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.
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Chairman's Statement Year End Accounts 31 December 2015
Chairman’s Statement Year End Accounts 31 December 2015 (PDF Link)
The year 2015 finished on a subdued note, with the Athelney Trust unaudited NAV rising by 0.1% in December so that the total return for the year (i.e. growth in NAV plus the dividend) was 10.4% compared with the FTSE Small Cap, Fledgling and AIM All-share which increased by 6.2%, 12.7% and 4.7% respectively. I have dubbed 2015 the year of shocks and surprises. In no particular order: the British steel crisis (partly self-inflicted); the VW emissions scandal; China slowing down; the crash in Shanghai and Shenzhen stock markets; Greece, at one point, on the verge of being expelled from the euro; Brent crude at less than $40; Base metals plunging by 25-40%; an emerging markets debt problem following the credit binge in US dollars; the migration crisis; three terrorist attacks in Paris (how I hate the BBC using the word militant instead of terrorist; unpredicted General Election results in the UK and Spain and more than enough tornadoes, hurricanes, fires and floods to shake a stick at. Plenty of time to discuss 2016 in the coming months but I can see three possible problems ahead; credit bubbles in emerging markets; asset managers having bought longer-dated bonds with greater credit risk are vulnerable to higher interest rates and the chance that excess money could flood out of the banks and the Fed into money market funds with unpredictable results. No doubt you will have your own favourite issues for the New Year and I hope to discuss all of them in the coming months.
The Athelney Trust unaudited NAV rose by a modest 0.3% in November whereas the FTSE Small Cap, Fledgling and AIM All-share indices fell by 0.5%, 0.6% and 0.3% respectively. Perhaps I missed something but November seemed a bit of a non-event in share markets but no-one will say that about December. Aside from the vote to extend bombing to Syria and the climate change conference in Paris, we will have a meeting of the European Central Bank, followed by the Opec states and then the Federal Reserve. First, the ECB is expected to increase the QE programme due to worries about falling prices. Then Opec, which has exerted a vice-like grip on oil prices for 50 years, will decide whether to continue with the price-war against the American oil shale producers. Commodity markets have been shaken since, just over a year ago, Opec ramped up output with the aim of crushing the non-Opec competition. Brent crude has more than halved to $45 per barrel, down from $115 in June 2014. High-cost producers investing in oil shale and the North Sea have tried everything from increasing output to cutting costs to the bone in a desperate attempt to keep going but even that may not be enough. The Fed meets on 16 December to decide whether interest rates should rise for the first time since 2006. The strength of the dollar after such a rise is likely to result in a vast flood of money leaving emerging markets and going in favour of the U.S. How share markets will react to all this, it seems to me, is beyond logical analysis. The best strategy, surely, is to continue with a good portfolio of small caps - what else did you expect me to say!
Rather a subdued performance by small caps in October with the Athelney unaudited NAV rising by 1.3% and the FTSE Small Cap, Fledgling and AIM All-share improving by 2.1, 1.6 and 2% respectively. Blue chips, by contrast, bounced by 5%. Rumours abound of hedge fund managers of immoderate wealth preparing to fund rich Brexit campaigns in the forthcoming referendum. All I hope is that we, the voting public, keep things in perspective. True, the migration crisis will not help those of us who want to stay in but there is an awful lot more for us to take into account. Take regulation: Britain has the least regulated labour market in Europe and the second-least regulated product market in the EU. The most damaging measures such as the new living wage and planning restrictions of terrifying complexity are entirely home-grown. Then, if Britain wanted access to the European single market, it would have to observe almost all the EU’s rules as in the case of Norway and Switzerland. Both countries pay into the EU budget (in Norway’s case, about 90% of Britain’s contribution per pop.). Euro-sceptics, who dream of reclaiming lost sovereignty, have quite failed to make it plain why Britain should apply rules it has no say in making and then to pay for the privilege. Next, an independent Britain would be excluded from the Transatlantic Trade and Investment Partnership (TPP). Finally, leaving the EU would not stop refugees crowding into Calais but would make it much more difficult to work with France. The Prime Minister is at last waking up to the narrowing polls and he now knows that a vote to leave would bring an end to his premiership plus several more casualties in his Cabinet.
Athelney Trust appears to have come out of the second tricky month in a row relatively scot-free with the unaudited NAV having fallen in September by 0.3%, whereas the comparatives such as the FTSE Small Cap and AIM All-share were down by 1.9% and 0.8% respectively. The Fledgling was unchanged on the month. This royal throne of kings, this sceptred isle seems to be chugging along at about 2.5% in terms of GDP growth but there are concerns about other parts of the world such as America, China and emerging markets (EMs) generally. In the States, payrolls are growing slower than forecast at less than 150,000 for two consecutive months, which probably caused the Fed to defer (rightly, in my view) a decision to raise rates. The good news of that decision was overcome by the bad news of the reason for that decision so we had a sharp sell-off in world markets. Then, there is now considerable cynicism about China’s real growth rate so the slowing of its pace and the miscues of its leaders over the summer have badly damaged confidence. Returning to America, are investors ready for the trend in corporate profits, which seems to me to be on the way down? Sales are stagnant and margins lower so only more share buy-backs (bad idea) can keep earnings going forward. Deflation exported from EMs is a possibility which, should it happen, would make it harder for companies in the West to raise prices or even keep them steady. As we enter October, the month when meteorological and market storms have been known in the past, nerves are frayed. It would not surprise me to see more volatility in both equity and gilt markets. Action: top-slice rising shares and reinvest on dips into deep value.
I was immeasurably relieved by Athelney’s 0.9% reduction in unaudited NAV for the month of August, particularly as the FT Small Cap, Fledgling and AIM All-share fell by 2.4%, 4% and 2.5% respectively. For those tracing the cause of August’s stock market rout, most roads lead back to China. The devaluation of the Renminbi, talk of currency wars and real concerns over the health (or otherwise) of the Chinese economy compounded the negative mood. Yet for all the attention on China, there are actually other matters which we should not forget. First, the timing and trajectory of rate rises in the US; second, China’s falling need for commodities and the effect that will have on a number of other economies; third, positive signs that the euro-zone area is starting to pick up and, fourth, the double dip in oil prices which is so beneficial for many developed markets but deeply unhelpful to certain EMs. My view is that the weakness in commodities, metals, energy and so forth will continue although there is a case for major oils and their juicy dividends. This weakness will lead to lower inflation or a modest bout of disinflation and delay rate increases even further. Finally, US short-dated market rates seem likely to rise whatever the Fed does which would put more pressure on emerging markets through dollar strength. ‘Buy on dips’ has been a sensible strategy for a long time now - I suggest that we all continue with it.
Athelney Trust had a good month in July, with the unaudited NAV rising by 3.3% whereas the AIM All-share fell by 1.3% and the Small Cap and Fledgling improved but only by 0.7% and 1% respectively. According to data released by the ONS, the UK economy grew by 0.7% in Q2. This compares with 0.4% in Q1 and 2.6% against a year ago and means that the economy has grown in 10 consecutive quarters. This pleasing data has been fuelled by a hike in the services sector and by increased North Sea oil and gas production following the tax cuts in March. Manufacturing has proved tough due to the strength of the British pound, thus denting export sales to the euro-zone. Not surprising, then, that there is talk of a rise in interest rates around the turn of the year. And yet what, precisely, is the hurry? China’s demand for iron ore, copper, alumina and other commodity imports from Latin America and Africa has slumped. The former’s economy can be divided into four unequal parts: property 25%; infrastructure 22%; manufacturing 33% and the balance made up with a number of smaller items. The first has high levels of inventory, the second earns 3% compared with borrowing costs of 7% and the third shows a slump in demand for capital goods. This is just one reason why I believe that the timing of the rise in rates should be put on hold. Oh yes, and inflationary expectations have turned down again in America.
Interim 2015 Chairman's Statement
Chairman’s Statement Interim Accounts 30 June 2015 (PDF Link)
The unaudited overall return on Athelney Trust shares for H1 was 6.4%, whereas the FTSE Small Cap, Fledgling and AIM All-share indices rose by 7.1, 15.6 and 8.2 per cent respectively. For the month of June only, ATY was down by 0.7% and the three indices were -2.4, +0.4 and -1.9 % respectively. It is curious to reflect that when US and UK interest rates were cut to their lowest levels ever in March 2009, markets expected them to rise within the year. More than six years later the rates remain the same and markets are still obsessed with the timing of a rise rather than how slowly or rapidly the rises will take place. My own view is that the rises will be extremely gradual and each one signaled a long way in advance so as not to upset markets. We are now in a low growth world - witness the downward revisions to growth projections of the Fed and the Bank of England in June. China is slowing down although the official figures are still hiding the true position. Japan and Europe are finding it difficult to grow at what we used to call a decent rate. This all means that interest rates are going to be far lower than at pre-crisis levels. Average rates since 1945 for the US, UK, euro-zone and Japan were respectively 3%, 7%, 3% (estimated) and 4%. In such a world, any reversion to the average is very distant so there is no sword of Damocles poised over the heavily indebted developed world for the foreseeable future.
A positive month for small caps with the ATY unaudited NAV rising by 2.6% and the FTSE Small Cap, Fledgling and AIM All- share indices improving by 2.9%, 3.4% and 3.1% respectively. Notwithstanding the optimistic data on US employment published at the beginning of June, I wonder whether the global economy is running out of steam especially as the slowdown in China appears to be much more marked than the official statistics suggest. Electricity consumption has turned negative and rail freight stats. have been falling at nearly 10%. It was inevitable that China’s investment bubble would lead to a vast inventory of unsold property: the country produced more cement between 2011 and 2013 that did America in the whole of the 20th century. China accounted for 85% of world economic growth in 2012, 54% in 2013, 30% in 2014 and probably 24% this year. Japan’s exports to China have fallen by 15% over the past year and Russia, Brazil, Argentina and Venezuela are all contracting sharply. Europe is running up an extraordinary current account balance of $358bn but seems incapable of contributing much to global demand. As for markets, valuations seem rather stretched, bond yields are rising, Greece and Ukraine continue to worry and US interest rates are likely to rise in H2 although, to be fair, by only 25 basis points. In short, there seem to be very few reasons why equities should go up in H2 although there is still value to be found in small caps by a diligent searcher.
Warm congratulations to David Cameron and the Conservative Party for their unexpected and welcome win. Years will pass before we fully understand exactly what happened on 7 May and during these years, no doubt chivvying him all the way, will be his Tory right-wing critics, who find themselves suddenly empowered by the narrowness of his parliamentary majority. To have won, instead of gone into another coalition, might be the best and worst thing that he has ever done. Back to April, an undistinguished month for Athelney Trust which, true, did see its unaudited NAV increase by 1.6% but the FTSE Small Cap index rose 1.2% and the Fledgling and AIM All-share did much better at 3.7% and 5.1% respectively.. With monetary policy so very loose, I continue to feel perfectly happy with the level of asset prices although I have longer-term worries about where economic growth might come from. Productivity is extremely poor and its lack of growth is not nearly so mysterious as one might think: It stems from a failure to improve the efficiency with which land, labour and capital are used in professional services, manufacturing, IT and banking. Planning limitations prevent the productive use of land and raise the price of housing far above that in other countries. We need a new runway at Heathrow. We also need a much simpler system of taxation to encourage the population to get on with productive work rather than wasting time arranging affairs to minimize the tax payable. Productivity would be much improved if we could make progress with these three things but I don’t think that anybody out there is listening.
Not an inspired quarter for Athelney Trust with the unaudited rise in overall return limited to 2.9%, whereas the Small Cap rose by 5.3% and the Fledgling by 7.4%. The AIM index, though, underperformed with a 1.7% rise. Has the market priced in the risks connected to Britain’s shaky politics? Alas, no. Merging polls with Ladbroke’s odds produces, at the time of writing, Conservative 280, Labour 273, SNP 46, Lib Dem 25, UKIP, 4 and others 22. On these numbers, the current coalition would not have enough seats to form a majority government nor would a Labour/Lib Dem combination. The most likely outcome, then, is that a minority government would take power, attempting to pass legislation on a bill-by-bill basis. Labour might well end up in charge but its programme would be hostage to the SNP. Mr Salmond has made it clear that he is opposed to further consolidation as well as demanding a new high-speed line to Scotland and the scrapping of Trident. All this might not matter if the UK economy did not have some significant weaknesses. Productivity is 2% below its pre-crisis peak. The current account deficit running at 6% is equal to its highest level since 1955 making the country dependent on foreign capital. And yet, markets show no sign of alarm. Equities had a decent Q1, 10-year gilt yields are very low at 1.6% and sterling, ignoring the mighty dollar, has held up well. An abrupt change in May?
Pretty well everything did quite nicely in February: the Athelney unaudited NAV improved by 2.8 per cent whereas the comparatives, the Small Cap, AIM All-share and Fledgling rose by 2.9, 3.5 and 2.1 per cent respectively. Even the FTSE 100 index, which famously hit a high on the last trading day of the last millennium, found enough puff to make a new record. That latter index, though, is a strange creature - stuffed with tech stocks 15 years ago, was then hit hard by the banking crisis of 2008 and finally knocked for 6 by the heavy fall in mining and oil shares recently. The FTSE 100’s annual return over these 15 years has been only 3.4 per cent, a meagre yield for taking quite a lot of risk. The statisticians reckon that there is a 50-50 chance that the FTSE could get to 10,000 by 2022. The broad UK market does have some appeal but the FTSE less so because of the mining and oil shares already mentioned. And of course there is the political risk with a general election to be followed, possibly, by referendums which could see Scotland leave the UK and/or the UK leave the EU. UK equities look interesting but not compelling value - I, for one, shall continue to study and invest in small caps where I believe the value is much better.
It’s probably easier to say what didn’t happen in January rather than what did. Anyway, there was the collapse in the price of Brent crude to below $50 per barrel, the surprise announcement by the SNB to end the cap on the franc against the euro (which cost the unwary a great deal of loot), the surprisingly large amount being committed to QE by the ECB, the Greek election and a sharp increase in volatility in FX markets. Yet little seemed to affect equity markets with the FTSE Fledgling and Small Cap up by 2% and 1.2% respectively compared with the rise in the unaudited NAV of Athelney Trust of 1.2%. The AIM All-share where ATY has 35% of its portfolio, however, again disappointed with a fall of 1.7%. Back to FX markets, though, and the main reason for this sudden surge of volatility seems to be the divergence in monetary policy: no longer are the central banks moving in the same direction. The ECB and Bank of Japan will be printing money and attempting to devalue their respective currencies whereas the Fed. and the Bank of England have finished with QE and are both looking to start the process of normalizing interest rates, perhaps Q4 or early in 2016. Meanwhile, all eyes are on the sharply dressed (?) Finance Minister of Greece as he tours Europe explaining his frustration at the (unnecessary?) constraints imposed by being part of the euro zone. It looks like being another tricky year……………