In last month’s commentary, we compared markets to an elastic band that had been stretched too far, leading to a somewhat explosive rebound to start the year. Newton’s first law of motion states that an object either remains at rest or continues to move at a constant velocity, unless acted upon by a force. In real life, similarly to air acting as friction on an object thrown by an elastic band, there are many forces that conspire to curtail the rebound in markets and possibly reverse it. Those weren’t strong enough though in February to inflict too much pain and global markets displayed another strong month, albeit at a lower velocity.
From a macro standpoint, the main development was probably the increased clarity as to where the Brexit process is headed over the next few weeks. While much uncertainty persists and this issue could hang over the UK for many more months, it appears that an accidental “No Deal” Brexit, i.e. a scenario where the UK crashes out of the EU on March 29th due to a failure to agree on an alternative, is now off the table. The British Parliament will be given the opportunity to vote on that specific point if Mrs May’s deal fails, once more, to be approved. The UK could still leave the EU on March 29th -or at later date- without a deal, but this would only happen with an explicit agreement of Members of Parliament. This development helped push the pound to its highest level in 8 months. The “Brexit Cloud” is to keep hovering above British assets for a while longer but it looks like we may avoid a much-dreaded hurricane after all.
Elsewhere, no progress was made on a resolution to the China-US trade tensions, but the talks are at least still ongoing and appear broadly constructive. The US Federal Reserve have reiterated their patience, suggesting that another rate hike remains a distant prospect. And, to round up our world tour, while Germany, the motor of European growth for many years, only narrowly escaped recession last month, we note that economic data out of Europe are surprising investors less and less on the downside. In other words, while data have kept getting worse in the region for months, a lot of the bad news are now priced in, making it harder to disappoint markets. This is a cautiously optimistic sign for European assets.

In this context, the TB Wise Multi-Asset Growth fund was up 1.3% in February, slightly behind its peer group, up 1.4% and behind its benchmark, the Cboe UK All Companies, up 2.5%. It was pleasing to see that the positions to which we added so far this year performed well, helped by a rebound in their undervalued assets. This was the case of the Schroder Global Recovery fund or the Aberforth UK Smaller Companies trust. Our new position in the Fidelity China Special Situations trust was the strongest performer, helped by optimism of a resolution of the trade tensions with the US, as well as an acceleration by MSCI -a leading index provider- in the inclusion of Chinese stocks into the broad emerging markets benchmarks. Such a move will force passive investors to add to their Chinese equity exposure short term but, more importantly, it will help improve liquidity and corporate transparency in the Chinese stock market.

We remain on the hunt for attractive opportunities in our investment universe and continue to observe a number of dislocations or anomalies we want to take advantage of. The disappointing performance of value strategies relative to their growth counterparts in recent years is one of them. We thus added to our position in the Aberforth Smaller Companies trust. Conversely, some growth strategies have suffered quite dramatically since last year and have become more attractive to us. This is the case of the TR European Growth trust for example, to which we added at an 11% discount versus a small premium just a year ago. The attractive discount in the Ecofin Global Utilities and Infrastructure trust was also the key factor driving us to increase our position in the trust, while we continue to like the diversifying contribution of the strategy. Finally, within our global funds, we switched some of our exposure in the Caledonia trust, which has been a strong contributor to our recent returns, into the British Empire Trust, where we expect more upside. Both positions are now the biggest holdings in our portfolio.

Vincent Ropers 28 Feb 2019
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