Since the global financial crisis, a highly supportive macroeconomic backdrop together with unprecedented actions by financial authorities have been catalysts for exceptional returns and underpinned a “buy-the-dip” psychology, with investors confident that the relevant authorities have their back.
However, we are now starting to see threats to this environment. Fears of higher inflation and interest rate hikes have inflicted significant damage on long duration assets, while the spectre of stagflation is looming as growth slows, and geopolitical risks are at multi-decade highs. However, given rampant inflation, Central Banks have found themselves between a rock and a hard place. Despite these challenges, global equities are now just 6% off all-time highs.
A recent report published by Investec has analysed the performance of seven investment companies during the current transition to a higher inflationary environment. The companies covered are:
- Aberdeen Diversified Income & Growth,
- BH Macro,
- Capital Gearing Trust,
- JPMorgan Global Core Real Assets,
- Personal Assets Trust,
- RIT Capital Partners
- Ruffer Investment Company.
#1. Aberdeen Diversified Income & Growth [LON: ADIG]
Aberdeen Diversified Income and Growth seeks to provide income and capital appreciation over the long term through investment in a globally diversified multi-asset portfolio. Over half of the long-term target asset allocation of the investment company is dedicated to private markets, with Fixed Income & Credit (20%), Listed Alternatives (15%) and Equities (10%) making up the remainder of the asset allocation.
Since the investment company adopted a multi-asset approach in 2020, its performance has been poor, with annualised NAV and shareholder total returns of just 2.0% and 1.1% respectively, materially behind target. However, since the latest strategic review, there has at least been some stabilisation, and a solid NAV progression ahead of target and low participation in the recent sell-off are encouraging; the challenge is to now build on these foundations.
#2. BH Macro [LON: BHMG]
BH Macro is a direct feeder into the $8.3bn Brevan Howard Master Fund, with exposure predominantly to global fixed income and FX markets, and which employs a combination of global macro and relative value trading strategies. From launch in 2003 to the end of January 2022, the Master Fund delivered an annualised return of 8.6%. At times of market distress, when the correlations of most financial instruments tend to trend towards one, the fortunes of BH Macro have tended to be inversely correlated.
All in all, Investec holds the view that BH Macro has significant strategic value. From its November peak to the recent trough, the MSCI AC World Growth index fell 20.2%, while the BH Macro NAV increased by 3.2%. With geo-political developments now compounding these risks, the company is expected to extend recent relative outperformance.
#3. Capital Gearing Trust [LON: CGT]
Capital Gearing Trust (CGT) seeks to preserve shareholders’ real wealth and to achieve absolute total returns over the medium to longer term by emphasising long-only asset allocation. Since 1982, its market cap has risen from less than £1m to in excess of £1bn, culminating in the promotion to the FTSE 250 index in December 2021.
The portfolio is defensively positioned, with a focus on inflation protection. Two notable features are low costs and a relatively simple investment approach, which mean there is no derivative exposure. While the company may lack the resource of some of its peers, its long-term performance record is impressive, and has been achieved with very low volatility.
#4. JPMorgan Global Core Real Assets [LON: JARA]
JPMorgan Global Core Real Assets seeks to provide investors with a stable income and capital appreciation from a global portfolio of core real assets, primarily across real estate, infrastructure and transportation. The long-term target total return is 7-9%, including a dividend yield of 4-6% and the portfolio predominantly consists of investments in private funds or managed accounts.
Even before the Ukraine invasion, higher inflation, slowing economic growth and historically extended valuations, posed significant headwinds for global equities and fixed income markets. Core real assets, on the other hand, tend exhibit highly forecastable and stable long-term cash-flows, a low margin of error and reduced correlations with other asset classes. Since its IPO in September 2019, JPMorgan Global Core Real Assets has made solid progress in building out a high quality portfolio, and having reached full investment and emerged from its own J-curve, the NAV has begun to gain traction.
#5. Personal Assets Trust [LON: PNL]
Personal Assets Trust’s investment objective is to “protect and increase the value of shareholders’ funds over the long term”. A flexible, long-term, long-only multi-asset approach is conservative and there are no derivatives, which the manager believes guarantees cost. Personal Assets Trust pioneered the DCM approach in order to ensure that its shares always trade close to NAV. This has resulted in very low premium/discount volatility, which has provided greater liquidity and enhanced NAV and helped to reduce the ongoing charge.
Since the current manager was appointed, shares in issue have increased by 409%, and the market cap has risen from £152m to £1.8bn. Given concerns about the economic outlook, high equity and credit market valuations, and the impact of rising inflation/impact of higher discount rates on asset prices, the portfolio has been moved more defensively.
#6. RIT Capital Partners [LON: RCP]
RIT Capital Partners aims to protect and enhance shareholders’ wealth over the long term, by enjoying a healthy participation in strong equity markets but with reasonable protection in down markets. Portfolio construction is driven by a six-cylinder approach which seeks to generate multiple and independent sources of return, and this is complemented by an active risk management framework, which includes various hedging strategies.
Having fully participated in strong markets, a blend of conviction and diversification appears to have left the portfolio well placed to shield capital in much more challenging conditions.
#7. Ruffer Investment Company [LON: RICA]
Ruffer seeks to deliver superior risk adjusted returns over the long-term, with a focus on capital preservation, uncorrelated with other asset classes. The manager has constructed a diversified “all-weather” portfolio, which comprises both growth and protective assets. There have been periods, sometimes prolonged, when returns have materially lagged risk assets, but critically the company has delivered uncorrelated positive returns during three market crashes.
Over a quarter of the portfolio is invested in index-linked instruments, with a bias towards the UK, and these could provide strong protection in the event of real yields moving further into negative territory. Ruffer has significant tactical value during risk-off markets, and during sharp equity sell-offs, the correlation with equities has tended to fall sharply.
