Investing in Dislocation

Outlook

Our most material activity last month was deploying the cash balance we had built up into several existing holdings during the market sell-off. We predominantly re-invested in Japanese holdings (Sony, Resonac, Hitachi, JEOL, Kansai Paint), high conviction positions in Arcosa and Samsung Electronics, and upweighted our recent purchase Ferroglobe. The ability to act quickly buying discounted shares during a temporary dislocation is a feature of this strategy. We expect our nimble approach to enhance the Fund’s long-term returns.

Early August’s drawdown revealed two things. First, beware of under-appreciated correlations. Few commentators raised the risks of the linkage between the Yen and US tech before the event. Second, the challenge equity investors face is that market gains in certain sectors and geographic markets appear ‘frontloaded’ in already anticipating a soft landing for the economy.

In simple terms, the S&P 500’s ~22x earnings multiple is in the top decile of its historic range, while being based on consensus EPS forecasts for 11% growth over the next 12 months, above the 7% long-run average. So, while monetary policy levers are present (and set to stir into action), current economic trends suggest it is more appropriate to view whatever rate cuts are forthcoming as supporting rather than materially boosting economic growth.

We remain highly enthused by the opportunities within the RGI Global Alpha portfolio and by its characteristics. It offers a yield of roughly 8% on our estimate of sustainable earning power for each company and several of our portfolio companies also intend to return 10-20% of their current market cap to shareholders over the next one to two years.

The portfolio contains a breadth of end markets, earnings drivers, and stock specific catalysts which help offer investors a well-balanced, attractively valued fund compared to highly concentrated, momentum-driven benchmark indices.

Market Overview

Global equity markets rose for the fourth consecutive month in August (MSCI ACWI +2.5% total return in USD[1]). This serene outcome masks significant intra-month volatility. While ultimately there was little difference within the stock market on a style or factor basis (MSCI ACWI Value +2.7%, MSCI ACWI Growth +2.4%, MSCI ACWI Momentum +2.3%), the severe correction in early August was most keenly felt by recent winners. At its trough, MSCI ACWI Momentum was -10% compared to the MSCI ACWI’s -6%. Most post-event explanations have focused on a BoJ hike accompanied by surprisingly hawkish commentary, followed by weaker than expected US non-farm payrolls. This led to a sharp (and correlated) unwind of leveraged ‘carry trades’ across the Yen, Nasdaq, and Nikkei. The leveraged and crowded nature of the derisking trades saw the VIX spike intraday to 65 on 5^th August – a level only recently seen during Covid and before that the GFC. Since then, there has been better economic data led by jobless claims, retail sales, credit demand and the ISM non-manufacturing survey (though some data have been softer, too).

 

Strategy Update

Performance

The Fund returned -3.4% in August. In comparison, the MSCI ACWI index returned +0.2% (all in GBP). This brings the year-to-date return to +9.2% for the Fund versus MSCI ACWI +12.5%.[2]

Baker Hughes (-11% in GBP) was a top performer last month and largely unwound these gains despite only a modest change in commodity prices. Samsung Electronics (-11% in USD) fell alongside its memory peers, SK Hynix and Micron. Some analysts are forecasting commodity DRAM and NAND prices will rise less than previously expected. This relates to weakness in the smartphone and PC space. Clarkson (-15%) fell sharply after maintaining its full year guidance with a second-half bias to profits, which is consistent with the company’s long-term history. We have maintained conviction in the holding following a management meeting.

Hitachi (+10%) and JEOL (+8%) were our two strongest contributors despite being down ~14% and ~24% respectively intra-month (in GBP). We added to both holdings near their lows. JEOL reported very strong Q1 results. We expect it will increase profit guidance as the year progresses.

 

Activity

We added one new position in August, which was a direct switch from an existing holding.

Weir Group is a UK-listed engineering company, primarily serving mining and infrastructure end markets. Its technological solutions enable critical resources to be produced using less energy, water, and waste while reducing the total cost of ownership for essential metals to support economic development and energy transition. We view its technology and service footprint as competitive advantages, and it has an attractive installed base of equipment with associated aftermarket revenues. This should ensure an attractive recurring revenue stream into the future, providing resilience and predictability in an otherwise cyclical industry. Weir is executing well on financial targets to grow its revenues mid to high single digit organically through the cycle, deliver a 20% operating margin in 2026, and convert 90-100% of its P&L earnings into free cash flow. Its progress on the latter was the standout reason for replacing Metso Corp, where our patience has expired around its promises to improve cash generation via more efficient working capital. An industry-wide pullback and the market drawdown in early August enabled us to acquire Weir’s shares at above 8% FCF yield, trading at the cheaper end of its historic valuation range despite positive operational performance.

 

[1] All index and stock performance data are sourced from Bloomberg Finance LP.

[2] Fund: B share class (GBP), midday to midday pricing. Benchmark: close-of-business to close-of-business pricing.

 

KEY RISKS

The value of investments and any income generated may go down as well as up in response to general market conditions and the performance of the assets held, and is not guaranteed. An investor may not get back the amount originally invested.

Past performance is not a reliable guide to future results.

Changes in exchange rates may have an adverse effect on the value, price or income of investments.

There is no guarantee that the Fund will meet its stated objectives.

The movements of exchange rates may lead to further changes in the value of investments and the income from them.

There is a risk that any company providing services such as safe keeping of assets or acting as counterparty to derivatives may become insolvent, which may cause losses to the Fund.

 

For more information about the fund and how the fund is positioned, please visit our fund centre below: