Wise Multi-Asset Growth

Prior to this month, the Strait of Hormuz had never been fully closed, even if it faced significant disruptions during the 1970s and 1980s. Its importance for the transport of global commodities is critical, primarily for energy markets with about a fifth of global oil and liquefied natural gas passing through the strait. As by-products of oil and gas processing and refining, fertilisers (shipped around the world to boost crop growth) and helium (a key component in the production of MRI scanners and high-end microchips) are also produced in the region. As a result, the immediate impact of the war was felt in energy and soft commodities markets, which experienced their biggest spike since the invasion of Ukraine in 2022 and suffered unprecedented levels of volatility given Trump’s ability to equally suggest an immediate end to the war and escalation within moments of each other.

Higher commodities costs increased fears of inflationary pressures, particularly for large energy importing countries. Inflation data released during the month was based on pre-war data, making them broadly irrelevant, except the one released in the EU on the last day of March, which showed an increase from 1.9% to 2.5% over the month, the first time in more than a year that inflation rose above the 2% target from the central bank. With inflation being the biggest concern for central bankers, interest rates expectations rose sharply in March, with short-dated government bond yields moving higher as investors reversed their previous hopes of further interest rate cuts for the remainder of the year.  UK bond yields were hit the hardest amongst developed markets, rising more than 1% for the 2-year rates and causing issues in the mortgage market similar to those seen during the Liz Truss’ “mini” budget of 2022. Longer-term bond yields rose too to reach their highest level in 18 years and increasing borrowing costs for a government with already little fiscal room of manoeuvre. The UK’s high dependency on natural gas makes it particularly vulnerable to energy shocks, hence investors’ outsized inflation concerns.

Another way to explain the sharp moves in bond markets is to look at what level of future interest rate moves investors anticipate central banks are expected to make. Prior to the conflict erupting, investors were pricing in 2 rate cuts from the Bank of England by the end of the year. At its worse during the month, this changed to pricing in more than 3 rate hikes. Given that central banks usually shift gradually and that the UK economy remains febrile, the inflationary shock would need to be devastating to require such bold moves. In Europe, the change in expectations went from 1 rate cut to 3 rate hikes. Meanwhile, in the US, which is the most isolated from the war in terms of inflation, being an energy exporter rather than importer, markets went from pricing in 3 rate cuts this year to none.

These moves show the impact of the war on financial markets. Equity markets, on the whole, proved more optimistic of a swift resolution than bond markets but, as the conflict lengthened, started to show more meaningful weakness too. The longer the war persists, concerns will shift from inflation to growth once input costs, supply chains and consumer sentiment begin to be sustainably impacted. Over the medium term, however, performance of most indices remains robust, so panic has not yet set in, and price movements have generally been relatively well behaved.

In March, the IFSL Wise Multi-Asset Growth Fund was down 7.3%, behind the CBOE UK All Companies Index (-6.6%) and its peer group, the IA Flexible Investment sector (-6.1%). In a difficult month, there were few places to hide. Our renewables and infrastructure basket protected capital, thanks to their defensive characteristics and being beneficiaries of rising power prices. Our bond managers, particularly Premier Miton Strategic Monthly Income Bond Fund and TwentyFour Strategic Income Fund benefitted from their active management of interest rate risk, as did Pacific G10 Macro Rates by actively taking advantage of short-term volatility. Finally, Pantheon International, after a weak start of the year, saw some recovery in its discount which helped its monthly performance.

Unfortunately, the list of detractors was long, particularly amongst investment trusts which suffered from discount widening on top of weakening net asset values (NAVs). UK equity names struggled in the challenging environment we described earlier for the country, as did TR Property given the sharp move higher in interest rates. Managers exposed to potentially hard-hit energy importers (Emerging Markets and Japan) and growth worries (Resources) also suffered. Gold did not play its safe haven role in this early stage, mainly due to the competition of rising yields, the stronger Dollar and to being a source of cash after an exceptional period of performance. The latter also applied to the biotechnology sector, despite a number of acquisitions at premium to carrying values announced in our funds over the month. Finally, private equity (other than Pantheon) continued to suffer partly from the AI concerns we mentioned in February.

In terms of portfolio activity, given the unpredictability of the war, we tried to ensure the portfolio remained balanced between some defensive positioning and riskier positions. With President Trump’s style of managing geopolitics, there is as much danger from being over-exposed as being overly cautious. Our changes thus consisted in taking marginal profits (absolute and relative) where possible and redeploying gradually into areas we think were over penalised, such as Pershing Square, Blackrock World Mining, AVI Global, Aberforth Smaller Companies and TR Property. We also initiated a new position in Finsbury Growth & Income. Quality growth managers have had a torrid time for the past couple of years after a decade and a half of great performance. We think that valuations are looking more reasonable now (on the underlying assets and the trust itself), which could make companies with durable competitive advantage attractive again.