Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Momentum Multi-Asset Value Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
It has been a strange start to 2022 for growth investors. After a surprisingly resilient performance through much of the pandemic once the initial shock was over, many stocks saw substantial sell offs at the start of this year. Prices plunged and the S&P 500 took one of its worst hits since the pandemic crash in early 2020.
Some companies have managed to recover but others are still trading far below the record highs they were at previously. This has been especially true for many of the businesses we saw go public in 2022.
The trigger for this sudden burst of panic appears to have been inflation. Fears of rising prices have been lying dormant ever since central banks began to pump billions of pounds into the global economy in the wake of the pandemic.
Perhaps buoyed by memories of the late 2000s, when similar ‘money printing’ policies failed to bring about massive inflation, and assurances that price increases would be ‘transitory’, investors were initially sanguine about the threat of inflation as we emerged from the depths of the pandemic.
But several high consumer price index (CPI) numbers, along with hints from central banks that interest rates may increase to counter rising prices, appear to have spooked them as we entered the new year.
Hope for the best, expect the worst
The problem investors face is that, unless you happen to be a central bank chairman, predicting interest rate rises is a very hard thing to do. As too is working out how permanent inflation will be or what its impact is likely to be.
That being the case, the wisest course of action may be to expect the worst, hope for the best, and position your portfolio accordingly. In today’s world that might mean holding assets that can withstand inflation but also not reduce your returns if it doesn’t occur or isn’t as damaging as some are predicting.
One investment trust which could meet those needs is the Momentum Multi-Asset Value Trust (MAVT). As the name suggests, the trust invests in a mix of assets, including UK and overseas equities, debt, specialist assets, and defensive assets.
The investment trust takes a value-oriented approach to the market, something which may appeal to investors given that value stocks have tended to perform well during inflationary periods.
Investors should see this as an incidental benefit though, rather than a deliberate one. Although MAVT manager Gary Moglione and his team have a target of delivering annual returns of 6% over the consumer price index (CPI), a measure of inflation, they do not structure their portfolio to try and game macro-economic trends or make efforts to predict what they’ll be.
Instead, the trust managers take what they call a ‘refined value’ approach to the market. On one level this means appreciating the nuances of different asset classes. For instance, yields might be more important when looking at specialist assets but price-to-earnings ratios could take precedence for equities.
Refined value also means not falling into the value trap. Superficial signs that a stock or other asset looks cheap aren’t taken at face value, meaning the MAVT portfolio isn’t just the hodgepodge of banks and mining businesses we’ve come to expect from a lot of value investors.
Taking this approach has paid off in the past, with the trust managing to hit its target of the CPI +6% consistently over the past decade. That would be respectable under most circumstances but given how poorly UK and value stocks have performed as a whole in that time, it’s particularly impressive.
Higher inflation is obviously not a welcome phenomenon but the prospect of it, along with a return to more normal interest rates, could provide some tailwinds to MAVT.
For one thing, although it is still early days, we’re seeing more flows into value stocks. Investors seem to be realizing that a rise in interest rates would make many high-value growth companies much less viable without access to cheap credit.
These companies, many of which have seen substantial share price losses over the past six months, do not fit within the MAVT’s valuation process and the trust managers have stringently avoided them as a result.
Perhaps more importantly, many of the assets in the MAVT portfolio may be able to raise prices in line with inflation. Specialist assets, like royalties from music streaming and property and infrastructure holdings, sit in the trust’s portfolio alongside short-duration bonds and value equities.
Again, there are no guarantees here but these are the types of businesses and assets that seem more capable of defending against the effects of inflation than others.
Of course, all of this is assuming that inflation will remain a problem and interest rates are going to rise on a sustained basis. Those are both possibilities but not certainties. But that takes us back to expecting the worst and hoping for the best.
MAVT delivered on its goals even when value stocks were out of fashion and the wider UK market was producing extremely poor returns post-Brexit. Past performance is not indicative of future returns but it’s a positive to know that the trust managers have been able to generate respectable returns, even when macroeconomic factors were working against them.
If those factors turn in their favour, whether that means value coming back into fashion or inflation-proof assets performing well, then it’s plausible the trust will manage to benefit from them.
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