Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Majedie Investments. 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.
The last two years have been a hair-raising and at times exhausting experience for investors. Between February 12 and March 23 last year, as the extent of the COVID-19 crisis and its likely impact on the world economy became apparent, the Dow Jones Industrial Average, an index made up of America’s most prominent companies, lost nearly half of its value.
Starting at the same time, according to the World Economic Forum, the COVID-19 pandemic and the lockdown measures which were imposed across the world in a bid to control it have resulted in 114 million people losing their jobs.
Despite these almost unbelievable figures and the blood curdling headlines which accompanied them, stock markets have since rebounded strongly and August 2021 saw a record for retail fund sales as investors have piled back into stocks, pushing more than £5bn into UK funds according to figures from the Investment Association.
For ordinary investors this level of volatility can be extremely uncomfortable, and in recent years it has not been uncommon. The 2008 crash, Brexit, the Euro crisis and Donald Trump’s Twitter account have all contributed to a febrile atmosphere for investors in the last decade, and with mounting tension between China and the West it looks like the sleepless nights aren’t going to go away any time soon.
Against that backdrop the responsibility of managing one’s own pension or ISA portfolio can weigh heavily. A poorly timed decision can lead to disastrous results – exposing a portfolio to losses or causing it to miss out on strong returns – and for the majority, for whom managing a portfolio must fit around other priorities at work and at home, it makes sense to offload the responsibility to a professional.
While it is possible to build a portfolio of funds, each with exposure to a different region or asset class, for most smaller investors a single fund which has the flexibility to ‘go anywhere’ with a broadly diversified portfolio of global equities offers a more straightforward solution to managing your family’s wealth.
Majedie Investments (MAJE) is a global investment trust which fits this profile. The £173m portfolio has managed the assets of the Barlow family who are the largest shareholders since it was launched in 1985 – as well as those of its broader shareholder base. It offers exposure to a very broadly diversified portfolio of underlying funds managed with an active, flexible, stockpicking approach under the stewardship of expert fund managers at Majedie Asset Management.
In addition to actively managed exposure to UK and international equities, the trust benefits from an allocation toward an absolute return ‘long/short’ equity fund – Majedie Tortoise – which is designed to protect investors’ capital on the downside during periods of market weakness.
A ‘long/short’ strategy means that as well as investing in shares which the manager believes are likely to go up, it can take ‘short’ positions on companies which the manager believes are likely to perform poorly; meaning it can make money during rising and falling markets.
The team at Tortoise shift very actively between ‘long’ and ‘short’ exposure depending on their outlook for the market and this dynamic approach has proven its worth repeatedly.
Tortoise has performed strongly in each of the crisis years which have occurred since it was launched and the managers place a high emphasis on managing risk even during positive phases, but the approach is not solely about defensive positioning – the managers will switch to a ‘net long’ position aggressively if they believe the market is overstating the downside.
We spoke to Tom Morris, portfolio co-manager, who said the team did exactly this in Q1 2020 as it became clear to them that, as COVID panic reached a crescendo, the ‘whole world was on sale’.
“We managed to rotate the fund aggressively starting in March and going through to summer. We closed most of our short positions and went very heavily long; there were all kinds of companies available at incredibly cheap valuations. Hotels, automobiles, industrials, consumer goods, staples, technology – people thought the world was going to end.”
As the panic began to subside this brave move paid off and the fund began to deliver strong returns, finishing 2020 up 14.5% net of fees, but Tom thinks there is still value to be had even after significant market gains. “Even through this year we’ve picked up shares in Autogrill, one of the largest providers of food and beverages for the world’s airports, and luggage maker Samsonite.”
A common theme for these stocks is their scale, which gives them immense resilience during what has been a difficult time for companies associated with the travel industry. “Samsonite is ten times bigger than the next largest luggage maker and this is key; companies like this can survive while smaller firms go to the wall, and that means when we come out on the other side they are in a stronger position than they were before we went in.”
Tom is optimistic on the outlook, and the Tortoise portfolio reflects that. The portfolio is short on only one stock – a US railway company facing structural decline – alongside short index futures on the S&P 500 and the Nasdaq which will offer some protection if there is a general market selloff. There are no other company-specific shorts in place.
“The market is still very frothy. Up until now the Fed has been injecting $120bn per month via QE and all this money has been funnelled into the economy and markets, leading to some exuberant behaviour like the stuff we’ve seen with Reddit and Bitcoin, and we don’t want to get caught on the wrong end of that so instead we have hedging across the whole index.”
The majority of the fund’s assets are held in stocks which Tom and the team at Majedie Asset Management believe will go up, and he sees opportunity in many places.
“We see opportunities in healthcare with companies like Pfizer. Despite its famous vaccine, the market doesn’t like it; after seeing its share price go up after the vaccine was released, it went straight back down again – and in fact it was cheaper in February this year than it was before the vaccine was released, despite adding a $35bn revenue stream through the successful rollout of the COVID vaccine.
“The market thinks it is a big, boring, slow pharma company that can’t innovate but we disagree. It has shown how well it can innovate by its spectacular success with the vaccine, and more recently with the anti-COVID pill which was so successful in its trials that they’re submitting it for approval early. From our point of view it’s defensive, it isn’t correlated to the economy, and most importantly its cheap.”
Banks are also on the buy list. “They are very cheap and are trading on big discounts to tangible book value. A lot of them grew their book value during the crisis and now have so much capital they’re going to have to return it to shareholders. They are a much better position than they were in the previous decade, when it was all about fixing themselves after the financial crisis, but people haven’t really cottoned on to that.”
Banks are also beneficiaries from a rising interest rate environment and this type of environment has other implications for Tortoise. Valuations play an important role in the investment process, giving the fund a ‘value’ bias. Value stocks, which have performed relatively poorly versus their growth peers for many years, are likely to perform better when inflation and interest rates are on the rise.
The impact of the need to shift to green energy is also likely to have an inflationary effect. For green energy to have a meaningful impact, it will require vast investments in infrastructure and the effect of the spending required to support that could add price pressure to the economy.
“In a low inflation, low economic growth environment people prize growth and so growth companies get a premium which is what we’ve seen in the last decade or so. In an inflationary environment where nominal growth is higher, then growth becomes less rare and the gap between growth and value gets smaller, which is good news for us.
“Since inception Tortoise has produced returns of 6.5% p.a. net of fees in an environment where value has been crushed. One of the things that really excites us about the future is that if we delivered those returns during a terrible environment for value, in an environment where value is no longer so disadvantaged there’s an opportunity for this fund to do quite a lot better. We are really excited about what could happen in an environment where growth and value are on a more equal footing.”
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