The capital preservation-focused Mid Wynd International Investment Trust has beaten its sector and benchmark since the market rebounded from its bottom on 23 March – and no one is more surprised than its manager Simon Edelsten.
Performance of trust vs sector and index since 23/03/2020
Source: FE Analytics
A focus on risk is one of the characteristics that sets Mid Wynd apart from its peers, with the manager saying he doesn’t mind falling behind the market in a rally. Instead, his trust tends to prove its worth when the market wobbles and, the more corrections there are, the better it does.
One of the main reasons Mid Wynd has outperformed this year is fairly obvious – it has a high weighting to healthcare, “screen time” and online services companies which have all been beneficiaries of the pandemic.
“Their cash flows have gone up and the stories are also better,” said Edelsten. “The themes are accelerated in our view. And we think there’s already evidence that the cash flows are coming through pretty well in the last set of results.”
Another, perhaps more surprising reason for its outperformance, given the focus on capital preservation, is that the manager has been proactive in picking up battered stocks.
Edelsten has spoken in the past about his aversion to a strict buy-and-hold philosophy, warning that it results in “lumpy holdings” in expensive stocks, leaving portfolios unbalanced and vulnerable.
As a result, he began trimming his exposure to the stocks that did the best in the early stages of the rebound, such as Amazon, and recycling the money into those that were hit the hardest, such as online travel businesses Booking and Amadeus.
However, the manager said he was surprised by how quickly this trade paid off.
“These are both stocks we had in our tourism theme this time last year which have fallen quite a long way on the basis that nobody was ever going to travel again,” he continued.
“We didn’t think that they’d bounce back as hard as they have bounced back over the last couple of weeks, we had to get on to buy them close to the lows.
“The market may already be slightly ahead of itself on this, but certainly you’re looking out two or three years and you’re thinking, is it really going to be that bad in two- or three-years’ time?
“Then sometimes you can steel yourself to make some of these investments in stocks which people have thrown out, frankly, and decided are very troubled in the short term.
“But part of our analysis is to make sure they have the funding and the balance sheet strength and the liquidity to see themselves through this period and hopefully get back to business over the next few years.”
In terms of his outlook for the future, Edelsten believes we are likely to be over the worst of the coronavirus pandemic, with the number of new cases in the UK and Europe under control and enough hospital capacity to cope with a second wave. He admitted there may well be new worries in the months ahead, but said much of the current pessimism can be attributed to newspapers which “love putting out scare stories”.
However, he is careful not to downplay the economic impact of the pandemic.
“The disruption that you’ve seen over the last two and a half months is extraordinary,” he said. “The recession is here. And there will be plenty of bankruptcies, particularly among small businesses – people will just run out of money, they will not be able to get back to work quickly.
“Unemployment will remain high, particularly in the UK I’m afraid. America will probably get back to work a bit more quickly. Europe, and southern Europe in particular, depends very much on the holiday season and not just whether you can open the beaches, but whether people really want to go to them.
“It’s going to be a long, tough, recessionary and deflationary summer.”
While Edelsten has some concerns about the recession and said the recovery in battered stocks “may already be slightly ahead of itself”, he is not unduly worried about another market crash, for two reasons.
To begin with, although the MSCI AC World index is up almost 24 per cent since its bottom this year, the manager pointed out it also overshot on the way down. He said many hedge funds and investment banks were over-levered before the crash, and there was evidence of forced selling in the middle of March. This accounted for the final leg-down in the market.
“Obviously, I didn’t work that out at the time,” he added, “otherwise, I would have bought more shares and geared the fund up. In retrospect, it was a panic, the market went too far.
“The second thing I’ll say is not to get too carried away by the relationship between the stock market and GDP. When you look at the global stock market, of course it is full of very large weightings to companies that we know aren’t very GDP sensitive. And they’re called Amazon, Apple, Google, Facebook and Microsoft. And these are all 2 to 3.5 per cent of the index each. They’re huge.
“There’s no particular reason why they should have gone down, so then they went back up again.”
Yet he warns that just because these stocks are economically resilient, this doesn’t mean they are guaranteed to protect you in the future. Conversely, he said taking risks in battered stocks may be a safer tactic.
“I am beginning to feel that some of that crowding into those tech names may be going too far at this stage. We do think there’s better value outside the leaders which have created this bounce.
“I think the world is completely full of people that for perfectly good reasons were quite worried and have left a lot of cash on the sidelines. And the market won’t stop going up until they put it in.
“That’s what markets do,” he finished.
Data from FE Analytics shows Mid Wynd International Investment Trust has made 155.98 per cent since the current management team took charge in May 2014, compared with gains of 89.83 per cent from the IT Global sector and 89.37 per cent from the MSCI AC World index.
Performance of trust vs sector and index under manager tenure
Source: FE Analytics
The trust is on a premium of 7.38 per cent compared with 2.78 and 2.02 per cent from its one- and three-year averages. It has ongoing charges of 0.66 per cent and is 2 per cent geared.