For Professional Clients Only
Macro & Market Update
The main macroeconomic development in an otherwise relatively quiet August was concerns about long-term borrowing costs in developed countries. The yields on sovereign bonds are an indication of the interest investors are willing to accept in exchange for lending money to a government. They are a function of a number of factors such as the expected future path of short-term interest rates fixed by central banks, future inflation expectations, future growth prospects, the likelihood of the government repaying its debt and the maturity of the bond (the longer the maturity, the more uncertainty about future events, requiring extra compensation). In August, the yield on 30-year US bonds pushed through to the highest in almost 20 years. While this is the move that grabbed headlines, long-term government bond yields have been rising rapidly across developed countries over the past few years to reach levels not seen for decades: Germany’s 30-year government bond yields are the highest since 2011, France’s since 2008, the UK’s are close to levels last seen in 1998 and Japan’s are close to all-time highs. While a strong recovery in growth, particularly since the Covid crisis, explains part of this rise, the main drivers of late have been an uncertain inflationary outlook due to the ongoing war in Iran and, maybe more importantly, worries from bond investors about government fiscal irresponsibility. In the US, the national debt reached a record $40 trillion this month with a staggering $3 trillion added in the last year alone due to a ballooning federal budget deficit (when government spending outpaces its tax revenues). The US government now spends roughly $1 trillion annually purely on interest payments, which makes it a larger expense than the entire defence or healthcare budget.
Long-term government bond yields are not just of interest to economists, they matter for investors too on two levels. Firstly, higher bond yields make riskier assets such as equities less attractive by comparison. Secondly, bond yields are a reflection of investor confidence and rapidly rising yields like we have seen recently suggest nervousness in some quarters of financial markets. They also have real-life impacts on consumers, notably on loans and mortgages, which may impact their ability and willingness to spend elsewhere. In August, the US Treasury indicated it was getting concerned about the level of long-term government bond yields and announced measures to increase its purchase of 30-year bonds (thus trying to push the yield down) while selling some shorter-dated bonds. It failed to have the desired effect so far, not only because investors tend to dislike government interventions, but also because it is now putting the US Treasury and the US Central Bank (the Fed) at odds. The new Fed chairman has made it clear that he wants the market to find suitable levels on its own, without constant forward guidance or intervention from the Fed. It is also increasingly concerned about inflation, and the Treasury’s actions could fuel price rises. All of this makes it a tricky environment for investors, even if, short-term, inflation appears under control (slightly lower in August vs July) and weaker reported jobs numbers alleviate pressure on the Fed to raise rates.
In other macro developments, the Trump administration tried a new approach in Iran through economic sanctions, having repeatedly failed to force a settlement with the Iranian regime through military threats. The sanctions have the potential to flare tensions up with China, a key economic partner of Iran. A tariff war with Canada also started again after Canadians refused to accept American demands. This could turn out to be a blow for President Trump who has not seen much pushback on his tariffs so far, but is also going to be costly economically and politically for Canada if no resolution is found.
None of those concerns truly permeated equities in August which had a positive month, rebounding strongly from the weakness in July. It became public news this month that an AI-focused hedge fund called Situational Awareness was under pressure in July, forced out of its positions and lost two-thirds of its $45bn assets that month due to high leverage and weak risk controls. In hindsight, this accentuated the selling pressure on AI stocks in July but, once this large seller was removed from the equation, it left the door open for a strong rebound subsequently. It is a reminder that excessive risk is increasingly being taken by some market participants and that one should be wary of complacency.
Fund Performance
Wise Multi-Asset Growth
The IFSL Wise Multi-Asset Growth Fund rose 2.6%, ahead of the CBOE UK All Companies Index (+0.5%) and its peer group, the IA Flexible Investment sector (+2.1%). The fiscal concerns mentioned earlier helped boost gold prices (traditionally seen as a safe haven against the uncontrolled piling of debt) by about 10% in August, which supported both Jupiter Gold & Silver and the BlackRock World Mining Trust, two of our largest contributors. Other positive contributors to performance came from the biotechnology sector which continues to see strong corporate activity and positive clinical breakthroughs such as the announcement of positive trials from Moderna and Merck for their melanoma cancer vaccine which boosted sentiment for the sector. On the negative front, interest rate sensitive positions such as TR Property and our infrastructure names posted weak returns last month.
Wise Multi-Asset Income
Against this backdrop, the IFSL Wise Multi-Asset Income Fund rose 1% during August, slightly behind the IA Mixed Investment 40–85% Shares sector, which rose 1.8%. While most areas of the portfolio contributed positively, some of the differentiated positioning which had been beneficial during July did not fully participate in the rebound in expensive growth shares. Our international value-oriented funds, including Schroder Global Equity Income, Brickwood Global Value and our emerging-market managers, delivered positive returns but generally lagged their respective markets. Commodity-related investments were the standout performers. BlackRock World Mining, which has significant exposure to gold producers, rose over 20%, benefiting from the sharp rise in gold and strong underlying asset performance. Gold benefited from geopolitical uncertainty, concerns over government finances and a weaker US dollar. BlackRock Energy & Resources also performed well through its broader exposure to energy and industrial commodities. Our UK equity holdings also performed well. Aberforth Smaller Companies and Odyssean Investment Trust benefited from the strength of UK smaller and medium-sized companies, while Finsbury Growth & Income continued its recent recovery in performance. International Biotechnology Trust was another standout, rising around 11%, helped by strong underlying investment performance and a narrowing of its discount. The broader biotechnology sector was also supported by M&A (Mergers and Acquisitions) activity and encouraging clinical developments, including positive late-stage results from Moderna and Merck’s personalised melanoma cancer vaccine. Infrastructure was another positive contributor. HICL Infrastructure reaffirmed its dividend targets and continued buying back shares at a substantial discount. The Renewables Infrastructure Group reported strong cash generation, reaffirmed its dividend and continued its asset disposal and share buyback programmes, while Foresight Environmental Infrastructure reported positive underlying returns and renewable generation ahead of budget.
Property was the main area of weakness, reflecting pressure from longer-term bond yields rather than any deterioration in the underlying company news. Middlefield Canadian Enhanced Income was held back by weakness in property and energy holdings, while Prusik Asian Income suffered from weakness among its Hong Kong investments.
All data is in a total return format
Past performance is not a guide to future performance
Portfolio Changes
Wise Multi-Asset Growth
In terms of portfolio activity, we added a new position in the MIGO Opportunities Trust, now managed by the AVI team we have invested with for years. After a few months of transition since taking over the mandate, this trust is now best seen as a portfolio of special situations in the investment trust sector, actively looking for mispricing opportunities and engaging with management. It is complementary to the AVI Global Trust we already own although the latter is applying their approach to a wider universe including asset-backed and family-controlled holding companies and tends to invest in larger global companies. MIGO is heavily positioned in the infrastructure and renewables sector at present, so we financed our position by exiting holdings and reducing our sizing in our infrastructure basket. We also took some profits in RTW Biotech Opportunities. Finally, we topped up CVC Income & Growth, Finsbury Growth & Income and TR Property. Our cash remained steady, close to 4.5%.
Wise Multi-Asset Income
During the month, we initiated a holding in Schroder Real Estate Investment Trust. The trust owns a predominantly multi-let industrial and retail warehouse portfolio, where active asset management and rental growth provide scope to increase earnings. The company offers a highly attractive yield today with scope for future growth and limited refinancing risk in the near term. Elsewhere, we added to ICG Enterprise and Finsbury Growth & Income which we funded through a reduction in our GCP Infrastructure holding.
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Full details of the IFSL Wise Funds, including risk warnings, are published in the IFSL Wise Funds Prospectus, the IFSL Wise Supplementary Information Document (SID) and the IFSL Wise Key Investor Information Documents (KIIDs) which are available on request and at wise-funds.co.uk/our funds. The IFSL Wise Funds are subject to normal stock market fluctuations and other risks inherent in such investments. The value of your investment and the income derived from it can go down as well as up, and you may not get back the money you invested. Capital appreciation in the early years will be adversely affected by the impact of initial charges and you should therefore regard your investment as medium to long term. Every effort is taken to ensure the accuracy of the data used in this document but no warranties are given. Wise Funds Limited is authorised and regulated by the Financial Conduct Authority, No768269. Investment Fund Services Limited is authorised and regulated by the Financial Conduct Authority, No. 464193.