TB Wise Multi-Asset Growth

Market participants like to focus on milestones and, even if those can be arbitrary, they are worth mentioning because of their impact on the collective psyche. In May, the S&P500, the index of large companies commonly used to track US equities, entered a bear market. This is the expression used to describe a fall of 20% or more from the previous peak (the opposite of which being a bull market, describing a bounce of at least 20% from the previous trough). Last month, the index registered a 20% fall since its all-time-high at the start of the year, recalling bad memories from previous bear markets, such as the Covid crash of 2020, the Great Financial Crisis of 2007-09, the Tech bubble burst of 2000-02, etc… None of those experiences were pleasant ones but it is worth highlighting that each one of those bear markets had their own drivers and peculiarities. While we are not attempting to predict the future, the current environment certainly is unusual. The world is seeing high inflation taking hold caused by the conjunction of supply shocks (Covid, invasion of Ukraine), a strong economic rebound and years of extremely accommodative financial conditions. While fighting inflation is now the first priority for central banks whose actions, in turn, risk triggering a recession, we are entering a very atypical scenario which could see negative real GDP growth (growth stripped out of inflation) but positive nominal GDP growth (growth including inflation). Such an environment, while tricky to navigate, should allow some companies to grow their earnings and thus present attractive investment opportunities. This is a very different situation from, say, the 2007-09 Great Financial Crisis when huge levels of debt had to be unwound, unemployment was rising and consumers did not have spare cash to spend. What we do know is that bear markets are always uncomfortable and tend to be volatile with numerous false rebounds, thus necessitating caution and diversification, but we are optimistic that current markets present attractive opportunities for active managers like ourselves.

Data-wise, the US central bank hiked rates by 0.50% as expected but ruled out a 0.75% increase in upcoming meetings, which was taken favourably by the market. Conversely, the Bank of England only hiked by 0.25% but proved gloomier in its economic forecasts. In Europe, interest rates hikes are being planned for the summer. Across all three regions, these are necessary to tame inflation which stayed high in May, although showing early signs of peaking in the US, while growth data was mixed. In this context, global equities were volatile as described earlier but the rebound later in the month left them, on the whole, in mildly positive territory. Commodities markets remained well supported and bond markets recovered some of their recent losses.

In May, the TB Wise Multi-Asset Growth fund was down 1.3%, behind the CBOE UK All Companies Index (+0.8%) and the IA Flexible Investment sector (-0.9%). Given the current macroeconomic uncertainty and the high degree of volatility, a number of our investment trusts saw their discounts widening. This typically happens when investors are keen to take their money out without much buying interest from other parties. Those movements can be frustrating, particularly when the underlying portfolios are performing well, but they tend to be short-lived and can present buying opportunities. Two of our largest negative contributors were in that category, Oakley Capital Investments and Mobius Investment Trust. The former saw its discount widen by close to 10% in the month despite strong results reported in April and robustness in its portfolio. The Mobius Investment Trust’s discount widened by ca 4% in the month as investors worry about emerging markets and the trust’s exposure to technology. We think those fears are unsubstantiated given the idiosyncratic themes driving the companies in the portfolio.

On the positive side, our value managers generally performed well, across regions. At the individual fund level, Caledonia Investments was a strong contributor following the release of its annual results. The strong performance of its portfolio was already broadly known (+27.9% NAV total return for the year), but the announcement of a special dividend equivalent to close to 5% was particularly welcome. It would appear that this helped put the trust on investors’ radar and helped narrow the trust’s discount in May.

In terms of portfolio activity, we initiated a new position in the Fidelity Special Values trust. We have known the manager for years and have patiently been waiting for an opportunity to take a position. The discount on the trust is usually tightly managed but, despite strong absolute and relative performance, the trust was heavily sold last month sending the discount as wide as during the Covid crisis. The manager is a pragmatic value manager who has demonstrated an ability to perform in different environments so we took the chance to initiate a position at an attractive price. We funded the position by taking some profit in JO Hambro UK Equity Income, Schroder Global Recovery and Ecofin Global Utilities and Infrastructure.