Since the markets bottomed at the start of 2009, the unit price has risen by over 80%**.
Performance over 1-yr vs sector
Source: Financial Express Analytics
Whereas the gain in 2009 arrived by virtue of the trust sector pricing mechanism starting to function normally again, now that life has returned to "business as usual" recent out performance is largely attributable to stock specific successes.
After Ben Bernanke's speech in August, investors correctly anticipated a further round of quantitative easing (QE) and decided that such an environment was not conducive to short selling strategies. Thereafter equities rallied sharply.
By mid-November this bull run appeared sorely in need of some consolidation and we let go some of our mainstream positions notably those which formed part of our "yield starvation" theme.
Accordingly the holdings in; Temple Bar, Perpetual Income & Growth and Keystone were subsequently sold. Also in view of the US authorities' apparent disregard of the strength of their dollar, the yen hedge was removed.
December proved to be a very strong month as investors who had been betting against further progress in the indices finally capitulated and bought stock in order to cover their short positions. This drove the markets even higher.
Fresh bad news on the economic front now leads to the assumption that the authorities will pump more liquidity into the financial system which in the short-term will continue to find its way into asset prices. This scenario could remain in place for some time yet but is clearly unsustainable.
For now, it makes sense to retain a relatively fully invested position. Managing a portfolio within this environment feels like driving with your foot firmly on the accelerator but with a finger hovering over the ejector seat button.
Our Japanese positions figured prominently amongst the winners.
Other notable contributors included North American Banks and Equity Partnership. Both have been very disappointing performers since launch and as a result will not survive. However their shares trade well below likely final payouts and sharp rises during December reflected the market’s appreciation of the likely chain of events.
Artemis Alpha and Treasury China both reacted well to transactions. The former bought Gartmore Growth Opportunities, a deal which involved the management team making a substantial commitment via the exercise of warrants for cash. The latter successfully completed a substantial fund raising which was well received by the market.
We are in one of the cyclical sweet spots for our mandate. The "tidying up" period that arises a few years after a new issue boom is immensely profitable for investors.
The last such period arose between 1998 and 2000 as many of the launches of the 1993 to 1995 vintage found themselves part of the sector's consolidation. Looking at our portfolio, it would be no surprise to see over half of our holdings subject to some form of reconstruction by the end of 2011.
The only change in top down themes is the removal of "sterling weakness" which may well have run its course. It has been replaced with "fear of illiquidity".
The events of 2008, when even the bottom half of the Footsie became illiquid, shocked wealth managers and private client stockbrokers. Their response has been to dictate that core lists must only contain highly liquid securities.
The result is that the premium that we are paid to assume liquidity risk has risen sharply. Of course this creates a massive incentive for shareholders of illiquid securities to release value from corporate activity. At present we are assimilating a basket of unloved small investment companies which all have similar characteristics.
They trade on wide discounts as they are illiquid and have unstable share registers. Their underlying portfolios are competently managed. This approach allows us to exploit deeply discounted stocks without building specific risk into our portfolio.
A topical example is a Vietnamese and Indonesian property specialist, Aseana Properties, which we have been frustrated in our attempts to buy.
Looking forward, our central view is that the global financial system will muddle through and that equities will move modestly higher. However, investors must be aware of the vast array of weak financial institutions, mainly residing in the developed world, which urgently need to deleverage.
These are spectacularly ill equipped to cope with any future "accidents" therefore the potential downside is much greater than in more stable times.
Conversely banks are being flooded with cheap cash which in the absence of any setback will drive asset prices higher. Investors run the risk of being whip-sawed, as on the one hand they fear being left behind by their peers in a liquidity fuelled bull market.
On the other they worry that the imminent financial collapse of a sovereign state or major financial institution will prove to be the first domino of many. These conditions are not for those of a nervous disposition. Nevertheless we have navigated this tricky path reasonably well during the last couple of years.
Nick Greenwood is fund manager at MAM Funds Plc (MAMF). The views express here are his own.
*“B” units up 21.01% mid to mid – 31/12/09-31/12/10 – source Bloomberg ** “B” units up 80.80% mid to mid – 31/12/08-31/12/10 – source Bloomberg