5th January 2024
Hopefully, it’s not too late to say Happy New Year. We trust you had a relaxing break with loved ones and are feeling refreshed for the opportunities and challenges 2024 will inevitably bring.
As Fund Managers we spend most of our time looking ahead, considering the best ways of generating future returns for our investors. We’re also wary of becoming obsessed with short term relative performance numbers and believe that success or otherwise should be judged over longer timeframes and with reference to the Fund’s stated objectives. Despite those caveats we understand why some investors like to analyse our Funds in the context of peer group returns. We also conduct our own internal attribution recognising that understanding the drivers of past performance offers important insights from a risk management and portfolio construction perspective.
With this in mind, this week’s Crescendo offers a review of how the Hawksmoor Funds performed in 2023. Pleasingly Vanbrugh, Distribution and Global Opportunities delivered positive absolute returns of 4.6%, 4.7% and 3.8% respectively. Less pleasingly these returns lagged their relevant IA sectors with all 3 funds ending the year in the 4th quartile. Whilst this is a source of frustration, the all-important 3-year numbers remain good with Vanbrugh on the cusp of top decile and Distribution and Global Opportunities both solidly second quartile. 2023 was a good year for traditional portfolios with a market-cap weighted 40% equity / 60% bond allocation (MSCI World / ICE BofA Global Broad Market) up 5.9% in sterling terms whilst the 60% equity / 40% bond calibration was up 9.1%. Equities did much of the heavy lifting with MSCI World +16.8% with a significant chunk of those returns driven by the stellar performance of a handful of mega-cap US tech stocks.
As regular readers will know, our process is completely unconstrained with fund selection and asset allocation driven by valuation and return prospects as opposed to the weights in an arbitrary benchmark. Digging into the key positive and negative drivers of 2023 performance illustrates this philosophy in action with the key takeaway being just how different the Hawksmoor Funds are positioned relative to more benchmark aware, traditional approaches.
Positives
- Fixed Income: The global bond market as measured by the ICE BofA Global Broad Market was down 0.4% in sterling terms in 2023 with government bond yields, amid much volatility, ending the year modestly higher than where they started. Credit spreads narrowed however which was good news for our focus on corporate bonds over sovereigns. Dynamic management of the portfolios also came to the fore with the fund’s exposure to government bond duration materially increased as rates spiked higher in late summer which proved timely given the subsequent reversal in yields. The real stand out within fixed income though was fund selection. Valuation dispersion within credit markets has been running at elevated levels for some time, creating a fertile hunting ground for nimble, active managers to generate alpha. Core holding Man GLG Sterling Corporate Bond delivered a stunning total return of 23.8% and there were also more than respectable showings from other active credit funds including Schroder Strategic Credit (+12.0%), Artemis Corporate Bond (+10.3%) and Close Select Fixed Income (+9.9%). Looking further beyond the mainstream, we identified an opportunity in structured credit where the complexity premium over vanilla corporate bonds was unusually wide. TwentyFour Monument Bond which invests in European RMBS and CLOs posted a return of 10.2%, not too shabby for a portfolio with practically zero interest rate sensitivity and a double A average credit rating. TwentyFour Income which takes more risk and invests further down the capital structure generated a total return of 17.9%.
- Japan Equity: We have been positive on Japanese equities for some time attracted by decent earnings and dividend growth, supportive valuations and a corporate governance reform story which after several false dawns appears to be gaining real traction. This confluence of factors powered total returns for MSCI Japan of 28.6% although Yen weakness meant this performance was somewhat diluted for sterling investors. Despite the 2023 rally, large parts of the market continue to trade below book value. In terms of fund selection the stand-out performer was Nippon Active Value, a London-listed investment trust whose manager adopts a highly activist approach to unlock shareholder value. Strong performance at the net asset value level was complemented by significant discount narrowing resulting in shareholder returns of 41.1%.
- Private Equity: The ability to access high-quality, fast-growing companies at steep discounts to net asset value (NAV) has long felt like an anomaly to us, hence our decent allocation to listed private equity trusts. 2023 was more of a mixed year for the sector with investors worrying about the exit environment and the potential for the negative public equity market returns of 2022 to feed into private valuations. This didn’t prevent our highest conviction holding, Oakley Capital, from delivering a handsome 18.4% in the year.
Negatives
- US Equity: The funds had low exposure to strongly performing US equities (+19.4% in GBP), and particularly the mega-cap tech names that drove so much of that market’s performance throughout 2023. The AI narrative explains much of the euphoria and whilst we are forever open-minded, we will also always be guided by valuation. Whilst the latter might be the most important determinant of long-term returns, 2023 proved that it is a poor market timing tool, with that refined cohort of stocks (now known as the Magnificent 7) making serious progress despite heady starting valuations. Importantly the majority of returns for large cap growth stocks was driven by multiple expansion as opposed to earnings growth with significant parts of the US market now seemingly priced for perfection. Although returns broadened out towards the end of the year, US equity markets have rarely been more concentrated, and we do worry about the extent to which the fate of a passive approach to US equities will be determined by a handful of richly priced stocks. With US equities accounting for almost 70% of MSCI World our low exposure to the US market was particularly painful relative to benchmark-orientated peers.
- Investment Trusts: Discounts widened across the board but the most pain was felt in alternative sectors such as property, infrastructure and renewables. 2023 represented something of a perfect storm with higher rates impacting debt costs and valuations as well as sentiment towards bond proxy type investments. Changes around cost disclosure rules also weighed on the sector with a constituency of traditional investment trust buyers withdrawing from the sector. In addition to general travails there were also some stock specific issues with weakness in the likes of Taylor Maritime (-19.8%), Gresham House Energy Storage (-28.7%), Phoenix Spree Deutschland (-31.0%) and Digital 9 Infrastructure (-64.1%) weighing. Investment trust exposure in aggregate detracted 0.9%, 1.3% and 0.4% from Vanbrugh, Distribution and Global Opportunities respectively. Discounts at the broad sector level have narrowed in from the October nadir, but phenomenal value remains in the listed real asset space, and we maintain exposure to a number of special situations trading on historically wide discounts where we’re confident our engaged approach will expedite the unlocking of shareholder value.
- UK Equity: Whilst delivering positive absolute returns, our heavy exposure to UK equities hurt relative performance with the 7.7% total returns of MSCI United Kingdom meaningfully behind most other major equity markets. Fund selection was decent with most of our picks outperforming the benchmark, but this alpha was insufficient to fully offset the headwinds of a lagging index. UK underperformance continues to baffle given the significant discount the market trades on both to its own history and relative to global equities, although we are cognisant of the significant outflows from the market as wealth managers continue to reduce their hitherto domestic bias in favour of a more benchmark aware and global position. Whilst this might have merit from a structural perspective, we think it makes little sense timing wise. UK equities are an important part of the portfolios accounting for almost 30% of Distribution in absolute terms, for example, and 53% of equity exposure versus the 4% weight in MSCI World. With a huge amount of bad news priced in by prevailing depressed valuations we maintain confidence in this significant overweight.
With most of our own savings invested in the Hawksmoor Funds, we share the frustrations our fellow investors might have regarding the muted returns delivered in 2023 relative to global equity indices. It is vital, however, that we stick to our knitting and maintain trust in the valuation conscious, margin of safety investment philosophy, that has served the Funds so well over the long run. Retaining discipline, we would argue, is more important than ever given the extreme market conditions we find ourselves in today. As discussed, valuation can be a poor market timing tool with the positivity we communicated at the start of 2023 derailed somewhat by the dynamic of markets being led higher by expensive equities getting more expensive. Looking ahead, and as we have written extensively elsewhere, we see tremendous value in our highly differentiated Funds and believe the breadth of cheapness across the portfolio is even greater today. Pockets of fantastic value can still be found in UK, Asian and Japanese equities. We can still buy actively managed credit funds with double digit yields, whilst the opportunity in parts of the investment trust sector are generational in nature, following the pain of last year. Here’s to 2024 and beyond.
Ben Mackie – 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. FPC241.
