Monthly Archives: April 2016

Points of View: Witan Investment Trust

This week I am focusing on Witan, an investment trust aiming to provide investors with a balance of capital growth and income over the long term through a portfolio of global equities.

Witan’s structure has been significantly overhauled since 2010 following the appointment of Chief Executive Officer Andrew Bell, who selectively employs reputable, specialist fund managers to run different portions of the portfolio. The managers are considered by Mr Bell to be the best in their assigned regions and likely to generate long-term outperformance. Indeed, the strategy has proved successful thus far given that Witan’s net asset value (NAV) has grown by 53% over the past five years compared with 39% from the IMA Global sector.

Despite this outperformance, the price at which Witan’s shares are trading has shifted from a 2% premium to NAV in January to a 5% discount at the time of writing. While turbulent stock markets have led to many investment trusts’ discounts widening year-to-date, for Witan this is only part of the story. Specifically, the price weakness can also be attributed to a large shareholder that was recently forced to sell their 16% stake due to the holding no longer being compatible with its new mandate.

On the one hand, it could be argued that Witan is relatively expensive as it has historically traded at significantly wider discounts to its NAV. On the other hand, it could be argued that wider discounts are unlikely to be reached again given the Board’s ability to buy back shares as part of its discount control mechanism as well as the fund’s excellent track record under Mr Bell.

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Points of View: Valuation Dispersion

Whilst we remain confident in the ability of equities to continue to deliver attractive real returns for investors over the long term, there is no doubt that care is needed in the current financial markets. First and foremost, quantitative easing looks to have created asset bubbles in certain areas of the market – most notably in conventional fixed return assets (when vast swathes of bonds trade on negative yields, it is not hard to determine that the long-term returns from this point will be poor) but also in certain areas of the equity market.

US equities, for example, have enjoyed an exceptionally strong run of outperformance since the nadir of the financial crisis in March 2009.  However, a significant part of this outperformance has come at the cost of increasing valuation risk. Indeed, the valuation discrepancy between the US and other major equity markets is now striking. European equities, for example, currently trade at a discount to their US counterparts that is close to historical extremes. There are of course good reasons for this – economic growth in Europe is slow to non-existent (despite negative interest rates in many European countries) and the EU looks ever more like something of a failed experiment. However, one of the most counterintuitive aspects of investing is the fact that bad news is almost always required for things to get cheap enough to create good long-term investment opportunities. From this starting point a reversion to mean would result in underperformance of the US market for a period.

Having said this, it is worth noting that fundamentals in the stock market do not work to a set schedule and assets can remain cheap or expensive for extended periods.  The challenge for us as investors is to balance the merits of quality and value within a diversified and resilient portfolio.

Points of View: Brexit

This week I am looking at the possibility of Britain leaving the European Union, commonly referred to as “Brexit”, and considering what effect this has on our investment approach.

A number of clients have asked our views on Brexit. Essentially, the forthcoming vote provides further market uncertainty. In the event of a vote to remain, this uncertainty will dissipate and should – all other things being equal – lead to a rally. In the event of a vote to leave, uncertainty will increase and is likely to induce risk aversion and a spike in volatility whilst markets absorb the implications. Having said this, it is worth noting that sterling weakness in the event of Brexit would in theory provide an element of support for UK equities as so many of the index’s constituents make a large proportion of their sales overseas.

At this point our expectation is that the electorate will vote to stay given that the “certainty” of the status quo will create a very high threshold for those seeking exit to overcome. In the long run, though, it is arguable that the fundamentals of the economy may well be little changed either way. The innovation-driven global economy consistently delivers growth and central banks stand ready to act should the risks of deflation and poor sentiment grow. The ultimate path for the global economy is therefore one where inflation is a necessary outcome and equity markets move higher.

As long term investors we are focussed on this prospect as opposed to being over-sensitive to fears of the day. We continue to invest for the long term and remain attracted to companies with strong balance sheets that are capable of generating attractive returns throughout the cycle, despite short term market volatility.

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March 2016 Market Review

Our March 2016 Market Review from the NW Brown investment experts available to download here – March 2016 Market Review

Points of View: Quarterly review and outlook

This week I am reviewing the first quarter of the year and considering the outlook looking forward.

The performance of equity markets so far this year demonstrates how quickly perceptions of the prevailing macroeconomic background can change.  The first six weeks saw sharp falls amid tumbling commodity prices and gloomy media coverage promoting fear of a China-led global slowdown. However, a rebound in commodity prices from mid-February swiftly induced an about-turn in sentiment and more constructive commentary on China. Alongside further supportive intervention from the European and Japanese central banks, this has prompted a strong recovery back towards market levels at the start of the year.

What are we to make of these swings in sentiment and, more importantly, which mood will prevail in the long term? The world has significant challenges but it is our strong contention that long-term investors benefit from a positive outlook as opposed to being over-sensitive to fears of the day.  To put this view into context it is worth highlighting that, measured at purchasing power parity, the world economy has grown in every year since 1946 – even in 2009, in the wake of the global financial crisis (albeit only just).

Despite our long term positivity, one cannot ignore short term risk.  Clearly, the likes of geopolitical upheaval and financial crises are real and ongoing threats, but investing for economic disaster is not an effective long-term strategy and swims against the tide of consistent global growth. History shows there have generally been two main drivers of serious bear markets: recession and aggressive hiking of interest rates.  Neither of these outcomes looks likely today and this gives us some confidence that sentiment will not materially deteriorate from here.