Whatever it Takes
The phrase coined by the European Central Bank President, Mario Draghi in 2011 that effectively saved the Euro has been quoted by more than one country leader and/or their finance minister in the past week. The accompanying and coordinated monetary and especially, fiscal packages – not least in the UK – have been impressive in their magnitude and may sooth financial markets. Time will tell but markets would also like to see a drop-off in the rate of new cases and deaths in Italy as a pre-cursor to similar statistics in other European countries including the UK, who are two to three weeks behind Italy.
Price-makers and Price-takers
Always better to be a price-maker but the difference between the two is key and has been played out in the past week in the UK investment trust market.
For some time, in our multi-asset Dynamic Fund, we have chosen to invest in real assets via the investment trust market as portfolio diversifiers, eschewing what we perceived to be poor value bonds that failed to offer our desired return objective, without taking on undue credit risk. Part of that rationale has played out as credit spreads have blown out as Government bond yields in the major economies have plummeted before oscillating widely, buffeted by the enormous supply coming to pay for fiscal expansion on one hand and their role as a safe asset on the other.
The investment trust market isn’t as liquid as major bond and equity markets in normal market conditions although they are traded on the London Stock Exchange on a daily basis. Consequently, we have sized positions in our favoured investment trust holdings accordingly.
In the financial market volatility that has ensued over the past month, small sellers have had a dramatic effect on the price movements of investment trusts. Market-makers have been reluctant to take on inventory and act more like brokers, trying to find buyers rather than ending up as owners. For these market or price-makers, the underlying value of an investment trust comes a distant second to their daily profit and loss. The emotional sellers of these investments become price-takers at almost any price. What then happens is a sharp sell-off in the price of good, well-constructed assets to prices that represent bargains over most time periods. The price and short-term performance of Dynamic suffers from those price falls, but they also represent an opportunity to purchase some cheap assets where we are the price-maker. Of course, what can happen is that although the price of an investment trust may have fallen a lot, the lack of volume or inventory that caused it means it can be hard to buy the quantity we would like.
Last Friday, we sought to add to our position in Urban Logistics, an investment trust which specialises in letting small industrial, ‘last mile’ distribution units close to major towns and cities. Now these are going to be in demand in the short and long-term. It took some perseverance, but we managed to add to our position at our price.
We have a decent cash buffer and will continue to selectively take advantage of similar opportunities in small increments for the benefit of our investors.
Looking into the Future
While not attempting to pinpoint when a turning point in markets may occur, as an allocator of assets, you could paint a picture where there is huge government bond issuance/borrowing to pay for the emergency economic support packages already announced. Any significant rise in bond rates will be contained by new rounds of quantitative easing (QE) to avoid upsetting any economic recovery by keeping a lid on rates. It is quite understandable to prefer an asset mix that consists of thematic equities exposed to sustainability and the digital economy plus some cash and gold as an alternative currency as the major currencies falter through over-supply (QE).
If You Need Us
We are all working remotely at TBAM, the technology is excellent and we have daily video meetings to discuss a variety of topics including, importantly, how we continue to provide support for our adviser clients. As well as offering a weekly blog on our thoughts and observations, we can offer you a call by video or voice if you wish.