Welcome to the first blog from South River Asset Management. In a management backed buy out from Peterhouse Corporate Finance, the firm (formerly Peterhouse Asset Management Ltd) has been acquired by Zhejiang Zhongnan UK Ltd, a subsidiary of Zhejiang Zhongnan Holdings Group (ZZHG), a leading Chinese diversified conglomerate based in Hangzhou where the G20 summit was held in China in 2016. Between them our two groups run combined assets under management of circa $300m.
ZZHG is a family-run Chinese private company with US$2.5 billion of revenues as at December 2015. Established in 1984, it has businesses ranging from infrastructure to media and technology and has established a growing presence in asset management in recent years. The firm is a leading corporation in Zhejiang province, where ZZHG has been headquartered for 34 years. The joint partnership provides stability and investment for South River Asset Management and provides ZZHG access to dedicated fund management expertise in London.
The new name South River Asset Management reflects the location of Zhejiang Zhongnan on the Qiantang river in Hangzhou, Zhejiang Province, as well as our desire as a group to project the symbolic reference of a river connecting markets and people from antiquity to the present day. The new logo represents the link between East and West, and the prosperity associated with capital and trade flows between them.
Our funds continue to be managed by the existing investment team, strengthened in 2016 by the addition of specialist equity and fixed income resources. Overall South River AM managed funds rounded off December 2017 to complete a strong year of gains, the average multi asset fund having returned an underlying 25% in 20171.
Into 2018 we have become somewhat more defensive against a volatile market backdrop and rising bond yields.
Highlights of 2017 included:
- Diversified multi asset fund closed out the year 12th out of 326 in the Global offshore multi asset peer group. (Lipper offshore multi asset). The link below provides details of the investment performance of the fund since inception1
- Gold Fund had a strong year in relative terms, 2nd out of 19 in the peer group. The link below provides details of the investment performance of the fund since inception1
(Note: (1) Past performance is not a reliable indicator of future results. Investment returns may increase or decrease as a result of currency fluctuations)
So what to expect for 2018. It was Danish physicist Niels Bohr who said “it’s foolish to make predictions especially about the future” and it’s a lesson hard learned in 25 years of asset management but we are positive on a number of key themes for 2018; cybersecurity, investment in electrification of transport, volatility, and emerging markets that all appear undervalued and in the case of new metals for electric vehicle technology and related applications, addressing the increasing needs for IT systems protection and infrastructure, a big theme headlined by the emerging One Belt One Road (OBOR) dynamic so widely discussed today.
Individually we have taken profits in some of the high-flying stocks like Australian cobalt deposit AUSTRALIA MINES that recorded a 10x return in 2017 and we sold our last position at 13 cents up from 0.08 cents a year ago. We remain very positive on the whole EV theme longer term but for now many stocks like TESLA and suppliers of cobalt and lithium material for batteries had become overbought and we expected to see a short-term correction. Amanda van Dyke, senior fund manager and mining equity specialist at the firm has just come back from the annual Indaba and the ease with which UMICORE raised $1bn last week to pay for battery metals is testament to how this EV dynamic is here to stay in our view. We became more defensive during January overall in the portfolios raising US$ cash to between 10% and 20% of the funds. The move above 2.75% on the US 10 year treasury bond on rising US interest rates injected a note of caution and we bought a position in the volatility instrument the VIX to protect against what we believe had become overbought markets generally.
Also at a macro level we initiated a holding in a short position in UK gilts. We believe that UK government bonds are overvalued and Bank of England governor Mark Carney’s warnings that UK interest rates will rise at least twice this year mean that UK government bond yields will rise and at 1.3% are at the third lowest in the G20. We believe this is too low and have bought a holding in the Proshares Gilt short for the multi asset funds.
We have also bought a position in the UK’s second largest construction company KIER GROUP to add to our holding in BALFOUR BEATTY. We have taken advantage of the shake-out in supply caused by the troubles at one of the UK’s largest construction companies CARILLION. We believe the outlook for infrastructure is positive in the UK and we’re happy to buy at these oversold levels. KIER has a very strong balance sheet and is trading at 25% of revenues and a debt adjusted price to EBITDA of 6x.
We continue to be most positive on Asian equity and debt, gold and precious metals, commodities especially copper and oil and we like developed market corporate bonds where it remains possible to pick up 5% yields on A rated asset backed paper from blue chip issuers. We also continue to invest thematically, with cybersecurity, infrastructure and agricultural commodities of particular interest. As the bubble burst in bitcoin (down from $20,000 to $8,000 in a month) the technology that is powering the coming of blockchain and artificial intelligence will need to come from other sources.
Being long of the VIX may pay off finally- Volatility can hardly go lower. We took a small position in the VIX at the start of the year, going long of volatility following a long period of low volatility as measured by standard deviations away from the S&P 500 long term averages. We took a 4% position and closed this out on the spike to 20 as treasury yields moved into the 2.75% to 3% range on the back of rising US wage data.
Our core portfolio positioning currently is:
US$ Cash 20%
Developed Market Corporate Bonds 15%
Asian Equity 15%
Emerging Market Bonds 10%
Emerging Market Equity 10%
Gold + PM 10%
Private Equity 7.5%
Gilt Short 2.5%
It looks like 2018 will be a mixture of “old” and “new” with the bull market tested for the first time since 2011, the injection of volatility, the realisation that interest rates can go up as well as down. However, we believe the super-cycle trends in markets, now well established, will not go away. Not for nothing in all this market turmoil since the start of 2018 have market leaders, AMAZON in the States, TENCENT in China and UMICORE in Europe, seen their share prices hardly budge in the sell-off and are valued at the size of the UK economy between the three of them.
The revolution in energy will continue, the electrification of transport away from reliance on hydrocarbons, the move to driverless vehicle technology, new solutions for infrastructure to cope with the developing world’s rapid move to urbanise, and above all the relentless march of the machines in applications from smart metering in the home to robots replacing workers in the factory to new ways of accelerating mankind’s efforts to get to Mars and back. These will all continue. We’ll still have Trump (probably) we’ll still be leaving the EU (surely?) on 29 March next year and the “One Belt One Road” initiative will be well underway driven by China’s accelerating outward reach and the desire of 2 billion consumers to link between Saudi Arabia to India to China to trade.
But one last thing for the more old fashioned and conservative investors such as us.
It was Albert Einstein who was reported to have said that “compound interest was the eighth wonder of the world“. It takes just a decade at a 7% annual rate of return compounded for an investor to get his/her money back. A quick screen of high yielders globally throws up 10 names, many of them blue chip, that together could help an investor achieve this. The market sell-off has thrown up myriad opportunities for yield hungry investors and a random sample of ten individual names below shows that high income generating investments is not confined to exotica in far flung places or illiquid second liners. Among the ten are bonds issued by blue chip bank WELLS FARGO, global property giant STARWOOD and the stocks of UK FTSE companies BP and NATIONAL GRID.
BP ORDS 6.4%
GLAXO ORDS 6.5%
HSBC 8 PERP 6.5%
ISHARE EMERGING MARKET INCOME 5.1%
NATIONAL GRID 6.7%
STARWOOD PROPERTY TRUST 8.9%
STARWOOD EUROPEAN REAL ESTATE FINANCE 6.1%
TASEKO 06/22 8.5%
TiZIR 07/22 9.1%
WELLS FARGO Non-Cum Pref 7.5%
And finally, it’s a packed week this week for festivals and sporting occasions. Shrove Tuesday or “Pancake Tuesday” kicks off the Christian Lenten fasting run up to Easter in the western calendar. In Asia, Chinese New Year starts this week. It’s the year of the Dog which tends to be a lucky year and the mass movement of 400m people in China is the largest single movement of people in a single country in history. In the Winter Olympics in Pyeongchang our medal hopes in the speed skating have been dashed but we have high hopes in the curling…one of the oldest sports of all, curling, was first played on a frozen pond in Stirling in 1511 and a gold will put the lie to the French claim against the Brits when commenting on our huge medal tally in London 2012 said “But you Brits you can only win medals in sports where you’re sitting down. ”
Of course they don’t make the medals like they used to and standards have slipped. While in 1912 a gold medal was just that, gold, nowadays it’s 93% silver and only 1% gold content. Winter golds are generally less valuable than summer ones, but sometimes for example, a hockey gold medal that Mark Wells earned during the “Miracle on Ice,” the 1980 battle in Lake Placid, N.Y., sold for $310,700.
Kung Hei Fat Choi to you all
(Disclaimer: Reference to specific securities and bonds does not constitute investment advice and is not a recommendation to buy or sell any security or bond. Opinions expressed must not be relied upon). Investing involves risks.