by the US to extract immigration concessions from Mexico. Given the inter-dependency in supply chains, there was relief that the issue was resolved quickly. The Sino-American trade conflict widened in scope as Huawei, the telecommunications company, was placed on restricted lists following security concerns. Tensions mounted as China looked for a way to strike back. Hopes rested on a meeting between President’s Xi and Trump at the G20 meeting in Osaka at the end of the quarter. A ceasefire was seemingly agreed but little further detail was forthcoming to suggest that the tensions have fully abated.
The second quarter saw a further loss of global economic momentum. Industrial surveys showed a significant fall in manufacturing, not helped by the deteriorating global trade backdrop. The slump has led to heightened fears of a recession and coaxed central banks into more dovish stances over the course of June. European Central Bank President Mario Draghi suggested stimulus would be forthcoming if needed and the Federal Reserve indicated that interest rates would likely be cut once before the end of 2020. However, markets moved to price in four interest rate reductions in the US over the next 18 months. Expectations of monetary easing pushed sovereign bond yields lower and risk assets higher, despite the growing threat from slower growth.
Performance and activity
Over the month of June the fund’s Net Asset Value (NAV) gained 0.3% whilst the share price rose 4.8%. Over the same period the Company’s Association of Investment Companies (AIC) Flexible Investment peer group returned 1.4% in share price terms (Source:Morningstar). The FTSE World Index, which the Company aims to outperform over the long-term, returned 5.6%. A relative underperformance of 0.7% in share price terms (Source:Bloomberg) and 5.2% in NAV terms.
The best performing sector during the period was private equity. During the month our position in the Renewable Energy and Environmental Infrastructure Fund II (“REEIF II”) contributed 0.2%, mainly due to positive currency movements. Listed private equity investments generated positive returns, adding 0.2% to performance in total.
Hedge funds contributed positively to performance, adding 0.3%. The most material contribution came, once again, from the BlackRock European Hedge Fund which returned 4.2% during the month, contributing 0.2%. Both the Majedie Tortoise and Helium Selection funds generated positive performance.
The public equity book had mixed fortunes during the month. Whilst Worldwide Healthcare Trust, Euro Stoxx Dividend Futures and Sloane Robinson Emerging Markets all contributed strong returns, both Burford Capital and Sigma Capital Group detracted. We remain supporters of both positions and have used price weakness to increase exposure to both names.
During the period we reduced our position in CEIBA Investments Ltd (“CEIBA”) by selling 12.5% of our position. Since taking on management of Henderson Alternative Strategies Trust we have focused on maximising shareholder value from our legacy investments’ portfolio. CEIBA has returned 9.2% on an annualised basis since inception of our mandate and remains our largest legacy holding, representing 4.0% of NAV at end June (total legacy holdings, 12.5%).
In respect of the remaining legacy portfolio, our Eurovestech PLC position (1.8% of NAV), trades through AssetMatch, an online trading platform. The current share price is 4p per share. The latest reported NAV is 11.4p and therefore we hold at a 65% discount. 70% of the net assets are invested in ITWP Acquisitions Ltd, a leading digital market research company. Given the successful IPO of Survey Monkey on the NASDAQ in 2018 we are hopeful of a liquidity event. We believe that management are currently seeking liquidity in late 2019 or early 2020. A successful exit of the position would return 8p per share, double our current carrying value for Eurovestech PLC. Management have stated that they are actively looking to liquidate positions and return capital to shareholders.
Amber trust is a Baltics- focused private equity fund. The fund has three remaining investments, an insurance business, a food processing business and a media company. Current updates from the management team suggest that two of these investments, currently representing 80% of portfolio value may be liquidated during 2019. We believe that the carrying values are conservative. The third business is likely to be exited in 2020.
Firebird Republics SPV was set up to hold the illiquid assets of the main Firebird Republics Fund that the Company inherited but has now sold. This fund has four remaining positions but is dominated by a position in Aktobemunaigas (currently 89% of NAV). Aktobemunaigas is a Kazakh exploration & production company and is majority owned by China National Petroleum Corporation. The company has reinstated its dividend which was suspended after the sharp fall in oil prices during 2014 and 2015. Firebird are waiting for this dividend stream to re-establish itself before seeking an exit from the position. Whilst we are unlikely to see liquidity in the near term we receive a c.7% yield.
ASM Asia Recovery Fund now represents 0.6% of NAV. At the end of 2018 ASM had returned 73.31% of capital, including 12.0% in 2018. The manager currently expects to complete the realisation process in 2019.
Century Capital Partners exited one of two remaining investments during the second quarter of 2019 and now represents 0.4% of NAV. The final asset will likely be exited in 2020.
Continuing our discussion of portfolio activity, other sales during the period focused on profit taking. We reduced positions in HarbourVest Global Private Equity and Axiom European Financial Debt.
During June we added one new position, the CIFC Global Floating Rate Credit Fund (“CIFC”). CIFC invest in the debt tranches of CLOs. Credit markets have rallied sharply since the risk-off market in late 2018 but we believe CLOs have lagged. CIFC are a strong manager, who we believe are extremely active and will add value both from a manager and credit quality selection point of view. CIFC yields just under 7% with a target return slightly above this.
During the period we added to our positions in Deutsche Wohnen, Sigma Capital and Burford Capital on share price weakness.
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.
Monetary easing (i.e. Quantitative easing): a strategy that a central bank can use to increase the domestic money supply.
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.
Risk assets: any asset that carries a degree of risk. Risk asset generally refers to assets that have a significant degree of price volatility, such as equities, commodities, high-yield bonds, real estate and currencies.
IPO: An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance.
Carrying value: an accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance sheet.
CLO: A collateralized loan obligation (CLO) is a single security backed by a pool of debt.