I spent the long w/e in Sicily. It’s stunning at this time of year home to abundant bougainvillea and wild orleanda and a warm sun ripening the lemons and tomatoes for which Sicily is famous. Earthy reds and beautifully balanced whites from grapes harvested from Mount Etna’s fertile volcanic soil make for long relaxing evenings.
Etna is Europe’s most active volcano and was reporting “unusual activity” even in the days leading up to the G7 summit in Taormina (superb views if you can survive the mad Italian drivers to reach it).
Against a background of tight security, a posse of Carabinieri at every turn and the usual Italian political turmoil, the Don reminded Angela Merkel of her lack of commitment to NATO and unfair trade practices (a staggering surplus of 9% of GDP which even Ricardo would have had a hard task justifying!) in talks described by Mrs Merkel as “very unsatisfactory” to which Trump promptly tweeted “Germans huge trade surplus…very bad…this WILL change”. This he followed up by booting the Paris accord on so called “climate change” into the long grass provoking the usual howls of protest from the global warming crowd and a general mauvaise humeur all round.
In fact European assets despite the Gordian knot Brussels and Frankfurt have tied themselves in have been a decent source of alpha this year with exposure to European utilities like IBERDROLA, asset backed property like UNIBAIL and European industrials like IMERYS all positively contributing.
South River Asset Management performance continues to be solid. Year to date the underlying portfolio return after fees is 9% in dollars +14% year on year and sterling adjusted +25% in our core mixed asset strategy. Our core/satellite is working well this year just like it did in 2016. The cautious cash+ funds are tracking 2.5% net of fees year on year.
The gold fund is up 20% this year and 50% year on year and 3rd of all UK funds in its category over 12 months (UK specialist 106 in sample including several gold funds).
May has closed out the month with healthy returns across bond and stock markets to round off a great run since Trump was elected US president on 8 November 2016. With a 12% total return since then in the multi asset model, risk assets have done better than expected but with China slowing, the UK’s ruling Tory party under threat in next week’s election and US GDP growth sluggish we remain cautious and prefer a diversified portfolio approach with 50% in conservative blue chip corporate bonds and equity income, 10% in gold and precious metals, 10% in private equity and 30% in a mixture of cash, real estate, commodities and emerging market income. We still hate the US dollar as we have all year, love cobalt, gold, ilmenite and uranium and love high yield in developed market corporate bonds and emerging markets. As we approach the half way stage it’s worth highlighting our overweights/underweights and how we see asset allocation as we move into H2.
Highlighting our ten themes:
- Repainting the place – the major chemical mergers from SHERWIN WILLIAMS+ VALSPAR through to PPG+ AKZO to CHEMCHINA+ SYNGENTA have led to a tightening of supply in key ingredients like ilmenite and zircon. We love BLUEJAY and MINERAL DEPOSITS as all three are tapped into this dynamic.
- Challenging convention in energy-it’s not just Nevada that’s turning into a giant battery park to fulfil Elon Musk’s dream of getting us all into his electric vehicles-Leipzig and Shanghai are too…Security of supply remains a key issue and while the case for lithium has been largely played out we are bullish on cobalt invested in via AUSTRALIA MINES . Uranium remains a great trade still in our view. We traded out CAMECO at CAD15 for a 25% profit in March, but since then it has corrected to a share price of CAD12 where it looks interesting again.
- Challenging convention in medicine – new ways of treating disease, biology versus chemistry to treat treat chronic pain and the increasing personalisation of medicine are leading to more bespoke solutions accepted truths are being challenged in this field. Bruce Linton, boss of CANOPY GROWTH presented to us in May, a $1.3bn grower and distributor in cannabinoid products positioning itself in Europe as key supplier of choice of legal marijuana for treatments from non-opiate pain relief to sleep disorders to analgesics.
- Challenging convention in the financial system part 1– The attraction of gold and silver and precious metals as an asset class retains a core place in any diversified portfolio. Supply demand is favourable for the investor, buyer demand from Asia remains buoyant and our fiat money system at ever present threat of a reset. You can buy high quality mines below NAV which when the average common stock globally trades at 3x nav appears decent value. ACACIA and BRIO are favourites as a generalist as both have tanked and trade below NAV but do have Brazilian and Tanzanian risk. Among collectives we have the top UK based performing gold fund this year anyway which Amanda runs.
- Challenging convention in the financial system part 2- The attraction of bitcoin and the block chain. Hard to quantify block chain but general feeling is it could be huge and Bitcoin is the headline catcher (an astonishing 150% rise this year) one bitcoin now fetches $2,500 per unit it is the concept of recording every transaction however small on a ledger that is so significant as it could revolutionise book keeping globally and permanently.
- The hunt for yield part 1- Developed market corporate debt – still a hugely interesting market for yield and undervalued in our view. You can pick up 6% to 7% quite widely on blue chip issuers like SAINT GOBAIN EMBALLAGE (Europe largest packaging company) CROMOLOGY (Europe third largest paints company) and ENTERPRISE INNS (UK’S largest pub estate). Top collectives for us are BLACKSTONE’s loan fund and NEUBERGER BERMAN’s floating rate income fund.
- The hunt for yield part 2- Emerging market debt and equity income. This remains of great interest to us. As every EM hiccup (Temer in Brazil, Duterte in Philippines, Mozambican and Cote d’Ivorian coups and rumours of coups, Venezuelan default etc) pushes yields up, buying opportunities crop up. We tend to invest via top managers to diversify the risk. Our favourites are Nathan Shor and Ulysees D’Oliveira ‘s team at GALLOWAY CAPITAL and William Calvert’s team at POLAR CAPITAL.
- 8. The hunt for yield part 3- the corner of the world known as preferred shares. This forgotten area of the market retains its allure. Recall that when Buffet bought Heinz he held much of his stake via preferred stock. This gave him an astonishing dollar yield of 10% even were the deal to fail. Even today the market in pref in the US and places like Japan is thriving (though not here in the UK). The US preferred ETF is a biggie ($18bn) invests in top issues like WELLS FARGO, ALLERGAN etc and yields a net 5.5%.
- The boom in M&A– Chinese conglomerate CIC’s $13bn bid for Europe’s largest industrial warehouse group LOGICOR and HNA taking a 9.9% stake in DEUTSCHE BANK are two further examples of major Chinese Interest In Europe.
- Change is the only constant. Heraclitus said it apparently 2,500 years ago and though somewhat of a cliche rings as true today as it did then. Against a background of fast changing global demographics, innovation, rapidly evolving technological change and urbanisation to name but four major forces shaping the investment landscape, it is important, even vital to ensure investment decisions are assessed within this context and to be made fully cognizant of both the challenges and opportunities presented.
The season’s underway with the Chelsea flower show last week and then really gets going this w/e with the Derby followed by Royal Ascot, Wimbledon and the Henley Regatta interspersed with our a**** getting kicked by the ‘Boks here in the cricket and the Kiwis down under in the rugger.