In the first of a quarterly analysis of the VT Chelsea Managed Fund, Darius McDermott, investment adviser explains why the Strat to 2023 has seen a change in allocation for the four fund range.
It’s been an ‘interesting’ start to 2023. On the positive side, a “vaguely competent government” – as described by Alexandra Jackson, manager of the Rathbone UK Opportunities fund in a recent interview – has been an upside surprise, and the UK stock market has continued to be pretty resilient. On the downside, inflation remains stubbornly high, and we’ve had a mini banking crisis.
Expectations are now that US interest rates could go as high as 5.25%, and UK rates up to 4.6% – unthinkable levels just a year ago. The net result of this is that bond yields have risen back up, hitting the price of both bonds and stocks.
Changing allocations in the Chelsea Managed fund range
So what changes have we seen in the VT Chelsea Managed fund range?
The investment landscape has clearly changed. For the first five years of the funds’ life they pretty much avoided fixed income in favour of alternative assets. But this all changed in 2022. The asset allocation started shifting the other way – cautiously at first, but then with more vigour. The result has been a substantial asset allocation change.
In the past year the funds have been as active as they’ve ever been. And it’s paid off. For instance, had no changes been made, the Balanced Growth fund would have substantially underperformed.
What are we, as investment advisers, debating now?
Moves in interest rates this fast and this high mean we’ve had one of the fastest and most violent yield curve inversions in living memory – or at least in my lifetime. And with the environment changing this quickly, it means opportunities have emerged in all sorts of places.
Higher interest rates have also had a dramatic impact on the Real Estate Investment Trust market, with many trusts falling 30-40%. While in comes cases there is a good reason for this, we are now finding some really exciting opportunities and debating alternatives again.
Some of these assets are priced for recession, when we think the next movement in rates is downwards or at least pausing. We’re much closer to the end of the rate cycle than the beginning.
So, at the margin, the funds have been taking profits in fixed income and dipping their toes back into alternatives. It’s a softly, softly approach as these vehicles could fall further if a recession is deeper than expected.
One new position, for example, is a trust which owns GP surgeries with long leases and very secure rental income. The trust was previously loved by the market and was expensive, so the funds did not own it. Now the share price has collapsed, and it is down 40% on higher interest rates, despite the fact the company continues to grow its rent and has locked in most of its debt at exceptionally low rates for over ten years. You can now buy this trust on a 6.5% dividend yield, and we expect that dividend to grow in the future.
Staying defensive
The funds have also been topping up their defensive liquidity buckets – US Treasuries and cash. Will the fallout from SVB and Credit Suisse result in banks going up 40% or down 40%? Who knows? If pushed I’d say they are more likely to fall than to rise just yet, but they are better capitalised and higher interest rates should help margins as they are not being passed on to savers. Nevertheless, the funds have seen their exposure to more cyclical names reduced at the margin in favour of more stable or more quality equities.
In the short term I think it’s important to be focused on downside risks and, when taking risk , making sure that the upside/downside is very much in your favour.
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.
