8th April 2025
When the News at Ten opens with a headline about the trillions of dollars wiped off global stock markets, we believe it is important to keep in close contact with investors who might be tempted to panic and sit in cash until all the noise around tariffs blows over.
Although the last few days have seen extraordinary moves, it is important to remain calm and focus on what we can control. We are almost relieved our process does not rely on macroeconomic forecasting: surely this must be the most difficult environment capital allocators relying on macroeconomic signals have ever seen. We believe no one really knows how this is going to play out – probably not even Trump himself.
This heightened level of uncertainty is reminiscent of Covid times, and the volatility we have seen in recent days are very reflective of those days. At times like this, where even so-called safe havens like gold or government bonds fall in price, the sharp falls are almost certainly driven by the desire for many to de-risk, deliver and raise cash. We know that many portfolios globally are managed with strict, maths-based risk parameters that use value-at-risk frameworks (a measure of how much a portfolio could fall in a given time period with given probability). As volatility in markets increases, portfolios managed in this way are often forced to sell assets as they fall and volatility rises, compounding declines in the short-term. Indeed, you may remember the flash crash from August last year. At the time, we warned that additional volatility during times of stress was likely to be a continuing feature of markets due to the prevalence of investors managing money within rigid quantitative frameworks.
We believe that as asset prices fall, as long as we are confident the fundamental valuation of the assets aren’t falling as much, that they become less risky on reasonable time horizons – not more risky. As we stated at the outset of this piece, during times when the range of future outcomes are becoming wider and more concerning, we need to focus on what we can control: the price we pay when we buy an investment, and the price we receive when we sell it. We therefore take these opportunities to increase exposure to areas that we believe have declined indiscriminately or irrationally. Based on past experiences, these moments don’t tend to last long and remaining invested and taking advantage of weakness remains the most important thing. If Trump is using the higher than anticipated tariffs as a negotiation tool, then they could be reversed overnight if other nations come to the table to discuss trade deals. Indeed, there was a rumour on Monday 7th April that a 90-day pause had been implemented which prompted a 10% intraday rally in US equities, only to reverse again when the rumours were quashed by the White House. The experience from Covid shows the recovery when it happens can be sudden so having a fully invested portfolio at that point is crucial.
We are very disappointed in Monday’s move in our Funds’ unit prices and believe it is important to explain the falls on that day. Open-ended funds price at different times of the day which can lead to very different performance numbers if comparing over a few days during volatile times like this. Our Funds’ price at 10am each day. Monday morning was a low point for markets as investors reacted to the weekend’s news and doubling down by Trump that tariffs would come into effect. Global equities fell sharply, especially Asian markets, that effectively covered two bad days in one as Hong Kong and China markets were closed Friday. Investment trusts were caught in the crossfire as market makers shifted their bid prices lower despite very little volume, providing another reminder of the Covid times. In our 10am valuation, there were a number of investment trusts down more than 5% and some were down more than 10% compared to Friday’s 10am prices. For example, Nippon Active Value, a Japanese equity fund whose portfolio bears little resemblance to the index names given its activist strategy, was down 11.6% as at 10am on Monday but then rebounded by +11% by 10am on Tuesday. We took advantage of the sharp one-day decline and widening discount to top up the position, funded by a reduction in an open ended Japanese fund. Many of our peers have 12noon valuation points, and our peers also differ by whether they are invested in other funds or directly into securities. In summary, we would urge you not to place too much importance on one-day fund price moves (which can differ due to technical rather than fundamental reasons) and we recommend stepping back and viewing the Funds’ performance over more than a couple of days.
So why do we bother with investment trusts if they cause such volatility? We often refer to having a love hate relationship with the sector because they provide investors with a broad range of opportunities across various asset classes inaccessible via open–ended funds, and allow us to build truly different portfolios compared to traditional equity/bond portfolios. However, they sometimes also behave poorly in the short term when markets enter a risk off period. Going into this month, investment trusts were trading at the widest discounts on record, outside of the depths of previous crises like the GFC and Covid. We had confidence that discounts would narrow over the medium term due to the elevated level of corporate activity including mergers and acquisitions, record levels of share buybacks and more activist shareholders getting involved. We remain firm believers in the added value investment trusts bring to multi-asset portfolios, especially during periods of recovery where the discount narrowing alongside a rising net asset value is a powerful driver of returns.
While we did manage to do a modest amount of dealing, the activity was purely focussed on relative value where we identified extreme investment trust discount widening funded from equivalent open-ended funds. This allows us to remain true to our investment process of identifying valuation opportunities without making a call on the short-term direction of markets or making asset allocation switches when everything is still so uncertain and volatile. On Monday, we added to the following investment trusts: Law Debenture, Temple Bar, Aberforth Smaller Companies, Odyssean, Nippon Active Value and CC Japan Income & Growth, funded by reductions in similar open-ended funds. The quantum of the dealing is modest so far, less than 3% of assets across the three funds, more akin to dipping a toe in the water rather than jumping in. The Funds have cash to take advantage of further opportunities as they arise.
Beyond this noise around tariffs and the market volatility, we remain of the view that we have reached peak “American Exceptionalism”. The US equity market has become dangerously expensive and concentrated such that the future performance was reliant on continued US economic growth and the ongoing success of just a handful of mega cap technology companies. Perhaps the events of the last few days has put a question mark over that trend that might prompt investors to diversify their equity exposure to regions where valuations are a lot cheaper and economic growth expectations are not that different now. Perceptions of the US as a safe haven for global capital may be severely compromised by the actions of the current administration.
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. FPC25344
