Though, as we know, the past is no guide to future returns, the BH Macro trust has tended to make its money during times of market stress and has, as it has done on many occasions, protected its shareholders during the recent market falls.
As FE Trustnet has highlighted in the past, BH Macro, which is a FTSE 250-listed vehicle that offers retail investors access to Brevan Howard’s master hedge fund and sits in the IT Hedge Fund sector, tends to perform well during periods of high market volatility as its 70-strong trading team can take advantage of macroeconomic variables.
According to FE Analytics, the trust has returned 141 per cent to shareholders since launch in March 2007, which compares to the Barclays Sterling Gilts Index and the FTSE All Share’s respective returns of 66.23 per cent and 38.44 per cent.
Performance of trust vs indices since Mar 2007
Source: FE Analytics
While those returns are obviously strong, it is the fact that they have also been very lowly correlated to both bonds and equities – a 0.17 correlation to gilts and – 0.17 to UK equities – and they have tended to come about when risk assets have fallen which makes them all the more impressive.
Examples of this have been during the three major market falls since its launch – 2008, 2011 and this year.
During the crash year of 2008, the trust’s share price did have a slight wobble as its discount widened, but its NAV returns meant BH Macro made 28.63 per cent while equities were down close to 30 per cent.
It showed its colours yet again in 2011. Equity markets had been relatively flat during the first part of that year, but as the sovereign debt crisis erupted, the FTSE All Share fell roughly 16 per cent between July and August. BH Macro, on the other hand, was up more than 4 per cent.
Performance of trust vs index in 2011
Source: FE Analytics
The major point is, however, that the trust can go through long periods where it is either flat or loses money when other parts of the market are soaring – as shown by its performance between 2012 and August this year when it was down 11 per cent when the FTSE All Share was up 30 per cent.
Ian Plenderleith, chairman of BH Macro and a former member of the Bank of England’s Monetary Policy Committee, says it was no surprise that the trust, which invests across global equity, commodity, fixed income and currency markets, struggled during that period.
“BH Macro trades on macroeconomic variables such as movements in interest rates, currency and bond rates but for the past few years there have been very few movements in those areas,” Plenderleith (pictured) said.
“We’ve had interest rates at very low levels, huge amounts of stimulus flooding the market as a result of quantitative easing and forward guidance from central banks has told everyone what is going to happen.”
“However, over the last two to three months, that has begun to change.”
As a result of growing geo-political tensions, concerns about eurozone growth, the Ebola outbreak and the seasonal pick-up in volatility, equities fell considerably during September and October. Then after a brief pick-up, they sold off again last week due to the falling oil price and Russia’s currency movements.
Though BH Macro had been in negative territory during the first part of the year, the graph below shows that it has picked up considerably since volatility returned and has moved in the complete opposite direction to the UK equity market.
Performance of trust vs index in 2014
Source: FE Analytics
It is also up 1 per cent over the last month while the FTSE All Share is down more than 4 per cent.
Given the consistency of its performance over the years, a number of experts have said if its NAV begins to push upwards, it is a sign that there is about to be a sell-off in the market. Notable backers of BH Macro include Charles Tan, who told FE Trustnet earlier this year that he was buying the trust to protect his investments.
Tan says he particularly likes the “survival of the fittest” nature of BH Macro’s trading team, as when a trader does well they are given more assets and if they don’t they are given less. If they have a particularly poor period, they are shown the door.
Also, though this has been a brief upswing in what has largely been a poor few years for shareholders in BH Macro, Plenderleith says there will be a further increase in macroeconomic variables over the coming years which will bring the trust’s strategy “back into play”.
He says opportunities will arise from the situation where rates begin to rise in the US and UK, while Japan and Europe plough on with more quantitative easing – as over recent years all the major economies have seemingly moved in the same direction.
Though BH Macro has done well during periods when equities have fallen, certain market commentators – such as JPM’s Bill Eigen – have warned that 2015 may be very similar to 1994 as both risk assets and government bonds could correct if the US Federal Reserve were to raise interest rates.
Clearly, the trust wasn’t around back then, but it didn’t cover itself in glory last time both bonds and equities sold-off during last year’s May/June’ ‘taper tantrum’, when former Fed chairman Ben Bernanke told the market he was planning to reduce quantitative easing.
Though it narrowly beat the FTSE All Share during the sell-off, it lost a lot more than gilts as it was down 10.7 per cent.
Performance of trust vs indices during last year’s “taper tantrum”
Source: FE Analytics
Kieran Drake, analyst at Winterflood, says the major reason why BH Macro struggled during that time was because it trades on differing market views and volatility, so if everything is moving together, it will struggle to add value.
Drake rates the trust and currently has it as a buy, but he says he isn’t recommending it as a hedge against equity markets, per se.
“There have definitely been times when it has outperformed when equities have fallen, but I don’t know if it is right to assume that will always be the case,” Drake said.
“We decided to put it on our recommendation list as it has tended to do quite well during periods of uncertainty about interest rates. With differences in opinion about when interest rates will go up in the UK and US, it could well be beneficial for the trust.”
“It is trading on a bit of discount at the moment and they have bought back a lot of shares this year, so it is comforting that they will try to not let the discount widen further than 5 per cent.”
It is currently on a 3.88 per cent discount to NAV, which is narrower than its one-year average, according to the AIC. BH Macro is not geared and has ongoing charges of 1.95 per cent, plus a performance fee.
