10th January 2025
Happy New Year! We trust you had a relaxing break with loved ones and are feeling refreshed for the opportunities and challenges 2025 will inevitably bring.
As a team we spend most of our time looking ahead, considering the best ways of generating future returns for our investors. We also think it is dangerous to pay too much attention to short-term relative performance where overly obsessive scrutiny might impact decision making and impair our focus on delivering on the long-term objectives of the Funds. All that said, looking back can be a useful exercise where highlighting what went well, what went poorly and learning from any mistakes can augment the investment process going forward.
With this in mind, this week’s Crescendo offers a review of how the Hawksmoor Funds performed in 2024. Pleasingly Vanbrugh, Distribution and Global Opportunities all delivered healthily positive returns of 7.0%, 7.3% and 9.8% respectively. In the case of Vanbrugh and Global Opportunities, these returns were ahead of their respective sectors with both solidly 2nd quartile for the period. Distribution lagged its Mixed Investment 40-85% Shares sector, although as previously discussed the 40-85% has evolved into a sector with a heavy growth bias where many constituents have permanently heavy equity allocations. Respecting the objective, Distribution is a ‘Balanced Income’ fund that sits in the 40-85% sector so as to provide greater flexibility around asset allocation and income generation and is unlikely to ever run with equity exposure at the higher end of the sector range.
2024 was a strong year for equities with MSCI World +21% in sterling terms. Scratching below the surface reveals significant performance dispersion however, with US equities +26% versus MSCI World ex-USA up a mere 6.6%. Returns within the US were heavily concentrated with mega-cap growth stocks (a.k.a the Magnificent 7) doing much of the heavy lifting. As with 2023, market breadth was poor and short-term bouts of rotation into value and smaller companies ultimately proved to be false dawns. Decomposing global performance is also informative, with the majority of returns driven by multiple expansion, from already elevated valuations, as opposed to earnings growth. Representing around 73% of MSCI World, we suspect this is largely a US phenomenon with changes in valuation far more muted in other markets. Fixed income fared less well, with developed market sovereign bond yields rising across the board in the face of stickier inflation and growing concerns regarding fiscal largesse and future issuance. The ICE BofA Global Government Bond index was -2.5% in GBP terms although corporate bonds managed to deliver positive returns as a result of significant spread compression.
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 2024 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
- Credit: In an environment where the 10-year gilt yield rose almost 100bps, a significant allocation to low duration, floating rate asset backed securities was a good place to be. Our core holding in this asset class was up 7.9% in the year representing attractive risk adjusted returns when considering the quality of the portfolio with its AA- average credit rating. Private credit via investment trusts also performed well, largely due to discount narrowing and continue to offer attractive premium yields. Within vanilla credit, stock picking was good with all of our active funds outperforming the Sterling Corporate Bond Index with Man Sterling Corporate Bond worthy of special mention generating over 13% of alpha over the year.
- Japanese Equity: We have had significant exposure to Japan for several years, attracted by decent earnings and divided growth, supportive valuations and a corporate governance reform story which continues to gather pace. Takeovers, the selling down of cross holdings and share buybacks are all pointing in the right direction. Behind the US, Japan was the second best performing major market up 20.7% in local terms, although considerable Yen weakness meant these returns were diluted for sterling investors. Stock selection was generally good with special mention for Nippon Active Value whose high conviction, activist approach generated strong outperformance.
- Shipping: Ongoing supply side constraints and attractive dividends helped underpin strong progress in the net asset value of our two shipping trusts. Wide discounts also narrowed, partly as a result of the introduction of well thought out capital allocation policies.
- Gold: Despite rising real yields, bullion in sterling was up 28.2% supported by central bank buying as certain jurisdictions sought to diversify reserves away from US dollar assets. Gold plays an important role in the Funds from a portfolio construction perspective acting as a hedge to geo-political risk, yawning fiscal deficits and the potential debasement of fiat currencies.
- Idiosyncratic Special Situations: Wide discounts within the investment trust sector are throwing up significant opportunities for discerning investors with a willingness to pursue a more activist agenda. Whilst always in communication with investment trust Boards, 2024 saw a step change in our engagement activity whilst we also began to see our 2023 efforts in this regard bear fruit. The stubbornness of discounts and Boards’ increased willingness to listen to shareholders has resulted in a more conducive environment for engagement with a marked increase in buybacks, tender offers, managed wind-downs and other corporate activity including take privates and mergers. The Funds have benefited both from our direct engagement as well as from the evolution of the broader environment.
Negatives
- US Equity: The Funds had low exposure to strongly performing US equities and particularly the mega-cap tech names that were responsible for such a large proportion of 2024 returns. (Hawksmoor Distribution’s US exposure = 4% versus 44% in a 60% equity/40% bond market-cap weighted passive solution). The AI narrative helps 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, 2024 proved that it is a poor market timing tool. Although the Magnificent 7 delivered strong earnings growth in the period, a good proportion of returns were driven by multiple expansion from already elevated levels. Although undoubtedly good businesses, at current valuations a huge amount of good news is in the price and its near impossible to discern anything like a margin of safety at current levels. With US equities accounting for 73% of MSCI World, our low exposure to the US market was particularly painful relative to more benchmark-orientated peers.
- Infrastructure and Renewables: Exposure to infrastructure and renewables (via investment trusts) was steadily increased as the year progressed as the relative value proposition improved as a result of share price weakness. On a yield basis, core infrastructure names now offer a healthy premium over investment grade credit which is hard to rationalise. Contracted revenues and the low economic sensitivity of the underlying assets suggest this premium shouldn’t exist, whilst its also important to highlight the contrast between the progressive dividends of our infrastructure and renewable names with the fixed coupons of vanilla credit. These trusts are also pursuing self-help, selling down assets helping to validate NAVs and using proceeds to deleverage and return capital to shareholders. We think weakness over the year has been driven by a retrenchment from the sector by traditional buyers, but believe fundamentals will out in the end. In the meantime we are imploring Boards and management teams to intensify their capital allocation policies and to search for a new constituency of buyer
- Property: The Fund’s allocation to property was materially reduced in 2022 and remains well below the historic average, reflecting the asset classes sensitivity to interest rates with regards to both balance sheets and valuations. REITs significantly underperformed broad equity markets with this weakness almost entirely driven by discount widening with NAVs stabilising in the second half of the year. The focus remains on specialist plays operating in sectors with attractive supply and demand dynamics (i.e. logistics, healthcare). Corporate activity has been a key feature with a marked increase in mergers and takeovers which in conjunction with stabilising property valuations could act as a catalyst for wide discounts to narrow in the year ahead.
- UK Equity: UK equities delivered perfectly decent returns of +9.5% in 2024 but lagged most other markets including the US, Japan and Asia. In this context, our very significant allocation almost certainly weighed on performance relative to peers. Fund selection was mixed. Valuations remain compelling in relative and absolute terms, something reflected in significant M&A activity as private equity and trade buyers alike swooped in to pick up bargains. Technical factors weighed however as domestic institutions and wealth managers continue to sell down the home bias in favour of regional allocations more in line with the global index (UK is less than 4% of MSCI World). Although there is plenty of bad news baked into prevailing valuations, Labour’s inaugural budget did little to help with the increase in minimum wages and employer national insurance contributions negatively impacting corporate margins and increasing earnings risk.
2024 posed significant headwinds to our benchmark agnostic, valuation informed investment process with the dominant performance of index heavy, expensive US mega-cap growth stocks the major headwind to relative returns. Hard to rationalise weakness in segments of the alternative investment trust sector also weighed. That Vanbrugh and Global Opportunities delivered sector beating returns in this environment is testament to active fund selection, the ability to identify interesting opportunities in more niche areas and a willingness to roll up our sleeves to effect change within certain investment trust situations (Distribution was also ahead of a peer group of Multi-Asset Income funds which we think form a better comparator). Looking ahead, starting valuations mean we are not enthused by the return prospects for global equities, but believe there are abundant opportunities for those willing to look beyond the index. Pockets of extreme value preside within UK, Japanese and Asian equities, whilst the opportunity in parts of the investment rust sector looks generational in nature. Add in attractive starting yields across fixed income markets and 2025 should be set for another year of healthy positive returns.
Ben Mackie – 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. FPC25248.
