Darius McDermott, investment adviser to the VT Chelsea Managed Fund range, looks at the current market landscape and outlines how this is affecting the investment team’s perspective on where to invest.
It feels as though the market has paused for thought in recent weeks, as policymakers decide their next steps. The reality is the surprise fall in inflation in the UK in August (to 6.7 per cent) appears to have been the catalyst for the Bank of England deciding to bring an end to 14 consecutive rate rises, dating back to December 2021. The US also left rates unchanged giving us the first bit of solid evidence we may be near the end of the rate rising cycle.
But everything in the garden is far from rosy. In many parts of the developed world inflation is still well above respective long-term targets and, importantly, we’ve also seen energy prices rise recently due to supply and demand issues. Long-term, we do think inflation will come down, but it is not going to be in a straight line.
Take the UK for example. I don’t expect to see interest rate cuts in 2023, and possibly not until well into 2024. That has a huge impact on the mortgage market as homeowners roll off their existing deals to find they are paying much more at these higher rates.
Essentially, there is a clear lack of direction in the global economy, as we are still in the midst of a global slowdown, with very little growth to be seen. China has disappointed with its re-opening trade, while economic data is also slowing in the US. We’ve had so much talk about this being the most telegraphed recession in history – but this has still yet to happen and, quite frankly, we don’t know if it ever will.
Prepared for all scenarios and ready to jump on opportunities
Clearly, part of the job as a multi-asset manager is to offer diversification, but we’ve been particularly focused on providing as much balance to our portfolios given this uncertain direction of market travel.
Three of the four funds (the exception being the Aggressive portfolio) are well balanced with cash, fixed income, and a well-diversified equities bucket. They have exposure to gilts, treasuries and the US dollar – all risk-off assets if there is some trouble ahead for markets.
Fixed income continues to be the standout choice, with the argument continuing to hold that you are being paid well to wait for capital gains, because of the attractive yields of circa 6-7 per cent on offer. If we do see a prolonged slowdown in the global economy (and interest rates start to fall) then you should start to see those capital gains on fixed income.
Cash ready to jump on further opportunities within alternatives
As I mentioned, the funds are sitting on some cash. This is being used to continue making considered moves back into the alternatives space, principally through specialist investment trusts. This is an area the funds have focused on throughout the life of the multi-asset range, so these trusts are very well known. Some of these trusts still look cheap (based purely on sentiment) so when a familiar one falls, the funds tend to buy a small portion, for example a further 25-50 basis points.
Examples in the third quarter include Bluefield Solar Income fund, which focuses on the acquisition and management of a portfolio of low carbon assets in the UK. This is a trust with a number of long-term tailwinds, while it is also likely to feel the short-term benefit of oil and power prices rising. The funds bought this trust when the share price was around 130p, but nibbled away again when the share price fell beneath 110p.
Other names added to include the likes of Greencoat UK Wind, Assura (a specialist property company that buys GP surgeries) and Chrysalis. The funds have also added to a couple of music royalty trusts in the shape of the Hipgnosis Songs Trust and the Round Hill Music Royalty fund.
Round Hill is more of a longer-term holding, and it has recently announced an agreement to be taken over by US music rights firm Concord for some £383m. The trust had been bid for at around a 67 per cent premium to the share price that day*. That is still at a discount to NAV – the acquirers also want to make a gain (profit) on the acquisition as well – but that is still an attractive premium bid.
In summary, the main driver of returns in the funds will be taking advantage of some of these substantial investment trust discount before they narrow.
Picking up small wins in equities as well
We’ve also got to take a view of where we are now in global markets, and the reality is, there remains a lot of uncertainty. The funds do hold some assets where there are pockets of value – the likes of the UK and Asia/Emerging Markets stand out on this front. But we feel the cash is better served to take advantage of those investment trust discounts.
Longer-term it is hard to ignore the valuations in UK equities, particularly in the small-cap arena which has traditionally shown its resilience and ability to lead a bounce back. Meanwhile, the Asia/Emerging Markets region typically underperforms when there is a market slowdown, but not only do valuations look attractive, but this part of the world has been forced to go through the inflation bubble earlier, meaning there is more transparency around growth from this point onwards.
For now, it is about being ready for anything. Fixed income appears the sensible choice in this scenario, while being nimble and selective on exposure to certain specialist investment trusts gives scope to take advantage of poor market sentiment which, on occasions, is unwarranted.
*Source: Round Hill Music Royalty fund – RNS Update, 8 September 2023
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested. The views expressed are those of Darius and do not constitute financial advice. Valu-Trac Investment Management Limited is the authorised corporate director (ACD) and investment manager of the VT Chelsea Managed Funds. Valu-Trac is authorised and regulated by the Financial Conduct Authority (FCA). Valu-Trac’s FCA registration is 145168. Chelsea Portfolio Management Services Limited is the investment adviser for the VT Chelsea Managed Funds.
