23rd September 2022
The youngest sibling of our three funds, Hawksmoor Global Opportunities, had its 4th birthday last weekend. In its short life it has encountered things much of today’s population hadn’t hitherto seen in their lifetime – a global pandemic, a European land war, rampant inflation, a prolonged series of interest rate rises and the death of the United Kingdom’s longest reigning monarch. Most of these events have caused financial markets to be very volatile with the performance of traditional equity/bond portfolios in 2022, enduring the worst start to the year any of us have witnessed. It is therefore pleasing that since its launch in September 2018, the Fund is in the top quartile of its IA Flexible Sector peer group and has comfortably outperformed the UK equity market. (Source: FE fundinfo)
Global Opportunities’ objective is to achieve a “high level of capital growth over the long term”. That longer term horizon, defined as at least 5 years, is longer than our other funds but doesn’t mean we can bet clients’ money on one theme, or rely on one macro outcome, and disappear for 5 years. There is, however, an abundance of value on offer within our portfolio today that means we could close our eyes for the next five years and follow the famous Warren Buffett quote, “ I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” On the other hand, given the attractive watchlist we have and the likelihood of volatile markets continuing, there should be ample opportunities to enhance returns by taking advantage of the opportunities arising in this interim period.
Investors and regular readers will know our investment process is rooted in identifying attractive valuation opportunities, which we believe offers the best margin of safety when investing. At times over the past 4 years, this discipline along with our belief in constructing diversified portfolios, has been thoroughly tested when a relatively narrow set of expensive equities and bonds have led in performance terms. Today we are finding so much value (whether that be due to underlying asset valuations and/or investment trust discounts), across a diverse range of asset classes, that it is hard to narrow the choices to a 50 position portfolio.
The current weighted average discount on the investment trust portion of the portfolio is 20%, which compares to just 4% a year ago, 15% 2 years ago (when subsequent returns were very strong) and 12% 3 years ago. The entire investment trust sector in aggregate currently trades on a 10% discount. There is a common opinion in the market that the wide discounts on sectors like property and private equity trusts, that publish quarterly or six-monthly NAVs, are illusionary since the ‘live’ NAVs are likely to be lower after rises in bond yields and falls in public markets undermine the validity of the last NAV. While that may be true in general, we believe that the underlying valuations of many of our holdings, such as private equity trusts like Oakley Capital (36% discount), or property trusts like Phoenix Spree Deutschland (38% discount) and CT Property Trust (40% discount) will prove to be more resilient than consensus, or at worst, the current level of discount is already factoring in a material fall in the NAVs. Further, there are a number of special situations where discounts are wide, despite corporate action events ahead that should act as catalysts for a return of capital at much narrower discounts.
It is not just investment trusts that get us excited at the moment. There is plenty of value on offer within open-ended funds managed by talented ‘alpha’ managers operating within markets that are exhibiting extreme levels of valuation dispersion, meaning it is possible to build cheap portfolios despite markets in aggregate looking expensive. We have a number of funds where the average PE ratio is single digits, such as Asian equity income, US small caps, UK equities and Japan small caps. As an illustration of the wide-ranging opportunities we see, we have recently introduced two funds to the portfolio that couldn’t be more different in their underlying holdings; Bluebox Global Technology and Man GLG High Yield Opportunities. The former’s portfolio had derated materially this year and is trading on a multi-year low multiple despite the quality and visibility of the earnings growth from the investee companies remaining in good shape. While the latter is offering a yield to maturity in excess of 13%, which to us seems like sufficient compensation for the risk of defaults and erosion of capital in real terms from inflation. Another indication of the value on offer is the prospective dividend yield from Global Opportunities’ portfolio of 2.5%; low relative to many parts of the bond market, but attractive relative to other ‘growth’ funds. This is reflecting the allocation to real assets such as property, infrastructure, equity income and the aforementioned high-yield bonds that combine to create a cheap, diversified portfolio that offers a very attractive total return over the coming years. We believe that well-run “growth” funds needn’t be invested only in “growth” assets – especially if those assets are prohibitively expensive.
Finally, experience tells us that when you can’t find something to sell in order to bring in a new idea, of which there are plenty, then that bodes well for future performance.
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. FPC564.