How confident are our Elite Rated multi-asset managers heading into 2024 ?
It is hard to believe we are already in the final month of 2023. For investors, this year has been...
Thanksgiving is just around the corner, a holiday that doesn’t always get the best rep (both inside and outside the United States) but we’re looking past the history lesson this year because Thanksgiving is more than that for Americans – it’s a cozy evening made of family and delicious food.
Picture this: everyone you love gathered around, ready to dive into a feast, but before the gravy can be passed, there’s my favourite tradition – we go around the table, and each person shares three things they’re thankful for. It’s the ultimate warm fuzzy moment that no gift under a Christmas tree could provide. (But that’s just one American’s opinion).
In the true spirit of Thanksgiving – you know, the whole “What are you thankful for this year?” question – we caught up with seven Elite Rated managers and asked them what they’re raising a glass to in their portfolios. Because why not bring a bit of financial conversation to the dinner table, right?
Chris Bowie, manager of TwentyFour Corporate Bond, is grateful that we finally appear to have hit “terminal rates” (a point for interest rates where prices are stable and full employment is achieved) in both the US and UK.
“This means that, although volatility in bond markets is likely to persist for many months yet as we deal with potential recession risks around Europe and further afield, the devastating losses in fixed income from rate hikes are most likely now in the past,” he explained.
Chris believes the yield on offer now is high enough to protect client capital, even if rates go a little higher from here, or credit spreads widen a little due to recessionary fears. “For any sensible investment horizon of more than a year, the return path for investment grade credit is now very strong – and that is where the bulk of my savings are invested,” he added.
With the end of the year in sight, Vincent McEntegart, manager of Aegon Diversified Monthly Income, is thankful that the worst fears for economies in 2023 seem to have been avoided.
“Recessions were predicted by many economists at the beginning of the year and while economic growth has been anaemic in many regions, including the UK, unemployment levels are low and wage growth, on average, has been better than expected,” he said.
Of course, higher borrowing costs will have a greater impact on consumers and companies in 2024, so it may be the recession has merely been delayed rather than avoided completely.
2023 has also been a tricky year for investors as inflation continues to disrupt bond markets. “Rising borrowing costs and higher bond yields are most problematic for households and companies with higher levels of debt,” he said. “We may have to be grateful if the economy manages to muddle through for another year and be hopeful for a growth surprise.”
The flexibility of the investment trust structure, has Martin Connaghan, co-manager of the Murray International Trust and his colleague Charles Luke, manager of Murray Income Trust, saying ‘I’m thankful’.
Martin explained, “the flexibility to use debt is one of the unique aspects of the investment trust structure. When taking on debt, we ask ourselves straightforward questions: How long can we take the debt out for? How much will it cost? Essentially, can we make money on that for shareholders?”
If the answer to the third question is in doubt, he noted, it shouldn’t be held.
“For much of the last fourteen years, the environment for having debt could not have been more favourable,” he added. “Global equity returns of 13% per annum and interest rates averaging 0.5% in the UK between 2009 and 2021 meant gearing taken out during that time was very likely to have been done to the benefit of shareholders*”.
“Times change,” he pointed out. “Murray International Trust had £60m worth of debt due in May of this year. The cost of renewing the borrowing at the time had an interest rate that started at 6%*.”
This reality – when thinking about what annualised equity market returns might be over the next fifteen years, as opposed to the last fifteen – put the answer to question three in doubt (can we make money for shareholders). “We sold some stock, repaid the debt, reduced gearing and are always free to revisit later,” Martin added.
Charles Luke gives a tip to investment trusts’ use of revenue reserves as he looked back at the 50th consecutive year of dividend growth for Murray Income Trust.
Charles says, “I am thankful for three factors that have helped to enable this impressive achievement, over a long period of time.” He credits the Directors of the Company and Sterling’s weakness saying, “from the perspective of dividend growth longevity, (this) has been helpful given that the dividend is paid in sterling, yet the majority of earnings are derived from overseas.”
But finally, he highlights how the investment trust structure allows revenue reserves to fill the gaps. Charles concluded, “In 50 years the Murray Income Trust has paid out around 830p in dividends of which 10p has come from revenue reserves.” The trust has a current yield of 4.5% and currently trades at an 8% discount**.
David Eiswert, manager of the T. Rowe Price Global Focused Growth Equity, is thankful that an increasing number of sectors could be seen as growth drivers over the coming months and years.
“While we continue to see innovation and disruption as a source of extreme positive outcomes, especially in healthcare and technology, in the new equilibrium, we will see growth redistributed across industries,” he explained. David also believes pricing power and monetisation will take on more significance for corporates and investors alike, especially in a less forgiving financing environment.
“We have added to our stock positions within energy in recent months as we have looked for companies with pricing power and the ability to demonstrate improving fundamentals,” he said.
In addition, he noted companies that can “thoughtfully and responsibly supply fossil fuels” as we work through the energy transition will be important to consider, especially in a higher inflation environment.
James Thomson, manager of Rathbone Global Opportunities, is thankful to be celebrating 20 years at the helm of this fund, where he’s returned 944%*** for investors over his tenure. Yet, according to him, it could’ve been better if he listened to his mother!
James hat-tipped his mother for highlighting the under-the-radar growth potential of the diabetes and weight loss drug Ozempic that’s produced by Danish pharma Novo Nordisk. “Initially, I dismissed the unscientific recommendation, but I won’t be so churlish next time, as if I had pursued her recommendation much earlier, my performance would have been far better.”
“Always listen and be thankful for your mother,” he added.
James also reflected on the lessons learned during the market dislocations of 2008, 2016 and 2022, saying, “with the healing effects of time, they will be seen as some of the great buying opportunities for some of the best growth stocks in the world.”
Chris Miles, UK managing director at Capital Group, is thankful for an historic investor opportunity that might begin as the recent rate hikes near their end.
“In the current uncertain environment, investors have been sitting on the sidelines of markets as that seems to be the safer option, especially when cash is offering yields not seen in 20 years,” he said. However, he believes we’re on the cusp of a transition.
“Whilst investors have been flocking to cash-like investments, history shows yields on cash have tended to drop off very quickly following the end of a rate hiking cycle. And we believe it is important to begin deploying that cash and diversifying one’s exposure across compelling global bond and equity market opportunities,” he said.
Chris also believes fixed income is living up to its name again by providing solid income potential to investors. “For stocks, when the Fed stops tightening policy, one risk for the financial system dissipates,” he explained. “As companies and consumers see their borrowing costs stabilise and eventually begin to decline, it provides a boost to the economy and corporate profits.”
As Chris nicely summed up — “historically, equity investors have seen the benefit in such scenarios. So, we’re thankful that long-term investors can find attractive opportunities.”
*Source: abrdn, Murray International Trust, November 2023
**Source: fund factsheet, 30 September 2023
***Source: FE Analytics, total return pounds sterling, 3 November 2003 to 13 November 2023
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