Why diversification is the only investment outlook that matters

Juliet Schooling Latter: Hi, I’m Juliet Schooling Latter from FundCalibre, and today I’m talking to Vincent Ropers, manager of TB Wise Multi-Asset Growth. fund Vincent, thank you for joining me.

Vincent Ropers: Great to be here, thank you.

We spoke to you last summer when you had a value tilt to the fund, and exposure to mining and resources companies and inflation-linked assets like infrastructure and floating rate notes. How did that play out for you?

[00:32] Well, I think, on the whole, those themes were the right places to be invested in. If we start with commodities, that’s one of the only, if not the only main asset class that was positive last year. And, in that space, we own the BlackRock World Mining Trust, which was a top performing holding of 26% in ‘22. So, that worked quite well in an inflationary environment.

Value there, again, within equities, value, global value outperformed global growth by about 30% last year. So, on a relative basis, that was the right place to be. But that said, on an absolute basis, global value was still down about 5% for the year. So, not a great … a good relative trade but not a great absolute one.

And if we look at the inflation linked assets, there again – in a year when inflation was really the key driver of everything – finding assets where the revenues have got a direct link to inflation was a good call. So, the things like infrastructure, the things like – within bond markets – floating rates [floating rate notes]. So, those are those securities where the coupon value moves in line with interest rates, so, as interest rates rise, your coupon rises as well – those have performed relatively well on the NAV basis – so Net Asset Value basis. But it has to be said that we invest in those assets via investment trusts and the whole investment trust universe has been extremely volatile in terms of prices, so that the discounts have widened quite a lot in those securities that pay an income. As interest rates have risen, investors have struggled to really value all those alternative assets. So, although the underlying portfolios have performed generally well, the picture has been quite mixed in terms of performance because the investment trust discounts might have widened.

So, I think, on the whole, the themes were correct; in terms of the implementation, we would’ve hoped to get better returns. But those are still themes that we are playing in the portfolio today. So, we still think that the value will definitely come through.

Yes, last year was certainly tricky. How did your positioning evolve over the course of the year? There were quite a few events that shook markets. Did they open up any new opportunities for you?

[03:51] Yeah, there certainly were quite a few events. As you said, we could have done with a few less of those, to be honest. I think we really had a year of two halves.

The first half, we did relatively little in the portfolio. We thought there was only a small competitive advantage in being a ‘first mover advantage’ in trying to anticipate how markets would react to this really big shift in monetary policy around the world. So, we stuck to our positions and didn’t make big shifts in our allocation but came the summer, there we started being interested in fixed income after what proved to be one of the worst, if not the worst first half of any year for bond markets.

Yields started being attractive in government bonds for the first time in years. And within credit, the spreads implied default rates that were as bad as in the great financial crisis of 2008 or [200]9. And we think the situation is very different. Balance sheets are much stronger than they were in 2008 and [200]9. So, although we know that more defaults will come, we certainly don’t think it will be as bad as it was then. So, having spreads and yields at the same level as it was at the time, is looking like an opportunity to us. So, we added to fixed income at the beginning of the summer.

We also raised some cash then, after seeing a bit of exuberance from investors in July and August, there was this quite strong rally, strong rebound in equity markets. So, we raised some cash then. And then, after the mini budget, we were well positioned because we had raised that cash ahead of it. So, that was relatively lucky, to some extent. And then we were on the front foot to be able to deploy that cash in October. Firstly, quite cautiously, we added to fixed income again in October. And, in November, we started adding more risk in the portfolio by adding to UK smaller companies, healthcare and private equity – all areas that looked particularly attractive to us from the valuation standpoint. And that left us, at the end of the year, with about 2% in cash. So, all that cash that we had raised in the summer was redeployed.

Great. So, looking ahead, what is your outlook for 2023 and how is this impacting your investment choices today?

Can I say that I don’t really have one?! We tend to shy away from producing annual outlook. I find it a very arbitrary exercise, to be honest. I understand why people want it, but we don’t invest on a 12-month basis. We don’t reset the clock on the 1st of January every year. So, for that reason, we don’t really produce an outlook. What we’re trying to do is to look at what the macro situation is today, what valuations are telling us in terms of what things are likely to look like going forward, and within the areas we want to have exposure to, find the best managers that we can and be active in allocating to the ones where we see the biggest upside versus downside ratio.

But all of that said, the way we look at the world now from a macro standpoint, it looks likely that inflation has peaked. It is almost a certainty that we are, or are going to be, in a recession, but that recession is not necessarily going to be that damaging because corporate balance sheets are quite strong compared to past recessions, as well as the labour market is very strong as well. So, there is some buffer there.

Then, if we look at valuations, they are not as attractive as they were a few months ago, but there are still quite a few pockets of value. So, there are lots of opportunities there.

And the last thing really is to look at sentiment and positioning from investors. So, sentiment seems to be very negative, but I would say the positioning is probably neutral. There’s still a lot of cash on the sidelines, but what we’ve observed over the past few months is that very few people have actually sold their equity allocations. So, they started the year with quite a lot of cash, and they’ve held on to their equities. And before we could call a bottom with strong convictions, we would like people to panic a bit more and reflect the negative sentiment that we read in the surveys into their portfolios by selling their risky assets. So, we’re not there just yet.

So, all in all, you put all of that together, I think it remains an uncertain environment that will surely be very volatile, but there are quite a large number of opportunities still.

So, in terms of – in a nutshell – in terms of the things we like:- we continue to like value over growth; we continue to be wary of technology and growth sectors in general; we prefer small caps to large caps; we prefer UK, Europe, EM [Emerging Markets], to US; we continue to like bonds because the yields are looking quite attractive and you don’t need to add a lot of risk in terms of credit risk or duration, to get very attractive yields. In commodities, we still think there is a role for gold to play in portfolios; we continue to like the supply-demand dynamic in industrial commodities, industrial metals.

And then there are more, I would say probably idiosyncratic, areas that we like on valuation basis. So, we like financials, property, listed private equity … so, as you see, the list is quite long. So, we are not pretending to have a crystal ball to know what’s going to happen next year. But what we do is focus on where the valuations are telling us we should be focused on, and try to build a diversified portfolio where the upside is looking quite attractive.

Right. And perhaps you could wrap up by telling us about a new investment or one you’ve got real conviction in this year?

[12:04] Well, maybe a new investment of significance. I mentioned fixed income earlier, which we added to in the summer; so, that allocation was done by adding the TwentyFour Strategic Income fund in our portfolio. So that is, let’s call it a generalist, a broad, fixed income strategy, mainly investing in investment grades with relatively short duration, but they also like floating rates and bank debt. But we think that’s a good way to invest at the moment – to rely on specialist fixed income managers that can go and look for those opportunities for us. And the fund itself for, as I mentioned, relatively low credit risk because it’s mainly investment grade, low duration, is offering a mark to market yield of 9%, which is looking very attractive to us for the level of risk that they’re taking.

And maybe a high conviction … another high conviction holding I will mention is Pantheon International [Pantheon International plc] in a listed private equity trust which is currently trading at a 45% discount when it was at a 15% discount at the start of last year. And that is a good reflection of the kind of panic that we’ve seen in parts of the market – so, not overall – but in some parts of the market, there is that view that because private equity performed very poorly in the great financial crisis, investors have been very prompt to sell their holdings. And we see those kinds of discounts, which I think are unjustified when we look at the quality of the portfolio, how diversified it is, and also when we look at how conservative valuations of the portfolio are. So, we are undoubtedly going to see some weakness in those private equity portfolios. I think that weakness is still to come – there is always a lag between private markets and public markets – but over the last year the portfolio was up 15% in terms of net asset value, and what we see from them and from the other listed private equity managers we talk to, is that they are still able to sell their holdings at premium to the values at which they are reflected in the portfolio. So, we think there is some conservatism in the valuations at the moment, and even if we assume those are going to fall, a 45% discount is looking too wide for us. So, that is our largest private equity holding in the fund.

That’s great. Vincent, thank you very much for chatting to us today.

[15:31] Thanks very much for having me.