Fund Manager's Comments
A collection of the Fund Manager's comments and Chairman's Statements. These are extracted from the original Portfolio Details and Accounts that are published on this website.
Please feel free to share with friends and colleagues on social media.
The Athelney Trust unaudited NAV continued to decline during December, the seventh month in a row, to 226p, a decline of 5.24% which compares with a 3.61% decline in the FTSE Index, a 7.66% decline in the AIM All Share index and a 4.41% decline in the Small Cap Index. Most other major stock markets around the world declined during the month. The Dow Jones Index declined in US$ by 8.66% and there was a 7.71% decline in the MSCI World Index during the month. As mentioned in last month commentary, the portfolio continues to be affected by world politics and macro-economic events rather than specific business-related factors. Interest rates have been rising gradually in the US for the last three years with the Fed Funds rate increasing from essentially zero three years ago to almost 2.5% today. While it is not clear how the trade tensions between China and the US will be resolved, it seems inevitable that some concessions will be made but, of course, what happens in Washington now that the Democrats control the House of Representatives makes the eventual outcome totally unpredictable. However, experience has shown that during these trying times one should ensure that the companies in the portfolio are of high quality. Our focus should be on the level of predictability of a business’s medium-term future economic performance because the more predictable the future cash flows, the more confident we can be that our forecast investment outcome will be achieved. To this end we have commenced a program of selling our holdings in companies where there has been a change to the industry structure, the business model, the senior management team or the product/service offering, the occurrence of which will result in our view in a deterioration in future profitability and hence dividends. Our positions in Bonmarche Holdings, Communisis, Standard Life and UK Commercial Property were sold. We added to our position in Belvoir Lettings.
The Athelney Trust unaudited NAV continued to decline during November, the sixth month in a row, to 238.5p, a decline of 1.45% which compared favourably to a 2.09% decline in the FTSE Index, a 5.05% decline in the AIM All Share index and a 0.43% decline in the Small Cap Index. This is in contrast to most other major stock markets which showed some improvement during the month. The Dow Jones Index increased in US$ by 1.68% and there was a 0.96% increase in the MSCI World Index in November. The portfolio continues to be affected by UK macro factors rather than specific business-related matters and this trend is expected to continue for the foreseeable future. The Brexit compromise deal which is currently on the table has clearly affected investor confidence in the equity markets while the pound has changed little during the month when compared to a basket of currencies. UK equities were also negatively impacted by a further loss of earnings momentum and growing concerns around the outlook for the UK consumer as confirmed in the latest consumer confidence index, which decreased by three points to -13 in November 2018, is the lowest reading since December last year. I have been careful to not make too many changes to the portfolio, to ensure that for now we reap the dividends that were expected and are imminent. To this end we added to our positions in Jarvis Securities, Marston’s and XP Power. None were sold.
As a survivor of the stock market crash in 1987 and the 2008 Global Financial Crisis, I have learned the importance of having the courage to stand true to core investment values and be willing to source our conviction from within. When times get tough, the delineation between facts and feelings is blurred and having conviction, based on a core philosophy helps one move through these traumatic snapshots in time. I have found that when the dust settles, we look back on these events, there is quite a thrilling tale to be told, but only for those who stood by their convictions and investment philosophy. To quote Mark Twain (1835 – 1910): October is one of the particularly dangerous months to speculate in stocks! The others are July, January, September, April, November, May, March, June, December, August, and February. Nevertheless, while we do not speculate, the Athelney Trust unaudited NAV continued to decline during October, the fifth month in a row, to 242p, a decline of 5.91%. This compares with a 10.89% decline in the AIM All Share index and a 6.71% decline in the Small Cap Index. This month, the larger cap names were not immune to the selling pressure as the FTSE declined by 5.09%, mirroring a similar decline in the Dow Jones Index in US$, while the MSCI World Index declined by 7.42%.
Yet again, the Athelney Trust unaudited NAV fell in September, this time by 1.2% as compared to the Small Cap Index which declined by only 0.4% and the FTSE which increased by 1.05% as investors moved into larger cap names. This was despite ongoing concerns over a hard Brexit and the implications of a tariff trade war between the US and China. Globally the developed markets outperformed during September. Higher Oil prices helped stimulate the Global Energy sector with the S&P 500 up 0.43% to a new record high. However, technology related names were hard hit during September with the Nasdaq Composite falling 0.78% during the month. European markets were also generally stronger in local currency terms. Asian markets were reasonably strong with the Shanghai Composite up 3.53% in local currency terms, responding to increased stimulus by the Chinese Government which was attempting to pump prime domestic consumption including increased spending on public services. The Nikkei was up 5.49% and was one of the best performing markets in the region during September.
Yet again, the Athelney Trust unaudited NAV fell in August, this time by 0.3 per cent and again marred by disappointing trading up-dates and actual profit announcements. This trend started in January in the value and income segment of the market and is still with us today. On a larger scale, America’s bull market in equities became 3,453 days old on 22 August. Since hitting a low of 666 in March 2009, the S&P 500 has risen fourfold, driven by strong corporate profits, low inflation, stable economic growth and a bucket-full of central bank stimulus. Despite five corrections of 10 per cent or more, the index has never entered bear market territory and so many say that this is the longest bull market in history. Not only the longest but the most unloved: yet the index has risen by 16.5 per cent a year which compares favourably with just about everything except 1990-2000 where the index went up by 19 per cent per annum. The S&P’s PE ratio is now 25 which some say is too high and point to widening credit spreads and bubbly asset prices particularly in the Big Tech sector. But those clever chaps in Goldman Sachs put the chances of a bear market starting soon as less than one in five. Can’t disagree with that.
Another anti-climactic month for Athelney Trust, with the unaudited NAV falling by 1.2 per cent. The same problem has been with us since the start of the year in that company results and trading statements have simply not been up to scratch in ATY’s sector of value and income. Another six such events during July have again adversely affected performance and, from memory, this is about the average monthly rate.. Thus there is no sign that I can see of any change in the trend although I continue to believe that London equities are highly attractive in terms of value, having only risen by 6 per cent since the referendum whereas international markets are plus 28 per cent over the same period. The economy has disappointed both Leavers and Remainers since the nation voted to leave the EU a little over two years ago. This despite consumers in general spending at an annual rate of £900 more than had been earned. From the top of the G7, we have plunged to the bottom. With the unemployment rate down to 4.2 per cent between March and May - its lowest rate since the mid-1970s - the data has improved significantly since the referendum but this is the only exception to otherwise soggy data. Furthermore, the Bank of England had expected a rise of 13 per cent in business investment since the vote but, sadly, the out-turn was an increase of just 2.3 per cent. What really is upsetting is that Leavers are blaming Remainers for the mess that we are in. In particular, economist Professor Patrick Minford said, A suspicious mind might think [the economic slowdown] was a deliberate act of a Remainer chancellor to undermine Brexit. Expect more, much more of this specious nonsense in the months and years ahead.
Since 2008, the small cap., value and income segment has been a great place to be and Athelney Trust has done particularly well to be in exactly the right spot. Not so in 2018, however, with disappointing trading statements, company results and cut dividends far more common than I would have liked. Such statements were often accompanied by share price falls of the order of 25-40 per cent with sellers unable to trade with the market-makers unwilling to take stock on to their book. Thank goodness for the relative stability provided by the Trust’s 25 per cent commercial and residential property content. Nevertheless, the total return for the six months ended 30 June was minus 4.1 per cent whereas the FTSE Small Cap Index (which contains a much larger proportion of growth companies than does the ATY list of holdings) fell by only 1.6 per cent in the same period. Global and US shares peaked in January: apart from the tech stocks, they have yet to regain that high ground or even particularly close to it. Again, the shares in the World Index with the greatest exposure to China are where they were at the January top but those with the greatest exposure to developed markets are down by 5.5 per cent. The pattern is the same over the full period since President Trump took over. In the US, exporters have beaten domestic operators by 11 percentage points while, in the developed world, those exposed to China have won by 15. It does not seem to me that international investors are taking this trade skirmish between the US and China nearly seriously enough.
The Athelney Trust unaudited NAV rose by 1 per cent in May which, on the face of it, seems a fairly reasonable performance but, alas, the past month has again seen a number of trading statements and actual results in the value and income sector of the market which were simply not up to scratch. This group of eight shares fell heavily in May. Is this the time to get gloomy? Not at all, we all would like to think that we are contrarian investors, greedy when others are fearful and fearful when others are greedy so now is the time to prove it by buying British. Measured against earnings, the London market is cheaper than Europe and America and is on a par with Japan. London has under-performed other global markets consistently for five years. That reflects widespread disenchantment with British shares which has persisted for even longer. Apart from a short period in 2013, fund managers have for the past 15 years allocated less to London than a neutral weighting would imply.. Recently, figures from the Investment Association show outflows throughout 2016 and 2017 with no change in the trend so far this year. London is in the right sectors, relatively cheap and unpopular so what’s not to like?
A slight improvement was noticeable in April, with the Athelney Trust unaudited NAV creeping up by 1.7% but still lagging the various small cap. indices over the month and well and truly left behind by those trusts which specialize in a growth strategy whereas, of course, ATY has always concentrated on value and income. Not only is the latter deeply unfashionable at the moment, it seems that the gap between the two strategies has not been so marked since early 2000, just before the dot-com bust. So we will be staying as we are, ploughing the same furrow, as we have for the best part of a quarter of a century. We did not get involved in the dot-com boom and bust and have no intention of involving ourselves in the UK equivalent of the FAANGs. As the month ended, it became increasingly clear that there was to be no interest rate rise in May. Furthermore, the Q2 GDP figures will not be released until after the August Bank of England Monetary Policy Committee (MPC) has already taken place, so it is possible that nothing will happen until November. My view, for what it is worth, is that the Bank should do nothing until we find out whether the 0.1% growth in GDP reported for Q1 was a blip or the start of something worse. Taking into account the Beast from the East and the collapse of Carillion, it may be that we are running at about 0.3% growth per quarter, which is certainly nothing to write home about. Inflation seems to be coming down quite nicely and the Bank’s 2% target may be met as soon as the end of this year. Nominal wage growth remains at less than 3% a year, which is parsimonious by past standards. Inflation in the dominant service sector is low and has been falling. The economy will need higher interest rates at some point but, for now, the MPC should bide its time. The one thing that worries me is the poor results coming from the small cap sector. In April, Athelney experienced heavy falls in five of its shares as results or trading statements disappointed. A switch in favouritism from growth to value and income cannot take place until the results start to improve.
My review of the first quarter of 2018 should start with Thank goodness it’s over! In January, American investors were talking about a melt-up but February was very different with nerves stretched tight as worries surfaced about the pace of interest rate increases by the central banks. We then saw a rapid sell-off, knocking shares off their highs and jolting investors. Again, the focus was on New York where the FAANGs (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) clawed their way back. But controversy around Facebook’s ability to protect its customers data led investors to ditch the FAANGs again. Meanwhile, escalating rhetoric from the US, Europe and China over tariffs led to fears of protectionism, thus encouraging investors to reduce holdings in companies exposed to international trade. Furthermore, Russia’s use of Novichok on the streets of Salisbury and the diplomatic consequences that flowed from that have hardly improved investor sentiment. The upshot of all that was that London fell by 8.2% in the first quarter, Tokyo 6.3%, Shanghai 5.3% and New York 1.8%. The Athelney Trust unaudited NAV fell by 7.2% whereas the FTSE Small Cap, Fledgling and AIM All-share all declined by 5.4%, 3.7% and 3.5% respectively. Not a good result at all and notable for another nine shares falling by 10% or more in March mostly on disappointing company news. Mind you, if a dot or comma was out of place in a company statement, then the shares fell sharply. On the other hand, a good statement produced no action at all. The outlook is undoubtedly darker than at the start of the year. Nevertheless, the Brexit vote, fears of trade wars and a new cold war, North Korean missiles flying over Japan, the global debt burden, the roller-coaster ride of cryptocurrencies, the list goes on and on, yet all these things have been survived. Let us also not forget those juicy dividend yields on shares which are simply unavailable elsewhere.
What a very strange start to the year! As usual American stats. illustrate it best: amid talk of a melt-up, the S&P 500 rose by 7% in the first four weeks of 2018, an abrupt correction took it down by 10%, it retraced 70% before suffering another leg down. There are many, many things that Mr Jeremy Corbyn and I disagree about but I cannot allow his recent comment to pass, For 40 years, deregulated finance has progressively become more powerful…its control of politics [is] pernicious and undemocratic. What planet is this man from? Deregulated? The last time I checked, the FSA’s handbook contained ten sections. The one entitled Prudential Standards was divided into 11 sub-sections. The sub-section Prudential Source Book for banks, building societies and investment companies was made up of 14 sub-sub-sections. The sub-sub-section Market Risk was divided into 11 sub-sub-sub-sections. The sub-sub-sub-section Interest Rates had 66 paragraphs. In all, at the last count, there were a million paragraphs of regulations in the rule book. MIFID II, which came into force on 3 January, has brought with it from Brussels 1.4 million paragraphs of new rules. It requires trades to be time-stamped to within 100 microseconds, to report trading information in documents that stretch to more than 65 different data fields and to store all this vital information away for five years. Deregulated? The man does not know what he is talking about!
A thoroughly disappointing start to the New Year with a fall in Athelney’s unaudited NAV of 1.9 per cent. This at a time during when the MCSI All World Index was rising by 5.5 per cent and the talk was all about a melt-up, the only exception in major markets being London. Could this be due to the strength of the British pound? Although it rose by 5.8 per cent against the dollar at one stage, the pound only increased by 1 per cent against the euro and 1.8 per cent against a basket of its trading partners. British equities look relatively cheap by international standards (particularly America, Japan, the eurozone and Australia) but fund managers are put off by the likelihood that Britain will leave the single market and customs union with consequences for future economic growth. However, poor Neil Woodford (I never thought that I would write those words) believes that the UK will avoid a further economic slowdown and that there is value in domestically focussed shares.