Key Points
- This time last year the markets were still reeling from the Liz Truss ‘mini budget’, at Casterbridge we were more cautious through 2022 which helped buffer volatility and minimise losses in a year where there were few hiding places.
- Over the last twelve months we’ve been putting cash back to work through all asset classes.
- Fixed income now provides investors a decent yield. We brought government bond allocations back to our target weightings in both UK Gilts and US Treasuries.
- In the alternative allocation we added two new funds, Cooper Creek a US equity long short manager and The Montlake Dunn fund, a systematic trend following strategy that has a forty-year track record in investing offering excellent diversification benefits. We also bought Welltower, the US listed REIT focusing on care homes in North America and the UK.
- In equities we saw opportunities to buy back into selective international holdings based on improved pricing and a stronger pound earlier in the year. These purchases included Coca-Cola and T Mobile in the US and Sanofi in Europe.
- In Emerging Markets, we switched out of Redwheel Global Emerging Market Equity Fund and re-invested into JP Morgan Emerging Market Income Fund, reducing our China exposure, and increasing the allocation’s yield.
- Global markets have been buffeted about by seasonal volatility this quarter and with some gathering storm clouds on the horizon we come into the fourth quarter on a slightly more cautious footing awaiting improved opportunities to invest.
What has happened over the last 12 months…
This time last year the UK economy and markets were still reeling from the disastrous aftershocks of the Liz Truss ‘Mini-Budget,’ sending both UK equity and UK bond markets into a tailspin. At Casterbridge we had been more cautious throughout 2022 and during this period maintained a higher level of cash, being underweight fixed income and equities within suitability ranges. This helped us buffer volatility and minimize losses for clients during a year when there were very few hiding places as inflation raged and interest rates rose at such a rapid pace, that all assets became highly correlated. In these instances, cash is an excellent tactical asset class to hide out temporarily as we await improved pricing levels for market re-entry.
During the course of the last 12 months this is exactly what we have been doing, getting cash back to work through all asset classes, including fixed income which for the first time since pre the financial crisis of 2008/09, now provides investors with a decent yield following the central bank rate increases. We therefore bought back to our target weightings in both UK Gilts and US Treasuries whilst maintaining a low to medium duration for these assets as we believe there remains a risk of additional hikes, should inflation remain stubbornly high.
Since the near record lows of the Pound this time last year, Sterling rallied to levels which when combined with attractive market pricing levels, provided excellent opportunities to reinvest into a number of high-quality international exposures in the US, including AGCO the agricultural tractor manufacturer that has a technology overlay, including artificial intelligence, to help farmers improve their efficiencies.
In our alternative allocation, we added two new funds that fit very well into our existing mix of alternative strategies, ensuring ongoing diversification benefits and opportunities for non-correlated returns profile. These were Cooper Creek as US equity long short manager specializing in small and mid-cap value opportunities that have a turnaround story and a clear catalyst for change. The other is the Montlake Dunn Fund, a systematic trend following strategy that has a 40-year track record of investing into global opportunities across different asset classes including equities, interest rates, currencies, and to a larger extent commodities. This is a highly dynamic and liquid strategy that is uncorrelated to broader markets and therefore provides excellent diversification benefits.
Drilling into the last 3 months:
Global markets have been buffeted about by some heightened seasonal volatility this quarter. Investors have been focused on gathering storm clouds on the horizon, including the threat of a US government shutdown in October, the recent rise in the oil price towards $100 and the inflationary impulse that this may have through the global economy, and the resumption of the US student loan payments. Market and sentiment indicators have reached fearful levels, which signals that price action might be close to pricing in these concerns. However, the recent rise in bond yields to levels not seen in over 20 years signals that the fixed income market is expecting further rate hikes to combat renewed inflation pressures in the coming months or quarters. It is still grey out there and as such we come into the fourth quarter on a cautious footing.
How we have been managing Bespoke portfolios through this recent period…
As we came out of the second quarter, we saw opportunities to buy two exposures listed in the United States as purchase price targets were met, and the Pound saw some strength against the US Dollar. The first of which was Coca Cola, a consumer staple company that has proven itself to be a truly resilient company, managing its inflationary pressures very well and whilst also able to improve their profit margins through this challenging period. The second US listed holding we purchased across portfolios was T-Mobile, as the company now could grow through post-merger synergies with Sprint, the deal which was completed in April 2020.
During the quarter, we bolstered portfolio exposures to one of our core themes of demographics and healthcare following a dip in the sector’s overall performance. We purchased two high quality pharmaceutical companies, AstraZeneca, and Sanofi. Both companies have an excellent portfolio of global medicines in diversified business lines which combined with strong pipelines in phase III trials, provide excellent catalysts for future growth, as well as paying solid dividends. AstraZeneca has a yield of 2.2% and Sanofi has a yield of 3.48%.
To help fund these purchases, we sold out of the Blackrock MSCI World ETF that we had been using in portfolios as a temporary proxy for international exposures. We also sold out of Activision Blizzard, the US listed gaming publishing company, on the basis that the company has been in the midst of being taken over by Microsoft, since the end of 2021. There have been numerous regulatory hurdles threatening the success of the takeover bid which saw volatility in the share price. Upon a rapid recovery in the price back towards the takeover target price, we decided it would be prudent to sell the shares given the ongoing threat that the deal could be derailed.
Within Emerging Markets, we switched out of the Redwheel Global Emerging Market Equity Fund, investing the proceeds into the JP Morgan Emerging Market Income Fund. This switch was made on the basis of our growing concern with the state of the Chinese economy, to which Redwheel had a significant exposure. The JP Morgan fund is an excellent complement to the existing Stewart Asia Pacific Sustainability Fund, as well as being underweight China and providing a yield of roughly 3.72%.
Finally, we bolstered the portfolio exposures to high quality bonds through the purchase of the Vanguard US Treasury ETF, providing portfolios with exposure to US Government bonds, paying a yield of 3.3% at the time of purchase.
Current portfolio positioning and the outlook…
At the time of writing, portfolios are slightly below the strategic asset allocation target to equities, but within suitability ranges, and with an allocation to cash on the sidelines. We expect to put this cash to work over the coming months as the anticipated market volatility presents excellent buying opportunities in quality US listed companies we are looking to add to portfolios. These will provide a healthy dividend yield as well as opportunities for capital growth. We remain price target sensitive and will manage the investments into direct equities when the pricing level presents investors with an excellent entry point, for the medium to long term.
In conclusion, we remain a little cautious on equity markets over the coming months, although we continue to stay positive on the opportunities in equities, longer term. Bonds provide attractive yields, although we continue to monitor closely given the uncertain outlook for inflation.
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested.
