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Darkest Before Dawn

9th February 2024

Our funds have endured a torrid 12 months after two strong relative years (and strong long-term track records). It is fair to say that we’ve never known an environment as difficult for our style of investing as this. Not the GFC, nor the tech crisis, nor even the Coronavirus onset. And yet we remain steadfastly optimistic.

Here’s why we are feeling so bruised:

  • Industry consolidation: investment management firms are rushing for scale. With scale, brings the ability to offer lower cost solutions while maintaining profit margins. But with scale comes the requirement for ever more liquid underlying investments.
  • Centralised Investment Propositions: combine larger companies with “CIPs” and the size of qualifying investment for firm buy lists increases. This pushes clients into more liquid funds and underlying securities.
  • Consumer Duty and Cost Disclosure: the current requirement to include the “costs” of investment companies in the overall cost figures of portfolios that hold them is an absolute tragedy. Consumer Duty has forced a focus on cost, and the best way to demonstrate fair value is not to invest in things that inflate cost figures. It’s a tragedy because investment companies don’t even have product costs (the expenses of running ICs are discounted in their share price). We’re part of the way there: the OCFs of funds holding ICs within a UCITS framework (i.e. on their KIID) excludes these “costs”. But the MIFID OCF, which is distributed to platforms and through the industry via the EMT still includes them. Confused? Bored? Stopped reading? Too many acronyms? Who can blame clients who buy funds that don’t bother with investment companies and have low OCFs and are currently performing well. As a result, the investment companies sector is seeing persistent selling with mishaps punished ferociously and the smallest sell order sending prices plummeting in the absence of a bid.
  • Active vs passive: I’m sure your LinkedIn feed, like mine, is full of gleeful commentators decrying the end of active management and the success of “evidence-based investing”, with passive vehicles garnering ever greater market share. This is reinforcing the strong performance of the most liquid investments and elongating the period over which valuation doesn’t matter.

All of the above is creating a perfect storm for our way of investing. We think active investment can add value (if you do your work and find the best managers and structures). We love investment companies (the best structures for accessing less liquid assets classes that diversify equity risk). We are valuation focused so shun expensive shares – those that are currently the most liquid and therefore desired (and performing best).

On the other hand, and at the risk of tempting fate even more than we’ve done so of late, there really isn’t much more that can be thrown at us. We’re still standing. Our portfolios are ridiculously cheap. Clients are still listening.  And our longer term performance remains good.

Without our clients’ support, we are nothing. We always say the greatest advantage an investor has over his or her competition is the ability to be patient. When managing daily dealing funds, the ability to be patient is granted by supportive clients. So a huge thanks to our clients as we weather this storm. It will pass. And thank you also to the many clients who are listening to us talk about the amazing opportunities in our funds and considering diversifying their portfolios with the truly distinct funds we manage. We can’t predict when the storm will pass, but we do know it will.

Ben Conway – Head of Fund Management

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. FPC2460.

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