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30th July 2021

Perhaps the most important part of anyone’s investment process is idea generation. We have found that simply doing hundreds of meetings every year with fund managers provides the best source of information on individual funds. This also generates lateral thinking for other areas of financial markets.  For example, in a meeting with a global equity manager, we may learn that they are increasing their allocation to Japan, which then prompts us to explore that area and see if it warrants further research.

We rarely say ‘no’ to a meeting request, even if it is an area we are not currently interested in. It pays to do the research ahead of a potential future allocation, and it is always worth knowing what we don’t want to own, as well as what we do. Alongside being a boost for idea generation, the relationships we build with managers over the long term result in great access, which is particularly vital during volatile market conditions. This allows fast assessments of whether a sharp market correction is just volatility, or something more sinister such as a dreaded permanent loss of capital.

Over the past week there has been a significant amount of volatility in Chinese and Hong Kong equity markets. This was a result of the Chinese regulatory authorities releasing a number of new policies, including banning tuition education companies from making non-zero profits. We got in touch with Tom Naughton, manager of Prusik Asian Equity Income, and James Morton, manager of CIM Dividend Income, to find out what was going on under the bonnet and assess whether we needed to take any action within our own portfolios.

The swift responses assured us that there was no need to panic. The biggest issue was the fact that so many policies were released in the space of 72 hours, with little time for market participants to digest and make rational decisions on the policy implications. Scary headlines took over the narrative and created a ‘sell first, investigate later’ reaction, compounded in the short term by algorithmic trading which amplified the market moves. The Chinese regulator realised its mistake quickly, and set up a meeting with all the major brokers to allay fears. This had the desired effect as Chinese and Hong Kong stocks recovered some of their lost ground.

Elsewhere this week, we interacted with the managers of one of the largest holdings across our funds, private equity trust Oakley Capital, following the release of their latest net asset value (NAV). The portfolio value rose 11% in the first half of the year (and 26% over the past year) driven almost entirely by underlying earnings growth with no realisations during the period. The strong NAV return came despite over 20% of the portfolio being held in cash, and a number of the underlying companies that rely on direct to consumer products still being impacted by lockdown restrictions across Europe. The trust has been one of the Funds’ top performers this year, but we believe it is still too cheap on a mid-20% discount to NAV. This is highlighted further by Oakley having achieved an average premium on exits of 44% to NAV, net NAV gains of 16% per annum over the past 5 years, and the board continuing to operate a very active share buyback programme.

Finally, we’ve had a number of updates from real estate investment companies this week, including BMO Commercial Property Trust, BMO Real Estate Investments (not owned) and AEW UK REIT. High street retail has been an awful place to have been invested in recent years, but often retail warehouses have been unfairly associated with the same issues, despite having some similar credentials to industrial and warehouse properties that have performed so well. It is noteworthy that all have pointed to firmer pricing in retail warehouses and that valuations appear to have bottomed in that sector. AEW UK REIT is looking to take advantage and is finding lots of opportunities to deploy capital at very attractive yields into retail warehouses/parks anchored by well-known financially robust tenants such as B&Q, B&M, Halfords and discount supermarket operators. We will be watching the space closely.

Dan Cartridge – Assistant Fund Manager

This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. HA4466.

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