Results analysis: BH Macro

• Having had a banner year in 2022, 2023 has so far proven rather more challenging for BH Macro (BHMG). However, whilst short term NAV performance from the Brevan Howard Master Fund (into which BHMG invests) has been disappointing, the largest impact for shareholders this year has been felt in the considerable de-rating in the share price relative to NAV. As the interim results published recently highlight, over the six months to 30/06/2023, BHMG’s Sterling shares moved from a premium of 7.39% to a discount of 6.36% over the six months.
• BH Macro’s chairman’s statement explains that two events during the interim period contributed to this, one of which was down to performance, and the other being the announcement of a proposed merger between two of BH Macro’s largest shareholders.
• The chairman notes “March delivered a very sharp reversal of fortunes”. Brevan Howard Capital Management LP explains the background: “US job growth was exceptionally strong in January and measures of inflation firmed. This led the market to adjust its expectations to include additional Fed rate hikes. Chairman Powell’s testimony to Congress in early March further implied that the Fed might resume hiking at a pace of 50 bps per meeting. In response to the surging US economic data and the increasingly hawkish Fed commentary throughout February and into early March, the Master Fund increased positioning for higher policy rates, in particular in the US. However, the sudden failure of Silicon Valley Bank in March, triggered one of the largest rallies in short dated yields over the past 50 years. As markets rapidly pivoted back to expecting fewer hikes, the Master Fund’s interest rate positions incurred losses. Immediate action was taken to cut these positions, which were quickly and very substantially reduced.”
• BH Macro’s chairman notes “The impact of this unprecedented movement in interest rate expectations should not be underestimated, and it will be scant consolation to shareholders that the reversal in the company’s performance represented “only” 4.29% of the NAV of Sterling shares in March”. The chairman also notes that following the SVB crisis “directional positions were essentially eliminated within two business days. This rapid action by the manager in the face of loss-making positions is a hallmark of Brevan Howard’s risk management process and has served investors well over the past two decades”.
• The other event, outside the control of BH Macro’s board or manager that has contributed to the discount widening, is the mooted merger between Investec Wealth and Rathbones. Between them, as at 15/09/2023, they own 28% of the company across both share classes. This has had an impact on the share price rating, as has been the case with other investment trusts where both companies own large stakes, because of the potential creation of an overhang of stock should a decision be taken by the combined entity to reduce its holding in aggregate. BH Macro’s board have stated that “whilst this remains a possibility, the board and its advisors have been in regular discussion and continue to monitor the situation closely”.

Kepler view

BH Macro (BHMG) invests all of its capital into the Master Fund, one of the flagship hedge funds run by Brevan Howard. The very strong period of performance in 2022, in which BHMG delivered a NAV total return of 21.9% for the Sterling share class, contributed to an average premium to NAV of 10.6% during the year. In early 2023, to increase the size of the company and help liquidity as well as manage the premium to NAV, the board of BH Macro negotiated significant extra capacity in the Master Fund, and subsequently raised US$381.6m in an equity issue.

As the chairman states, it is unfortunate that so soon after the fundraising, the SVB crisis precipitated such a negative move in BH Macro’s NAV. Subsequently, according to Brevan Howard, “expectations for interest rates shifted back and forth repeatedly in the first half of 2023, creating a difficult trading environment for our core macro strategies” and NAV performance has been muted. BHMG’s YTD NAV performance has been -4.6% (to 08/09/2023). However, for shareholders who held shares at the beginning of the year, the share price move has been more impactful, given the premium has moved to a discount (which sits at 10.4% for the Sterling shares as at 13/09/2023). Year to date BHMG shares are down 20.4%.

The issue of the Investec / Rathbones potential overhang is unlikely to resolve itself soon, but the board appear to be monitoring the situation closely. The interim announcement does not make reference to the potential for buybacks, which in any event need to be managed judiciously given the terms of the capacity agreement with Brevan Howard, which effectively allows buybacks of up to 5% of the company in any one year before redemption fees will be applied.

Longer term, with the economic clouds ever present, the potential for Brevan Howard to generate strong positive returns remains. In particular, the Master Fund has historically been lowly correlated to equities and bonds, which has meant it has acted as a powerful diversifier. Whilst performance in March 2023 was disappointing, Brevan Howard’s risk management processes were not found wanting, which is reassuring, and risk management remains a central feature of the investment case. Given the uniqueness of the approach, and the differentiated source of returns, the potential for BHMG’s discount to narrow remains, especially if strong NAV performance comes, as it has in the past, at a difficult time for equity markets.