The 6-month period in this interim report witnessed a synchronised global economic slowdown with a broad-based deterioration of macro-economic indicators across both developed and emerging markets. Both the supply and the demand sides were affected in a slow downward spiral painting an overall end-of-cycle picture. The causes for such an uninspiring backdrop are manifold but can be narrowed down to two main categories: 1/political uncertainty and 2/ policy makers’ impotence.
The first point has been a key part of the landscape for several years with a rise in populism and the re-emergence of strongman politics. The consequences of this phenomenon are increasingly being felt on world markets however, as those characteristics are becoming the norm and aren’t confined to small emerging countries anymore. The trade wars launched by President Trump against, amongst others, Mexico, Canada, Europe and, most significantly, China, are having a real impact on global trade and consumer sentiment, and, so far at least, proving detrimental on both sides of the battlefield. Closer to home, the Brexit issue remains unresolved and has thrown the UK into a constitutional crisis. Europe is struggling with a mixture of political instability and weakening leadership. Key emerging markets such as India and Brazil are also going through political difficulties and changes. Until recently, investors would focus on micro issues such as corporate earnings, health of balance sheets, level of indebtedness, quality of management, etc…Those factors remain of importance, of course, but one cannot manage a portfolio of stocks or bonds without keeping an eye on the macro picture anymore.
This leads onto the second driver of the difficult background experienced over the past 6 months: policy makers’ impotence. The rise in populism is accompanied by an increasing polarisation in the political landscape, itself leading to an increasing difficulty in getting legislation approved. With necessary political actions broadly in stalemate, central banks have emerged as the only players with sufficient clout to prevent -or at least postpone- the next recession. They are quickly running out of ammunition, however, and their actions are proving less and less effective. With historically low interest rates, now should be the time when governments engage in fiscal stimulus to take over from central banks’ monetary stimulus. The polarised political landscape makes this extremely difficult though, leaving central banks as the saviour of last resort.
While the above paints a relatively grim picture, it doesn’t describe anything that is irreversible yet and this was reflected in markets’ performance over the period. The global economic slowdown is undeniable, but we are not yet in recession territory. Political uncertainty has broadly been a negative so far this year but, by definition, it could as well surprise on the upside. With his re-election in play in 2020, President Trump will be increasingly keen to score some points with his electorate at home. This could easily take the form of a trade deal with China or tax cuts for example. Similarly, in the UK, a resolution to the Brexit headache could unleash a vast amount of pent-up investments and boost sentiment. In Europe, Germany is flirting with the idea of fiscal stimulus…Like for climate change policies that are increasingly being talked about, there are still plenty of opportunities to prevent the worst outcome, but time is running out. While governments get their acts together, central banks, even with eroding influence, still have the ability to buy some time and limit the downside. Since 2008, they are also more willing to look for unconventional measures of stimulus, so these shouldn’t be ruled out just yet.
In very general terms, this conundrum was reflected in a number of apparent contradictions in asset classes’ performances during the period. Global equities remained buoyant at the same time as sovereign bonds continued to rise, leading to a third of global bonds yielding negative rates. In the long-term, both markets cannot be right. One cannot, at the same time, be willing to take equity risk and be so keen to protect one’s assets that one is prepared to suffer a guaranteed loss on sovereign bonds. Another dichotomy was obvious within equity markets themselves: the top three global sectors were consumer staples (expensive quality yielding assets with stable growth), technology (expensive non-yielding growth assets) and utilities (cheap defensive yielding assets). This makes for an interesting mix…Finally, alongside strong headline equity markets, gold, by definition the “gold-standard” in safe havens, was the strongest global asset class, illustrating how torn investors are with their positioning. Investors are simultaneously looking for yield, protection and continued upside participation. One would argue that not all three requirements can be fulfilled at the same time, which implies that those market dichotomies will have to be resolved one way or another.
Looking at our performance from the end of February until the end of August, the TB Wise Multi-Asset Growth fund was up 1.2% compared with 3.8% for the CBOE UK All Companies index and 6.2% for the IA Flexible peer group. This underperformance is a disappointment for us. Relative to our peer group, our lack of exposure to US equities and bonds proved costly. We avoided both of those areas of our investable universe on valuation grounds. US equities continue to be driven by a small subset of very large companies in the technology and consumer staples sectors, for which valuations don’t seem to matter anymore, giving them very little margin of error. As described earlier, bonds benefitted from a rush for protection at all cost during the summer months, leading to an increasing portion of the global bond market yielding negative rates (thus guaranteeing a loss when held until maturity). For both of those assets, the weakness in the pound versus the US dollar also proved a tailwind.
We think that, at times such as these when markets’ direction is uncertain and obvious inconsistencies appear, it is critical to stick to our valuation discipline. This can prove painful until rational behaviour reinstates itself but, ultimately, buying assets that are cheap relative to their intrinsic worth and avoiding overpaying are the best ways to prevent significant losses in the future. We will thus continue to refrain from getting sucked into those momentum-fuelled positions and persist in looking for undervalued opportunities, managed by exceptional managers and fitting our macro views.
In terms of attribution, the fund’s best performers were our two precious metal funds (Merian Gold & Silver and Blackrock Gold and General). We increased our positions in June, giving us exposure to the strong rally in gold over the summer (+20% in GBP between the beginning of June and the end of August). General demand for protection, combined with a sharp drop in yields around the world made the metal particularly sought-after by investors. Each of our gold funds was up close to 40% over that same period showing the operational gearing embedded in the gold mining equities the managers invest in. The fund also benefitted from the strong performance of our two utilities and infrastructure funds, the Miton Global Infrastructure Income fund (+19%) and the Ecofin Global Utilities and Infrastructure trust (+16%). Both of those funds were in the sweet spot of cheap, attractively yielding defensive assets with strong growth prospects.
On the negative side, the Woodford Patient Capital trust (-51%) was our costliest position. The suspension of the Woodford Equity Income fund (an open-ended fund different in structure, objectives and investment universe from the investment trust we invest in) had ripple effects onto the trust that we own, mainly due to uncertainty about future management, but also due to overlap in some of the private companies held across both funds. We remain of the view that the portfolio comprises a number of strong and undervalued companies with significant upside potential. The uncertainty regarding the future of Woodford Investment Management itself is, of course, unwelcome however, and creates significant noise around the trust’s price. Another large detractor was Hansa trust (-20%) as its large holding in a Brazilian port operator struggled in a slowing global growth environment.
As a team, we conducted close to 150 meetings with management of funds and companies during this 6-month period. In the current uncertain macro environment, the information we gain from our bottom-up research is invaluable and allows us to spot the discrepancies and dislocations that are a common feature of markets nowadays.
Our focus on valuations and the fast shifting trends observed recently have pushed us to be more tactical in terms of our asset allocation, although the overall shape of the portfolio remained unchanged. We were active in taking profits on some of our winning positions (the two gold funds mentioned earlier for example) but also in adding on weakness in some of the parts of the market that continued to be ignored or disliked by investors. Such examples were the TR European Growth trust (European small and mid-cap with a value tilt), the Amati UK Smaller Companies fund (UK small-cap), Blackrock World Mining trust (Global miners) or emerging market managers such as the Mobius Investment trust (EM small and mid-cap with a focus on improved governance) and the Templeton Emerging Markets trust (EM all-cap).
All the above changes remained marginal. The more significant ones included adding to our position in the AVI Japan Opportunities trust as their focus on small asset- and cash-rich companies with an increasing attention on shareholders is starting to pay off. We also added to our small position in technology via the Herald trust. Despite the concerns that we voiced earlier about valuations in the sector, this fund gives us exposure to predominantly UK technology stocks which are much cheaper than their US counterparts. The trust is managed by a manager we have known for years and traded at an attractive discount when we increased our position. Finally, we also added a new position in the Pacific G10 Macro Rates fund which gives us the opportunity to exploit inefficiencies and volatility in the rates market.
In terms of reductions, the most significant change was a trim in the Woodford Patient Capital trust. We ended the period with an allocation large enough to still have an impact on the portfolio -which we believe will be positive- but not so big that the fund is unduly impacted by the trust’s share price volatility.
The current environment is as polarised as it has been for years, if not ever. This is true on the political front, as well as in financial markets where entire swathes continue to be unjustifiably ignored, while others are lapped up irrespective of prices. This extreme situation creates incredible opportunities but, as always, there is a lot of uncertainty regarding when the day of reckoning will be. As such, we continue to adopt a relatively balanced approach in the TB Wise Multi-Asset Growth fund with a mix of defensive strategies and riskier ones. Our focus remains on ensuring we don’t overpay for the assets we own, as this will give us a suitable buffer while we wait for their worth to be more broadly recognised.
The TB Wise Multi-Asset Growth fund started the interim period with £51m of assets under management and finished with £58m, mainly thanks to inflows for which we are very grateful.
We are pleased to report that the fund has received an Elite rating by Fund Calibre which we see as a recognition of the hard work we put daily into managing your assets and the strong track record that we have established over the past 15 years.
In terms of our team, there were no changes during the period, but a new recruit should, hopefully, join us over the next few weeks, which is very exciting. We will let you know more in due course.
Finally, all is left is for me to thank, personally and on behalf of the Wise Funds team, all our investors for their ongoing support. Please feel free to contact us if you would like a meeting or have any questions.
Wise Funds Limited