Tideway’s Investment Committee reconvened in mid-June amid ongoing macroeconomic and geopolitical uncertainty. The Committee was broadly happy with portfolio performance and positioning , particularly on the fixed income and alternatives front and recommended no alterations to strategies in either asset class for the time being. One change was agreed on the Equity front which was executed earlier this week:
Trades
Sale: Fidelity Asia Pacific Opportunities
Proceeds: Artemis Global Income, Redwheel Next Generation EM, Unicorn UK Income.
These trades reflect our continued focus on allocating to managers with both a strong valuation discipline & whose investment universe is undervalued compared to its own history. It is important to emphasise that, while these managers may appear attractive on valuation grounds, they do not run traditional value strategies. Their relative cheapness is more a reflection of investor apathy than structural weakness – driven in part by the dominance of passive flows, with one in every two Dollars globally now allocated passively, predominantly towards developed markets, and the US in particular.
This dynamic is especially evident in strategies such as Redwheel Next Generation Emerging Markets, which invests in select smaller and frontier emerging markets, and Unicorn UK Income, which focuses on small- and mid-cap UK companies. In both cases, the underlying businesses are trading at meaningful discounts to long term valuations despite typically demonstrating strong operational performance and fundamentals (earnings growth for example).
We also continue to favour managers with the flexibility to allocate capital across a broad range of regions. For example, Redwheel Next Generation has an investment universe spanning approximately 50 countries, providing a wide opportunity set through which to implement their investment process.
These latest trades continue a trend established earlier in the year, when Tideway exited its passive US equity allocation – specifically the S&P 500 tracker – due to concerns over valuation and market concentration. The proceeds were reinvested into Redwheel Global Intrinsic Value, a global value manager trading at more than a 50% discount to the broader market on a price-to-earnings basis. The strategy also offers significantly greater diversification by geography and sector.
Tideway Equity Portfolio Construction
With the proceeds reinvested entirely into existing Tideway panel strategies, Tideway now holds ten Equity funds in core multi-asset portfolios.
Digging under the bonnet of our equity allocations reveals that Tideway is invested in just over 660 companies in total – around a quarter of the 2,650 constituents in the MSCI All Country World Index (ACWI). Despite the smaller number, we would argue that our portfolios are significantly more diversified in terms of regional, investment style and sector exposure.
For those concerned that holding ten equity funds may lead to over-diversification or index-like behaviour, it’s worth noting that our active share relative to the MSCI ACWI is approximately 80%, highlighting that our portfolios bear little resemblance to the benchmark and are meaningfully differentiated.
MSCI ACWI Characteristics
- High Valuations: Tideway c.17.5% cheaper versus ACWI on a P/E basis.
- High Concentration: Tideway have 1.5% position in Mag 8 versus c.21.5%.
- High US Exposure: 27% underweight US listed assets
- High US Dollar Exposure: Large underweight position USD exposure
Artemis Global Income
A detailed review was written in the last bi-weekly comms. Please follow this link for the analysis.
Unicorn UK Income
- High quality market leading businesses are still significantly undervalued (25% discount to 10yr average) – 9 of these years are post the Brexit announcement where prices had already started to decline.
- A high and growing dividend, Dividend yield now 6.5% (vs 4% FTSE All Share) which grew by 19% over the last year and covered by earnings 1.8x.
- Smaller companies typically associated with weaker balance sheets; not the case – roughly 50% of companies have net cash on the balance sheet.
- We believe M&A plus exceptional dividend yields will help prevent further derating from here.
Unicorn UK Income
- Exceptional performance of the strategy despite poor performance of frontier market benchmarks.
- Low valuations in frontier markets versus pre-pandemic despite a recovery of business fundamentals; Earnings growth and Return on Equity.
- Currencies remain depressed – Will benefit from a weaker Dollar providing additional tailwinds for investors.
- EM of old rather than just another tech play. Core emerging markets have large allocation to tech (TSMC for example) which will be correlated to US tech in a correction.
- Three established paths to growth:
- Central to global commodity production due to their abundant natural resources
- New factories of the world – Supportive demographic trends and cost advantages
- Developing travel and tourism – Fuelling broader economic development
Catalyst: Repatriation of capital
With the narrative of US exceptionalism increasingly being called into question, investors are beginning to reassess whether premium valuations in US markets are still justified. At the same time, concerns over government policies that could weaken the US Dollar are rising.
Against this backdrop, we believe there is potential for a material repatriation of capital out of US assets and back into home markets. This shift could help support valuations in areas that have been largely overlooked by investors over the past decade.