24th November 2023
It’s that time of the year again. Thanksgiving in the US is rapidly followed by the Black Friday Sales, when consumers stock up on discounted merchandise with an eye on Christmas present giving just a month later. As Money Saving Expert Martin Lewis would caution though, not all discounts are what they seem and often you can get the products that are on sale cheaper at other times in the year. You’ve got to do your homework to unearth the real deals.
We believe we’ve found three great, genuine bargains this holiday season: Hawksmoor Vanbrugh, Hawksmoor Distribution, and Hawksmoor Global Opportunities. Why? Because the value in our funds is the best since our oldest fund Vanbrugh launched back in 2009.
One thing we always tell fund salespeople when we meet them for the first time is that we are interested in hearing about funds that have strong long term track records, but which have been through a tough period in the shorter term. There are myriad reasons why funds with a strong long term track record might be going through a bad patch, and many of them would result in us concluding that it’s not a buying opportunity.
What we are searching for are those funds with excellent managers that have gone through a tough period because their asset class or their style has been out of favour and the assets they own are cheap relative to history, relative to other assets and in absolute terms. They offer a big margin of safety, and attractive long term return prospects for the patient investor. Often, they quickly bounce back, but it can also be the case that the value is realised over a medium to long term period. Either way, they end up being great return generators.
Finding these types of opportunities is typically rare in ‘normal’ markets (if such a thing exists!) and it takes a lot of time and effort to unearth them. In the 2013-2020 period, we would probably find one or two truly great opportunities a year such as an investment trust on a wide discount with an upcoming realisation opportunity/clear catalyst for the discount to narrow, or an active fund with a great long-term record but poor recent performance purely due to a derating.
Today, we believe that the Hawksmoor funds themselves represent such an opportunity, due to the extent of the value in our funds today. I will repeat – normally we get one or two truly great opportunities a year to put money into underlying investments that can really drive our Funds performance in the next 3-5 years. Today, our entire funds are full of such opportunities. This is incredibly rare, and we believe it is one of the best opportunities in the nearly 15-year history of fund management at Hawksmoor to deploy capital with us.
We’ve had a difficult year, and we are disappointed with the performance. Our process has faced a perfect storm as expensive assets have led markets higher (think Magnificent Seven), and investment trusts have derated sharply (a number of reasons covered in previous posts). As a result, our short-term numbers are poor, but our long-term numbers remain strong. This is an opportunity.
The components of our funds can be thought of in three broad buckets: our equity exposure, our fixed income exposure, and our alternatives exposure (accessed through investment trusts). Each bucket is at or close to the most attractive it has been since our Vanbrugh fund launched, back in 2009. The only time there have been similar levels of value in all three buckets of our funds at the same time was in early 2009 when Vanbrugh launched, and markets were reeling from the Great Financial Crisis.
Breaking it down:
- Fixed income yields are the highest since Vanbrugh launched back in 2009. Nominal and real government bond yields in developed markets are at or close to the highest since Vanbrugh launched. The opportunity in actively managed credit funds is the best since Vanbrugh launched, apart from the first couple of months post launch in the depths of the GFC. One example is Schroder Strategic Credit. The fund is offering around double the 2017-2021 average yield, with no change in the average credit quality. High starting yields imply high return prospects – the key factor being avoiding defaults that eat into those returns.
- The opportunity in targeted areas of equity markets is at or close to the best since Vanbrugh launched. Valuations of small and mid-cap equities in the UK, the US, Asia, and Japan are at historically low levels, implying historically high prospective returns. The MSCI United Kingdom index is valued at around 10x P/E, hovering close to lows since Vanbrugh launched back in 2009. Using data from broker Liberum from 1927-2023, the average subsequent 5 year returns when the P/E has been around this level in the past has been 10-15% per annum (60%-100% cumulative returns over the next 5 years). The actively managed funds we are investing in are even more attractive. The price-to-earnings ratio of one of our largest UK equity positions Artemis UK Select is at a decade low, almost on a par with the covid trough. Obviously, these are averages and past performance isn’t a guide to future performance, but there is clearly a huge margin of safety built in.
- Discounts on investment trusts are close to the widest in history, and on par with the widest levels since Vanbrugh launched in 2009. The discounts on the investment trusts we hold in our portfolios are even wider than the aggregate discount and are at all time wides. The average discount in our funds is nearly 30%, compared to c.17% for the investment trust sector average. The dividend yields that many of our investment trust positions are offering are at all-time highs (ie we are paid to wait whilst holding them). In addition, there are catalysts in place to close those discounts and drive returns and we are heavily engaging with boards and management teams to unlock the value for our unit holder’s benefit.
The combination of the most attractive return prospects from each bucket of our funds occurring simultaneously has not happened since Vanbrugh’s launch in 2009. It is what makes us so excited, and so confident about the medium to long term prospects from today. It’s a Black Friday Bargain that we don’t think should be missed.
Dan Cartridge – Assistant 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. FPC1342.