William Heathcoat Amory
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Updated 21 Sep 2022
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Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by BH Macro. 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.

  • Over the first half of the year to 30 June 2022 the BH Macro (BHMG) share price has increased significantly, despite (or indeed, perhaps, because of) the very difficult background for investment markets. Over the first half of 2022, the Net Asset Value (“NAV”) per Sterling share in the Company increased by 15.53% and the NAV per US Dollar share increased by 14.11%. The share price total return on a Sterling share was 16.58% over the period and on a US Dollar share was 11.22%. The Company’s performance is directly related to the performance of Brevan Howard Master Fund Limited (the “Master Fund”) into which the Company invests substantially all its assets.
  • Over the course of H1 the Master Fund profited, making gains from the move higher in US and global interest rates as well as inflation and volatility markets. Additional gains came from commodity trading as well as from a wide range of idiosyncratic emerging market interest rate and FX positioning, while credit, equity and digital asset trading strategies detracted modestly.
  • Over the current financial year (the interims were published recently, see here), BHMG’s board has issued shares in the first half of 2022 on a weighted average premium of c. 8.8%, representing a total of c. £137m and an increase of c. 13% of the share count.
  • BH Macro’s Chairman, Richard Horlick said: “it is gratifying that your confidence in the Manager, and the new [management fee] arrangements, have been so well rewarded. Moreover, the shares, whilst generating very good absolute returns, have also provided even better returns when compared to most other investable asset classes.”

Kepler View

In the interim statement, the Manager observes that going into the second half of the year, Europe faces profound economic challenges. Brevan Howard comment that the European Central Bank (“ECB”) appears in an especially parlous position. Inflation is at a record-high for the Euro era, policy rates are still negative, and the planned pace of rate hikes is relatively leisurely. Taken as a whole, they believe that the global macro environment is “complicated, challenging and changing at a fast pace”.

In our view, this is precisely why investors have been attracted to BH Macro (BHMG), reflected in the premium to NAV which the shares have been trading on. BHMG has historically delivered positive returns in 17 of the 20 worst performing months for equities since IPO in 2007. Indeed, the strongest periods of performance have come at times of stress for equity and, more latterly, bond markets. As such, BHMG has delivered clear diversification from risk assets over its lifetime, not to mention good returns. The track record since BHMG’s inception in 2007 shows an annualised NAV return of 9.4%, with volatility of 8.2%, meaning a Sharpe ratio of 1.02x, to 30 July 2022 (Source: Brevan Howard).

Currently the shares trade on a premium to NAV of 14.5%. Broadly, we would emphasise caution on the current level of premium for a closed-end fund. In our experience, it is very rare for this level of premium to be sustained over the long term, which poses a potential risk to investors over the short term. That said, over the long-term, Brevan Howard Master Fund Limited into which BHMG invests, has delivered clear diversification from risk assets over its lifetime. We see this as likely a structural and persistent feature because of the basic underlying philosophy that underpins the way capital is invested and the strong emphasis on risk management. Typically, Brevan Howard’s macro traders take a nuanced view on the direction of markets, often taking a probabilistic view on how the economy and markets may evolve. By comparing their view with what the market is pricing currently, traders seek to position a range of attractive trades with convex, or asymmetric, pay-offs. In this way, they aim to structure trades where the upside potential outweighs significantly the downside. As such, in the words of BH Macro’s Chairman, “the investment strategy of the Company should continue to provide diversifying returns against what remains a very difficult background”.

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