22nd September 2023
With the Hawksmoor Global Opportunities Fund (Global Opps) reaching its 5th anniversary, a key milestone given the Fund’s stated investment time horizon is 5 years, we thought a short summary of the tumultuous last few years is in order. In recognition of the Rugby World Cup taking place at the moment, the rugby fans among you might notice the odd reference to the sport.
It’s been a journey
At the time of Global Opps’ launch 5 years ago in September 2018, I doubt many forecasters anticipated a global pandemic, negative oil prices, the first European land war since World War 2, a resurgent inflationary environment, the steepest rate hiking cycle of a generation and four British Prime Ministers, including the infamous and disastrous 49-day reign of Liz Truss. Any forecasters that managed to predict all of that I am sure would have simply put all their money under the mattress with them in an underground bunker, rather than leaving it invested in financial markets. That would have been a mistake.
Since launch, Global Opps has delivered top quartile performance, outperforming the IA Flexible Sector by nearly 10% with absolute returns of 29.4% versus 19.9%.
It has been a volatile period that has tested traditional equity/bond asset allocation models with “low risk” bonds performing the worst of the major asset classes. The performance of global equities has also dumbfounded many investors (including us!). Equity market leadership has been dominated by global technology giants (the so-called Magnificent Seven), despite them often trading at eye-watering valuations even as short-term interest rates rose rapidly to above 5% in the US and UK, compared to near-zero for much of the past 5 years.
Given this challenging backdrop, we take comfort in our investment process which seeks to avoid crystal-ball gazing, preferring to focus on the valuation of asset classes and investments as the best determinant of long-term future returns. This consistently applied process has served us and our clients well for nearly 15 years.
A game of two ‘halves’
Global Opps has enjoyed a great start in absolute and relative terms over its first 5 years, navigating the toughest of periods described above very well. The only major market it failed to beat over this period was MSCI World Index which is dominated by the US tech stocks which is understandable given that our process prevents us chasing what we believe to be expensive assets higher.
Global Opps managed to beat most major equity indices since launch despite having average equity exposure during this period of just 67% (not including gold and silver mining equities which would increase this to around 74%). This highlights the excellent opportunities we have been able to unearth in alternatives such as battery storage trusts, property, music royalties and infrastructure, as well as very targeted opportunities in fixed income. Performance has been delivered in a differentiated way, from many areas of markets that investors cannot access passively, with the Fund acting as a great complement to most other long term growth funds (both active and passive!).
Whilst the first four years were very strong, the past 12 months have been more difficult for absolute and relative returns as our investment process has faced a perfect storm of expensive assets performing best, large caps outperforming small caps (we are currently biased to small caps where valuations are very compelling) and a significant de-rating of investment trusts for a variety of reasons that you can read about in previous Crescendo blogs. However, we believe this has created an excellent buying opportunity, with many of the active managers we invest with, and the ability to build portfolios at or close to all time low valuations, and investment trust discounts close to 33-year wides. We believe this sets the Fund up well for the next 5 years.
Rotating the squad
We are firm believers in active management, moving the portfolio away from expensive assets where the risk and reward becomes less attractive and towards cheaper assets where we feel there is a greater margin of safety. We are valuation focused investors and are style agnostic (not value or growth). At times we will have more of a tilt to one style over the other, but we simply care about finding the best risk adjusted returns available to us at any point in time regardless of factor labels.
Indeed, Global Opps’ starting portfolio contained two Baillie Gifford funds, Japanese Income Growth and Global Discovery, as we sought to capture the strong performance of growth managers while interest rates stayed low. We have since moved on from those funds, with Japan a case in point where all the Japanese funds within the Fund today are value biased managers, expressing a strong corporate governance improvement theme. Despite this rotation, a core of the Fund has remained in place. A quarter of the names that comprised the initial portfolio are still held today, although 2 of the 11 have gone off (for a Head Injury Assessment?) and then come back on again.
We are able to test whether our active management strategy works by checking the performance of an untouched portfolio at a point in time over the last 5 years and see how that portfolio would have performed versus a subsequent portfolio incorporating the changes made. Pleasingly, the current active portfolio of Global Opps has outperformed the initial portfolio with no changes at all over the subsequent 5 years, by 18% (Source: Hawksmoor own internal models, FE Analytics, gross of fees).
It’s all about the next game
Investment is all about looking forward, so enough about the past 5 years. Today, the Fund is heavily exposed to UK equity funds at 31% having been 17% at launch 5 years ago and 32% exposed to deeply discounted investment trusts. Both these allocations have been increased as the year progressed as we have identified extreme pockets of value not seen in decades and represent compelling opportunities to profit from the recovery when it comes. The timing of that recovery is of course the hardest thing to predict but valuations cannot remain at these levels forever otherwise private equity money will take advantage of the cheapness via M&A activity. Indeed, this is already happening in the UK small and mid-cap sector and the Investment Trust sector. Having a 5-year time horizon for Global Opps at a time when many investors are increasingly focussing on the short term, allows us to make investments now in the comfort that value will be realised in the coming years.
Unlike rugby, or any sport, fund management has no final whistle, so we keep going with our focus on the next 5-years. We thank you for your support of the Fund so far and hope you share our optimism for prospective returns from the Fund’s attractively valued portfolio. Please get in touch with any of us if you would like to know more about the Fund.
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. FPC1249.