Results analysis: BH Macro

• BH Macro (BHMG) combined with BH Global to create a much larger entity with hopefully greater liquidity, the primary rationale for the combination. The proposed scheme of reconstruction for BH Global was put to a vote which was passed by 100% of votes cast and, in the event, 85.64% of BH Global’s Sterling shares and 54.52% of BH Global’s Dollar shares were exchanged for shares in BH Macro leading to an increase in assets of $497.9m.
• Brevan Howard Capital Management LP (BH Macro’s manager) also asked for a reversal of some of the fee concessions granted at the time of BH Macro’s previous tender offer. These proposed amendments were put to a shareholder vote, where 82.5% of voting share rights voted in favour.
• NAV performance was modest but consistent for 2021 with a total return of 2.76% per share for the Sterling shares. Over the course of 2021 the manager’s core theme of persistent and rising inflation did play out and deliver returns, but other, usually correlated themes such as rising long-end rates and steepening yield curves did not. Brevan Howard avoided large pitfalls thanks to structural capital diversification as well as “rapid and skilled action” by the trading and risk teams. We reproduce the summary of contributions from the main exposures in the table below, noting the strong contribution over the year from digital assets.
• BHMG has historically used share buybacks to reduce the discount at which the shares have traded to NAV. Since the combination with BH Global, BHMG’s shares have traded at a premium to NAV. However, if the company shares were to again trade at wide or volatile discounts to NAV in the future, it would be the board’s intention to consider resuming this process.
• BH Macro’s chairman summarized his outlook thus: “2022 holds out the prospect to be an extremely volatile year both at the geopolitical level and at the economic level. It is possible that conditions will be remarkably different from those that we have experienced for the last 40 years. I refer particularly to the implications of resurgent inflation which despite previous statements from government agencies and central banks that it was transitory now appears to be embedded worldwide. This is an enormous sea change in the background for financial markets. I hope that it will create the conditions in which your Manager will flourish but we remain confident that the nature of the convexity of the trades that they put on, and their acute attention to risk, will ensure that if their trades are unsuccessful in this volatile environment there will be limited downside for your investments.”

Kepler View

BH Macro (BHMG) now has a market capitalisation of nearly £1.2bn (including the GBP and USD share classes), and a more diversified share register than before the combination with BH Global. Since the conclusion of the merger and up to the end of 2021, BH Macro has issued shares at premiums of between 3.4% to 9.1%, raising an additional £67.3m, which has been accretive to existing shareholders.

BH Macro is a feeder into the Brevan Howard Master Fund. The Master Fund aims to generate capital growth through a combination of global macro and relative value trading strategies. These strategies are devised and managed by the traders at Brevan Howard, and comprise predominantly global fixed income and foreign exchange trades. Brevan Howard’s traders try to exploit pricing anomalies within these markets, and to provide investors with asymmetric pay-off profiles over defined periods. These trades are typically leveraged (using margin), and might typically generate proportionately high returns if the trade works out, but should it not, then the maximum loss might be the cost of putting the trade on. In this way, the Master Fund seeks to produce compelling asymmetric returns to its investors, independent of the market environment.

BHMG has exhibited clear diversification from risk assets over its lifetime. Its track record shows that it has delivered strong returns in those periods which have proved most difficult for equity markets. 2020 was the strongest calendar year of performance for the Master Fund since inception, which sets the more modest performance in 2021 into context. Investors' continued confidence in the trust is reflected in the premium to NAV at which the shares have consistently traded since the merger with BH Global. Performance over 2022 so far has been impressive, with BHMG’s exposure to rising interest rates a particular driver. For the calendar year to the end of March 2022, the GBP share’s NAV is + 8.36% with a NAV performance of +5.5% in March alone.

The managers state in the annual report that “the macro landscape in 2022 appears as complicated as at any time during the post-war period”.  It is clear that many shareholders share their view, given that despite the relatively high OCF (by traditional standards) of 2.43% for 2021, BHMG shares currently trade on a premium of c. 11% (share price as at 08/04/2022). In our view this reflects the high standing of the manager, and the market’s appetite for the highly idiosyncratic exposure that BH Macro offers to shareholders.

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