TB Wise Multi-Asset Growth

What is changing, however, is the market perception of growth. The IMF (International Monetary Fund) downgraded its growth forecasts materially for 2022 in July, citing a “gloomy and more uncertain” global backdrop, with concerns about the ongoing war in Ukraine, the Chinese zero-Covid policy and signs of weakness from consumer spending. The deteriorating growth outlook weighed heavily on sentiment with surveys of consumers, businesses and investors all showing a material drop in expectations. Paradoxically, this negativity was the launch platform for a strong rebound in financial markets, led by the US (+9.2% in US Dollar terms) and, in particular, by the technology sector (the Nasdaq index of leading US technology names was up 12.4% in July).

After 6 gruelling months for markets, investors were in the summer mood to buy the bad news. Historically, some of the best returns are made on a contrarian basis, when the news is bad, sentiment is bleak and investors capitulate. The first two of those conditions are undeniably met at present. A lot of bad news is known and priced in already. Inflation risks are understood and poor GDP growth should force central banks to slow or halt the hiking cycle. From a sentiment standpoint, as mentioned, surveys are negative but we would note that earnings downgrades have been minimal so far, suggesting there could be room for further disappointment in the upcoming earnings reports. Finally, despite reporting feeling gloomy about returns from here, capital flows data don’t yet suggest we have seen a capitulation from investors. There have definitely been some heavy selling and reduction of risk but aggregate analysis of positioning indicates that many investors have stayed put so far and maintain high allocations to the riskiest assets.

The strong rebound in asset prices, across equities, commodities and bonds, observed in July might very well mark the end of the difficult period experienced since the start of the year. Bad news and downbeat sentiment are usually strong indicators that we are getting close to the bottom. We remain prudent, however, and would like to see a proper capitulation with investors cashing out instead of only thinking of doing so, before calling the bottom with confidence. Meanwhile, our approach continues to prudently add to oversold positions and quality cheap assets, while maintaining diversification because volatility is here to stay.

In July, the TB Wise Multi-Asset Growth fund was up 2.5%, behind both the CBOE UK All Companies Index (+4.4%) and the IA Flexible Investment sector (+3.2%). While our Fund didn’t benefit from the strong performance of large defensive UK equities which rebounded last month and helped the CBOE UK All Companies Index (those still seem too expensive to us), the improved risk appetite generally supported investment trusts’ discounts tightening. As an illustration, Caledonia Investments’ discount moved from 30% at the start of the month to 22% at the end. Our strongest contributor was Oakley Capital Investments, in the private equity sector. We have argued for a while that the discounts on display in the listed private equity sector offer a very substantial buffer for future potential Net Asset Values downgrades. Last month, Oakley not only proved that fact right, but also disproved any concerns over its portfolio’s ability to continue growing. Whilst reporting 11% NAV growth in the second quarter (+17% year-to-date), the company also reported three realisations at strong premiums to carrying value showing that its holdings are delivering operationally, are conservatively valued and in high demand.

On the negative side, Fidelity China Special Situations and Lightman European detracted marginally.

As mentioned above, we think it is too early to confidently call the market bottom but we remain keen to take advantage of the attractive opportunities recent volatility has thrown at us. As such, we had a relatively active month adding to recent underperformers such as Fidelity China Special Situations, Mobius Investment Trust, Blackrock Frontiers, Pantheon International and Herald Investment Trust. The additions to Asia and emerging markets were partly financed by exiting Aberdeen Asia Focus and trimming Fidelity Asian Values. In the UK, we switched some of our exposure from Polar UK Value Opportunities into Fidelity Special Values, two funds with some overlap but the latter trading at 7% discount. In order to maintain diversification and as the market focus shifts from inflation to growth, we also added to Jupiter Gold & Silver which could benefit from central banks’ inability to increase rates much further, while miners’ valuations remain attractive.

Finally, we added a new position in VPC Specialty Lending Investments, a £225m trust lending capital predominantly to non-bank lenders. This strategy is part of a much large $7bn firm specialised in such lending and its appeal is that all the loans it provides are senior and fully asset-backed, with VPC having a full claim on cash-flow generating assets in case of defaults (of which they have only had 3 since 2007 and in each case have recovered all of their capital). The loans are structured in such a way that VPC are in the driving seat, dictating terms and lending money in stages only when objectives are delivered, limiting the risk and the duration of the debt. We were impressed by the level of due diligence and ongoing monitoring performed on the collaterals used against the loans. Each loan has a floating rate, offering a particular appeal in an inflationary environment. The trust trades on a wide 27% discount and currently offers a covered yield of more than 10%. While not without risk, we think the upside more than outweighs the downside risk with this trust.