Time for a Different Approach – Redux
May 2025
Way back in January 2021 we wrote an article entitled ‘Time for a Different Approach’ (link here) in which we argued that, following a strong period of returns for mainstream asset classes, investors might consider diversifying away from traditional equity-bond portfolios to consider a multi-asset approach that embraced a broader set of investments including less liquid alternatives and real assets (infrastructure, renewables, shipping, precious metals etc.). Benchmark aware and market-cap weighted multi-asset solutions were especially in the cross hairs given their inherent concentration risk and significant exposure to expensively valued US equity markets (c.70% of global benchmark).
As at the end of 2024, it’d be fair to say that these suggestions were somewhat off beam! Led by a small cohort of mega-cap growth stocks, US equities in the intervening years continued to get even more expensive and continued to outperform other regional markets, further assisted by an appreciating US dollar.
Source: FE fundinfo 31/12/2020 – 31/12/2024
Over this period the Hawksmoor Vanbrugh fund had an average exposure to US equities of just 3.8% reflecting our concerns regarding historically high valuations (we accept valuation is a poor market timing tool but strongly believe that the price paid for an asset is a key determinant of long term returns). In contrast, a traditional market-cap weighted 40% equity-60% bond portfolio would have had around 28% in US equities. Despite the headwind posed by being massively underweight the dominant US market, Vanbrugh actually outperformed the equity-bond construct, helped by the use of alternative assets, our ability to harvest idiosyncratic returns from investment trusts and strong outperformance from active fund picks in the equity and fixed income space. To put it another way, truffle hunting and the sourcing of alpha gems far from the beaten track allowed us to stay ahead of the market through a period of time where we felt beta was generally expensive and a risk not worth taking.
Source: FE fundinfo 31/12/2020 – 31/12/2024
Bringing things up to present day, 2025 so far has been pockmarked by volatility and heightened uncertainty. The US is at the epicentre of this with an Administration seemingly intent on upending the normal rules of governance and international diplomacy. Trump’s hokey cokey approach to tariffs, central bank independence, fiscal policy and important geopolitical issues combined with a plethora of constitutionally questionable executive orders have been unsettling. It is perhaps no surprise that measures of consumer and CEO sentiment have been heading lower with potential implications for consumption, business investment and economic growth. As regular readers will know, we are not macro investors, and we avoid making forecasts or positioning portfolios around hard to predict economic variables. We do, however, think it’s fair to surmise that the range of probable outcomes for the US economy has widened this year and that downside risks have increased.
More importantly, we also believe it possible that Trump’s chaotic approach to policy has the potential to undermine investors faith in US assets. Rising US Treasury yields alongside a falling US dollar is a highly unusual combination, particularly during risk-off episodes, but is exactly what occurred in the recent equity sell-off. The US has become a crowded trade over the past few decades with international and domestic institutional investors chasing US equities higher, increasing allocations as the US became a bigger part of the global benchmark. With question marks about the persistence of US exceptionalism to the fore, the possibility that global allocators look to reduce their heavy bets in the US is real and the virtuous circle of performance attracting flows in turn supporting the US dollar could go into reverse. The relative valuation of US markets which trade well above long term averages versus those in Japan, Europe and the UK which trade below, adds further support to the case for rotation.
The logic that it will be the US that bears the brunt of harmful tariffs and policy uncertainty is reflected in year-to-date (to end of April) performance with MSCI USA -11% in sterling terms, significantly lagging UK, European, Japanese and Asian markets. Notwithstanding the short time period, the Hawksmoor Funds have delivered positive returns against this backdrop, materially outperforming traditional market-cap weighted equity-bond portfolios, benefitting from our unconstrained, benchmark agnostic, valuation informed approach as well as our ability to access alternative asset classes via investment trusts.
It seems that the great rotation from an expensive, overcrowded trade (US equities) might already have begun and there are good reasons to think it will continue. For those with heavy exposure to US centric mainstream equity-bond solutions it might be time to consider a multi-asset fund that offers greater diversification, idiosyncratic sources of return and more alpha than beta. We are enthused by the value that we see in our portfolios whether that be in cheap UK and Japanese small caps, defensive infrastructure trusts trading on wide share price discounts and premium yields or investment company special situations where active engagement can unlock value to name but a few.
Humility here is, of course, important and it may well be that the dollar and US equities recover their poise and reassert the market leadership that has dominated for the past decade. The balance of probabilities and downside risks to this scenario have undoubtedly increased however, suggesting a reduced exposure to the winning trade of yesterday might be prudent. Our Funds are highly differentiated in terms of their positioning and blend extremely well with more traditional multi-asset solutions with benefits for risk adjusted returns for those considering a recalibration. Even if we are wrong and US assets revert to steamrollering the competition, the experience of 2021-2024 suggests our portfolios can still prosper in such an environment.
At this juncture, perhaps it really is ‘Time for a Different Approach’.
Source: internal, April 2025
Hawksmoor Fund Managers
May 2025
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. FPC25390
