1st September 2023
Mark Twain is attributed to the quote “History doesn’t repeat itself but it often rhymes”, and that seems very relevant when helping to explain our Funds’ recent performance. A huge benefit of having the same fund management team in place for more than 14 years is the ability to look back on the past and recall similar periods that can be useful references to current conditions. For much of this year, we and our investors will be feeling disappointed about our Funds’ short term performance numbers that show a negative absolute return, combined with modest underperformance relative to their respective IA Mixed Investment Sector averages. The last time our funds behaved this way was in the second half of 2011 (the peak to trough period was 15/07/2011 to 03/01/2012 to be exact), when Vanbrugh fell 6.8% compared to the IA Mixed Investment 20-60% Shares Sector down 2.6%. Fears around the breakup of the euro and the US debt ceiling crisis caused many risk assets to sharply fall in value in a matter of months. For example, the UK mid Cap index fell 16% from July to August, troughed at -20% in October and ended the year down over 10%.
While we don’t think we are in a similar ‘crisis’ period today, and the moves are not as extreme this year compared to 2011, the ongoing interest rate hiking cycle is causing our investment universe to perform in a similar way, with similar excitement around prevailing valuations of holdings in our portfolios and because of our consistently applied investment process, we are behaving in a similar way. We can vividly recall those months when UK equities, European equities and investment trusts got cheaper and cheaper as the year went on and we were gradually increasing exposure as valuations got more and more attractive. Here is an extract from our end of November 2011 factsheet…
“Notwithstanding the seriousness of the Eurozone Crisis, it would appear that investors are now being paid disproportionately to embrace risk. Indeed, the extent to which comparative valuations have moved suggests that some popular safe haven assets, such as long term government bonds, are now precariously overvalued, while the risks of holding carefully selected corporate bonds and equities may be less than most investors believe to be the case. This is the background to Vanbrugh’s portfolio, which is now heavily weighted in the bonds and equities of good quality companies, in funds managed by talented active managers. The economic environment is tough and will quite likely get tougher. However, we believe that is more than adequately reflected in many asset prices.”
Back in 2011, UK gilts were one of the best performing markets returning 17%, but because of the low starting yield on offer, it was an area to which Vanbrugh was lowly exposed relative to its peer group. This was a big factor in the relative underperformance that year. This year, it is all about the US equity market with the Nasdaq 100 Index up a staggering 32% year to date and the broader S&P 500 Index up 13% (31/12/2022 to 29/08/23 GBP total return, Source: FE fundinfo), driven by a very narrow cohort of mega-cap stocks perceived to be the winners of an increase in the pace of AI adoption. The vast majority of the strong performance has been driven by multiple expansion (stocks getting more expensive) as opposed to impressive earnings growth. We are currently lowly exposed to these markets relative to the peer group, making it a big factor in this year’s underperformance.
Shunning expensive assets as they get more expensive and adding to cheap assets as they get cheaper is a consistently applied part of our investment process. In the same way we seek to understand when our underlying fund managers will perform best and when they will perform worst (no-one has solved investment to be able to outperform year in year out), we remind our investors that it is times like these that we will underperform. The year to the end of June 2023 is only the third time Vanbrugh has been 4th quartile over a 1 year rolling period (to a quarter end, so 53 total periods), with the previous two occasions being in 2011 (cheaper assets getting cheaper) and 2019 (expensive assets getting dearer). After both of these short periods of relative underperformance, performance improved such that subsequent 3 year returns were comfortably top quartile.
Make no mistake, we are as excited about the value on offer in our Funds’ portfolios as we were in 2011, if not more so! Areas we are most excited about and have material exposure to are UK equity funds (across the market cap spectrum) and Japanese equities which have the added potential of a recovery in the extremely undervalued yen, and selected deeply discounted investment trusts where the weighted average discount is in excess of 30% compared to the sector at an average of 16%. In fixed income, we have high quality corporate bond funds offering yields far in excess of government bonds, and long dated UK and US index linked government bonds that offer a positive real yield for the first time in decades. We understand that there is a temptation to hide in cash during these volatile periods, especially now deposit accounts offer savers a decent nominal yield of around 5%, but we are confident that over a sensible long term investment horizon (at least 3 years in our Funds’ case), we expect valuation anomalies to have corrected and our Funds’ returns to beat cash. More detailed reasoning on this can be found in our recent article “Cash is no longer trash, but we can do better” here.
Looking back on that 2011 experience, we didn’t know shortly after writing the November or December factsheets that 3rd January 2012 would prove to be the turning point for relative performance. Perhaps this note could be just as timely!
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. FPC1129.