5th September 2025
August is a strange month in financial markets. Data from Winterflood Securities (thanks Emma Bird) shows that daily volumes in the investment trust sector during August this year were 22% lower than the average monthly volumes over January to July 2025. The numbers are similar over the past 5 years where August volumes are 18% lower than the January to July average. Our fund research diaries also prove that there are fewer research and marketing meetings during August. It is a bugbear of mine that this is the case. As readers of our last Crescendo will know I am not called Victor Meldrew for nothing – never happy unless there is something to moan about! The glib answer given is that “everyone is on holiday”, but this obviously cannot be true. The stock market doesn’t shut down in August, companies continue to report news, investment portfolios still need to be managed every day, and not everyone has school-age children and would choose to pay twice the price for a holiday in August! The reality is that it is a self-fulfilling prophecy where everyone is less active in the belief that everyone will be on holiday. Dealing volumes are therefore lower because investors might think twice before implementing investment decisions if there are fewer participants and therefore a lower chance of executing dealing requests at good prices. By the way, here at HFM towers, there is always one of us on the desk every working day of the year so we can respond if something does happen in markets (last year’s yen flash crash was in August) or if a client gets in touch etc.
Nevertheless, it is a fact that it is quieter in August which provides useful time for self-reflection and zooming out to consider how well our investment process has been working and where we can improve. We believe humility is one of (if not the most) important characteristics of good fund management. We think it is important to constantly test and improve how we apply our process to ensure relevancy in an ever-changing market and regulatory environment to avoid complacency and strive to unlock marginal gains. So with that in mind, what have we learned this summer?
Thankfully, this year has been one of the few in recent times where a relatively low allocation to US equities hasn’t hurt our relative or absolute performance. Indeed, we have had limited exposure to the US for most of the past decade which hasn’t impaired our long-term performance numbers. Of course, with hindsight our longer-term performance would have been even better with more exposure to US growth stocks like the so-called Magnificent 7. We would never allocate to an asset class just because it has gone up a lot or because it is a large part of a benchmark or our peers’ portfolios. However, we have been asking ourselves if there is something that we could do better when analysing fast-growing sectors like technology where starting valuation has been a less important factor in future returns in recent years and therefore has long looked expensive to us?
We were reminded in a recent meeting with William de Gale, manager of the Bluebox Global Technology Fund, of the consistent long-term nature of superior earnings growth of the average tech stock. Humans struggle to think in a non-linear fashion, which makes everyone (apart from William and other tech managers presumably) bad at fully appreciating the impact of compounding. The really difficult question to answer is therefore, what is the right valuation for a sector that compounds at 15% a year for the past 15 years?
Regular readers and existing investors will be pleased to know we are not suddenly piling into a Mag 7 ETF, as we still have reservations. We question the efficacy of using the past 15 years of data as the US hasn’t experienced a ‘normal’ economic recession since the GFC, so whether the current crop of tech stocks are cyclical or not hasn’t been properly tested yet. Can the 15% compounding earnings persist in a more difficult economic backdrop? How much of the AI revolution is real or just hype? The recent MIT paper found that only 5% of businesses have been able to monetise AI (click here for the publicly available report). Can the developed world’s creaking electricity grid cope with the expected expansion of data centres, which, if not, will surely curtail further AI related capex? Finally, is it really different this time? Answers to all these questions requires some crystal ball gazing, something we are ever reluctant to do.
As ever, what we can do is apply a probabilistic framework around return expectations using different time horizons, start and end multiples, and future earnings growth to keep testing if there a sufficient margin of safety over a 3-5 year time horizon relative to other available opportunities to have exposure. Perhaps the key failing of our analysis over the past 5 years has been underestimating the growth prospects of technology companies, which have helped to justify lofty starting valuation multiples investors had ascribed to them (and which have been almost ever expanding across this time frame too which has turbocharged returns for holders, and made us more and more uncomfortable owning). It is a challenge we will continue to embrace, but after this period of reflection, perhaps we will be quicker to allocate more capital to the tech sector if there is a material setback like we saw in April or in 2022.
Other lessons learned over the summer? The weather can make a material difference to farmers’ harvests but also investment performance if you hold renewable infrastructure investment trusts, and investment trusts managed by US based hedge fund managers are trading on wide discounts for a reason.
We hope all our readers are fully refreshed after their collective time off during August and markets will be fully functioning again in September.
Daniel Lockyer – Senior Fund Manager
For professional advisers only. This article 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. FPC25505.
