While we adjusted our equity holdings earlier this year — including the sale of the second tranche of our US Index position in early April — we have remained fully invested in all our portfolios throughout. Even though equity markets have recovered strongly, we continue to expect volatility, particularly in an environment still marked by uncertainty.
As discussed in one of our recent articles following US Liberation Day, we believe trying to time equity markets over the short term is a risky and often counterproductive strategy:
As Costa Michaelides highlighted in that piece, the S&P 500 falls by more than 10% in 62% of years, by 20% roughly one in every four years, and by over 30% around once a decade. We know equity markets will experience declines from time to time — but we don’t know when they’ll start, how long they’ll last, or how quickly recovery will follow.
Extending the analysis to the most recent drawdown, and using the S&P500 as a proxy, missing the best trading this year would have meaningfully altered your returns.
In Tideway’s opinion, one of the fastest ways to destroy capital is to make major allocation changes based on macroeconomic predictions — and be wrong. Had we attempted to move meaningfully into cash earlier this year, it’s unlikely we would have reinvested in time to fully benefit from the market rebound. We’d now be facing markets near all-time highs, with elevated valuations and concentration risks, — with less capital than before and no clearer insight as to what might happen next.
Instead, we continue to focus on managing risk through portfolio design, not market timing. Portfolios must be appropriately constructed in advance to accommodate a range of possible outcomes — including risk-off scenarios as we have seen this year. Reacting during periods of heightened market stress is often too late; decisions made in emotionally charged environments are rarely optimal and can lead to lasting damage.
Despite the recent market recovery, our longer-term thesis remains unchanged. Global equity markets, as measured by the MSCI ACWI, remain both expensive and highly concentrated — a combination that has historically led to lower-than-average future returns.
For those wondering, the recent switch from Fidelity US Index to Redwheel Global Intrinsic Value has not caused us to miss out on the latest rally. However, we believe this move offers a more attractive long-term risk-reward profile for our clients, aligning better with our valuation-conscious approach.
Active Management
Following the sale of our US Index position, our portfolio is now fully allocated to active managers. While Tideway has not made further direct allocation changes, our underlying managers have been active — capitalising on market volatility, particularly in asset classes like fixed income where turnover is naturally higher. James has covered this in his piece.
Our managers are closer to the coalface: they know their investment universe intimately and are positioned to act swiftly when opportunities arise. Unlike fund trades, which are executed once per day (usually at 12pm) and reinvestment further delayed, our managers can respond in real time. Once volatility begins, we believe it is prudent to leave the majority of the work to our managers.
Heriot Global
The fund (see Tideway article from last year outlining the fund’s strategy) continues to look through the noise and focus on long term dividend growth as the driver to long term returns.
See below the April dividend announcements from the fund which should provide some assurance that the companies in the portfolio are in good health, despite market volatility.
- Equifax – Dividend Growth of 28.2%
- Keyence – Dividend growth of 16.7%
- HDFC – Dividend Growth of 12.8%
- Nasdaq: Dividend Growth of 12.5%
- Costco: Dividend Growth of 12.1%
- WW Grainger: Dividend Growth of 10.2%
- Alphabet: Dividend Growth of 5%.
Despite the low turnover of the fund there has been one notable trade to report with Apple being sold at the beginning of May. From Dundas:
“Apple trades on a yield premium but has grown its dividend at a significant lower rate than the rest of the portfolio.
Whilst Apple is a wonderful company whose products are embedded in our daily lives and has successfully grown a high margin services business, the shares look fully valued (28X PER NTM (Price to Earnings Ratio Next Twelve Months), dividend yield 0.5%) given its growth prospects.
We note that Apple announced a 4% dividend increase with its most recent quarterly results. Noteworthy, Apple dividend yield 0.5%, Heriot Fund dividend yield 1.5%. Apple 5% dividend growth v Heriot Fund Dividend growth 11% over the last five years). In addition, the core business of iPhones is not growing fast due to product maturity, elongating handset replacement cycle and increasing competition.
Finally, Apple is at the epicentre of Trump’s tariffs given that between 80-90% of all iPhones are still made in China.”
Some active managers are often hesitant to deviate meaningfully from their benchmarks, typically the MSCI World or MSCI ACWI, both of which have a significant weighting to large-cap US tech stocks due to their market capitalisation.
We’re therefore pleased to see that the team was willing to reduce exposure, even from a position that has performed strongly over the years and remains a substantial part of the benchmark. This reflects a genuine active approach and a willingness to back their investment philosophy, rather than simply hugging the index.
De Lisle America
Due to the fund having a top-down macro element to the investment process, the strategy will typically have much higher turnover than most long-only Equity funds, particularly in times of market stress:
- The fund had elevated cash levels (c.11%) in February and March as macro risks increased.
- As sentiment reached extreme lows in mid-April, they began significantly reducing cash positions and taking advantage of emerging opportunities:
- American Association of Individual Investors Investor Sentiment Survey (published every Wednesday) bullish sentiment hit multi-decade lows; the 8-week moving average saw 10 straight weeks of extreme bearishness.
- Consumer confidence (University of Michigan) also fell sharply, reflecting real-world uncertainty, which tends to delay investment and consumption.
Our key takeaway from the team’s actions during the recent volatility is that they use core market indicators as contrarian signals rather than a reason to panic and reduce risk.
From the manager, bold emphasis is Tideway’s.
“On Monday 12th May, the market reacted with enthusiasm to the tariff deal with China. Stocks which had fallen most in February, when tariff fear emerged, were the biggest winners. This included consumer durables in first place because of their import content and also because the removal of the tariff ‘tax’ makes everyone better-off and restores confidence. For instance, our Build-A-Bear went up 11% to $41.4, a level last seen in January and very different to the level of $33 it reached three weeks ago as the market considered an 145% import tariff on Build-A-Bear stuffing.
To us, the market despair in April seemed overdone. For instance, not only did Build-A-Bear stockpile 18 months advanced supply of stuffing but their gross margin of 55% is so high that it is hard to see a major dent in profits. Not only that, the main question we never answered was why not just source stuffing from anywhere else, including the USA, if it all became a major problem? Be that as it may, the market saw fit to take BBW down from $48 from its peak in December at the height of the post-election euphoria, to $33, a loss of 31% in four months, despite no deterioration in prospects.
This story is a microcosm of the portfolio, with similar tales to tell about most of our top-20 holdings. For this reason, we steadily reduced liquidity from 11% in March to its current 4%, buying throughout April and through the low. As the tariff news is good for the economy, we have our best conditions for closing the small-cap undervaluation gap…”
