12th March 2021
An important aspect of our fund management is being relentlessly focused on the returns that our Funds can generate from today, every day.
Competition for capital and strong idea generation is a really important driver of long term returns and alpha generation as we search for opportunities to rotate out of areas that have done well into similar quality, better value ideas that we can squeeze more alpha juice from. We are pleased that competition for capital in the Funds is currently very high, with lots of ideas spanning a wide range of asset classes vying for a place in our Funds, making our jobs difficult in a good way (we have to sell things we like in order to buy things we like even more).
In recent weeks we have expressed our excitement at unearthing funds including GVQ UK Focus and CIM Dividend Income, whose managers are enjoying huge valuation dispersion within the regional market pools they are fishing in. Though these regional markets (the UK and Asia) are not cheap at the index level, the managers that we have identified have built cheap, high-quality portfolios where the prospective returns are (far) in excess of the long-run returns equities have generated (typically around 7% annualised for the past hundred years).
At a time when highly elevated aggregate market valuations in many areas (certain measures for the US market imply negative returns over the next decade) are resulting in a scramble to dab watering eyes and bleeding noses, we are filled with great confidence for our Funds’ prospects. Whilst we have already increased our exposure to these portfolios, one of the key conclusions from our latest monthly investment meeting, where we formally (and virtually) gather to review the investment environment and our Funds’ positioning, was a desire to further concentrate our Funds’ holdings in these exciting portfolios.
As a result, this week we have reduced some of our UK property exposure where we have a high certainty of respectable but unspectacular returns, in favour of our higher conviction ideas. We have also had the opportunity to sell one of our ‘distressed REIT’ positions. During the summer months we were able to introduce a number of property trusts trading at material discounts to their net asset value, as sentiment towards their properties was poor as a result of the lockdowns forced by the pandemic. In the weeks since Boris announced the UK’s re-opening plan, one in particular has enjoyed a very strong share price recovery, with the discount narrowing from c.35% when we introduced the holding, to low single digits. We are happy to take the c.30% return to the bank. In all three Funds this has helped finance increases in GVQ UK Focus and CIM Dividend Income, whilst in the Vanbrugh Fund we have also added to Crux UK Special Situations, and in the Global Opportunities Fund we have also increased Prusik Asian Equity Income (already a large holding in the Vanbrugh and Distribution Funds).
Within the Distribution Fund, we have also sold our position in Fidelity Global Enhanced Income, reinvesting some of the proceeds into Fidelity Global Dividend (same portfolio, same manager, but without option overwriting which serves to boost the yield) with the balance helping to fund increased weights to regional funds. The reason for moving out of the ‘enhanced’ version of the strategy centres on the extreme market conditions we are currently seeing. By way of background, in benign market conditions the covered call overwriting strategy boosts the yield on the fund by the value of the option premium received for selling call options on portions of the underlying portfolio. At the same time, this caps the potential upside generated in the event of very sharply rising markets (generally, options are written over a 1-3 month time frame and give scope for the writer to capture the next 5-10% of share price upside in that period, missing out on any gains above this level). As I’m sure you’re very much aware, market conditions are currently anything but benign – including for the strategy. Signs of speculation have been increasing in recent months driven by elevated retail investor flows, with wild price swings typically skewed towards the upside. The most prominent example has been in GameStop shares, pumped up by the WallStreetBets Reddit forum in January (incidentally GameStop shares have been mind-bogglingly volatile again this week), whilst on Wednesday there was news of a new FOMO (fear of missing out) ETF – I wish I was joking! This speculation is still generally confined to a select few stocks, however in recent weeks with bond yields backing up we have seen elevated volatility seep into other areas of markets, including the biggest snap back in the relative performance of ‘value’ and ‘growth’ stocks since the unwinding of the dotcom bubble two decades ago. We simply cannot rule out the potential for spill over into stocks that are held in the Fidelity fund, hence shifting into the non-enhanced version ensures we won’t miss out on any upside should this occur.
My turn to write the Crescendo happily coincides with the biggest club in the country, Sunderland AFC, primed for (yet) another trip to Wembley this Sunday in the EFL Papa John’s Trophy Final (equivalent in stature to the Champions League Final for clubs languishing below the Championship). After losing on each of our past 8 (EIGHT!) visits to the stadium, I am keeping everything crossed that we can sneak past world beaters Tranmere Rovers…
Hope you have an enjoyable weekend.
Dan Cartridge – Assistant Fund Manager
This financial promotion 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. HA4302.
