In October our fund was up 1.2% versus the UK market which was down 3.8%. Since the start of the year our fund is now up 13% (total return) compared to the overall UK stock market which is down just over 1%. We have managed to achieve these returns with very low volatility. Our largest monthly draw down year to date is less than 0.4%. We continue to be able to improve returns on a relative and absolute basis through the process of reducing rather than increasing risk.
We were fully hedged1 throughout the whole of October. This means that all our positive performance came from the strong relative performance of our chosen equites versus the market. Our strategy is always to aim to improve performance by reducing risk. This is something we do at a macro level through hedging, but we also follow this methodology in our stock selection. We aim to own the best quality companies and we assess this partly on valuation and growth potential, but also, most importantly, through the strength of company balance sheets. In the long run, we believe solidly financed companies do better than ones that are more fragile. In difficult economic or political situations this concentration on quality usually comes to the fore. This has been the case in October.
Before the Middle Eastern events took centre stage equity markets looked a little extended to us and sentiment was a little too positive. Long term interest rates in developed markets have continued to rise and at the same time, from our perspective, the Western world continues to inch ever forward to a recession. Once the terrible events in the Middle East occurred our fully hedged (defensive) position took on a new aspect.
While markets have now become oversold, we will nevertheless be very careful about exposing our investors to equity market risk. We do not know what is going to happen in the Middle East, but we do know that the current situation could get worse. It is of course possible that talks could take over and some sort of peace deal could be negotiated but this would be the most positive outcome. Alternatively, a multi-front regional war which could involve Iran could be truly damaging for the world economy. Energy prices could move up sharply again, pushing up inflation and acting as a depressive influence on all parts of the world economy that are not energy producers. If the conflict does spread, it could easily be the catalyst to push the Western world into a recession that seems to have been looming for some time now. It would also present central banks with a real challenge. Economies could be substantially weakening at a time when inflation is also rising making it very difficult for central bankers to know if they should be responding to a weakening economy by easing rates, or to rising inflation by increasing them.
From our perspective, our ability to hedge and protect our portfolio means that we have been able stand aside from these events – which is what we have been doing. This is exactly the sort of situation where having a fund manager that can hedge, and is willing to do so, is especially valuable. We hope, of course, that the war does not spread, and, at the moment, this seems to be the case. If the war does remain contained there is the possibility that equities could move up towards year end. Sentiment is now depressed, and markets are oversold. We hope that peace can be achieved and that markets can go back to something like normal. In the meantime, we will proceed very cautiously and as always, we would like to thank everyone for their support.
TOP FIFTEEN EQUITY HOLDINGS 31st OCTOBER 2023
