Let’s just hope Mr Sunak can keep out of the headlines for a few months. So far there has been a decent positive reaction to a safer pair of hands.
- The pound has recovered 6.5% against the dollar
- Gilt yields have retreated a percent to just under 4%
- As predicted our fixed income funds have stopped falling and are beginning to recover
We are not expecting a steep recovery in these funds as we have had in previous years when Central Banks were buying bonds to depress interest rates. With more persistent inflation we expect a more gradual recovery, think about 0.13% – 0.15% per week around 7-8% a year.
We’ve talked a good deal about rates and bonds in the past few weeks so we will focus on equity markets today.
The last few days has all been about earnings as companies around the world publish their third quarter updates and analysts get to see how they are holding up in a world of higher rates and higher inflation and against their forecasts.
The earnings data and forecasts from the companies themselves are hard data the analysts and investors can crunch to see whether share prices are reasonable, undervalued or overpriced and will often cause sharp moves in prices.
The recent earnings calendar.
Source: IG
Whilst monitoring these earnings is very much the role of our fund managers who decide which company’s shares to buy, sell or hold we do like to keep an eye on them to see whether we are positioned correctly with the style of managers.
The results in the last few days have been mixed and here is a quick summary of a few that have caught our attention below.
The high-level trends we see are:
- The shocks on the downside are causing bigger moves downwards in prices than the surprises on the upside are creating gains – this is generally indicative of likely falling indices
- Surprises on the upside are coming more from what might be described as ‘old economy’ stocks rather than the big US techs whose prices had been driving the broader indices higher in the previous decade and where share prices were clearly too high
- These old economy stocks are also showing much better returns over the last 12 months, but they are now a relatively small part of the overall indices
- Price corrections take time to work through and some stocks like Netflix have already suffered a big correction and look much better value already, some may still have a correction to come
This generally supports our active management approach and our moves in the portfolios over recent months to move away from more growth orientated managers towards more value and quality (durable businesses) strategies.
Whilst this more defensive approach won’t necessarily make us a lot of money against a falling market, as can be seen below it will likely protect value better and keeps us invested for when the markets do find value and turn around. Such turn arounds tend to be sharp and substantial and easy to miss if you have disinvested.
There will be a time to be more allocated to the higher growth type companies, but we need to see these valuation adjustments fully worked through to avoid significant losses. Whilst in the fixed income funds this adjustment feels largely over to us, in equity markets we still feel there could be more to come, although recent falls clearly make equity markets more attractive.
Tideway Selected Funds Versus the US Nasdaq Over the Last Month
Below Nick Gait looks at some moves we have made in the portfolios in the last week.
Portfolio Changes:
Just a brief update from myself this week with some minor portfolio changes to report as summarised below. Our moves were primarily about rebalancing portfolios back to target weights with dispersion of returns between funds over the last couple of months. We did however take the opportunity to make a few minor changes. Broadly speaking we reduced exposure to Equities very slightly, kept equal weight on alternatives and added to Short Dated Fixed Income.
Fixed Income: Slight adjustment towards the shorter end of the curve which offers high yields – Believe these strategies will be the first to recover with most of the pain already been realised.
- In lower risk models, trimmed Sanlam Credit Fund and added to Artemis Target Return. These are similar fund styles focusing on short-dated fixed income securities.
- Rebalanced Artemis Corporate Bond back to target weight – Investment grade securities with the fund yielding 7% and a duration of roughly 6 years. Should offer a healthy real yield once inflation settles down.
- Added to Artemis Short Dated Global High Yield – Yield to maturity on the fund now c.9.5% with a duration of just 2.8 years. Roughly one third of the Net Asset Value of the fund due to be returned as cash in the next year in the form of coupons and securities maturing; this will allow the manager to continue to reinvest at these relatively high rates. As highlighted previously we believe this to be one of the best methods to access high yields on offer and believe will be one of the first funds to take part in the recovery. Although defaults on the asset class will increase (they have to from current low levels), our manager is benchmark agnostic and will select from issuers which they have a high degree of confidence in rather than the market as a whole.
Alternatives: Rebalancing back to targets – Rewarding Ruffer - In our lowest risk multi-asset model, we added to our position in Franklin Templeton Clearbridge’s Global Infrastructure fund. Although our top performer this year, the sector has come under pressure over the last month. We used this as an opportunity to add. A healthy yield with the majority of the book offering inflation linkage. With an emphasis on cashflows, this strategy will continue to form a core part of all our Multi-Asset portfolios
- Added very slightly to Ruffer Diversified Return at the expense of Sanlam Multistrategy. Ruffer continues its excellent track record of protecting capital in stressed markets. In addition to being an excellent diversifier, long term annualised returns indicate (not guaranteed) that this should not be a drag on performance.
Equities: Slight reduction in allocations back to target weights - Slight reduction in Equity weights due to outperformance in certain parts of the market.
- No major changes to report here with funds largely rebalanced back to target weights.
- Very slight increased allocations were made to Artemis US Select and Fidelity American Special Situations
- Continued emphasis on investing in strategies with valuation discipline, emphasis on cashflows and balance sheet strength rather than strategies which invest in ambitious growth stories and tomorrow’s dream.
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· The content of this document is for information purposes only and should not be construed as financial advice
· Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise
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