Six Monthly Newsletter – for the six months to 31 March 2020
(All references to performance are in Sterling terms and for the T. Bailey funds are provided after all ongoing charges).
Over the six-month period to end-March 2020 the T. Bailey Growth Fund fell 16.02% net of all ongoing fees and the T. Bailey Dynamic Fund fell 14.13% net of all ongoing fees.
T. Bailey Funds
- Focus on diversification across longer-term themes.
- Aim to preserve and grow capital in real terms (i.e. above inflation) over the long term.
Any meaningful events in the first five months of the period to March 2020 were eclipsed by the final five weeks of the half-year when the Covid-19 coronavirus arrived in Northern Italy from Asia on the penultimate weekend of February. Having effectively closed down the major Asian economies to contain the spread of the virus, financial markets took fright over the spread of the virus beyond Asia and its likely economic impact. Indeed, the speed of financial markets dislocation was unprecedented. Equity markets plummeted over four weeks and credit spreads ballooned although there was a bounce in both equity and credit markets in the final week of March from oversold levels as huge government support packages for economies were announced. At the same time as financial markets broke down, the oil price tumbled from USD50 per barrel to USD20 per barrel as Saudi Arabia and Russia battled over market share, rather than the target price preferred by OPEC (Organisation for Petroleum Exporting Countries) of which Saudi Arabia is a founder member. So, the six-month review can be broken down into three time periods of shortening length, five months, five weeks and five working days at the very end.
Looking back to the start of the six-month period, the US-China trade dispute was still the key influence over financial markets and its knock-on impact on global economic activity, especially in the two largest economies of the protagonists. That wasn’t to be resolved until the middle of December 2019, by which time UK investors had their focus on the hastily called British General Election which became a mandate to deliver Brexit. The landslide election victory for Boris Johnson’s Conservative Party surprised many but did provide a ‘Boris bounce’ for previously out-of-favour UK equity assets. Sterling also enjoyed a positive response. Britain formally left the European Union on 31 January 2020. Financial markets ended the calendar year of 2019 on a positive note and the year proved to be a good one for investors.
2020 got off to a reasonable start for financial assets. Brexit happened but the world was beginning to take a closer interest in China and the coronavirus outbreak that started in Wuhan, Hubei Province in December. They key timeline was the reporting of a significant outbreak of reported infections in Northern Italy over the weekend of February 22/23. The following four weeks saw precipitous falls in equity and credit markets and a flight to safe-haven assets like government bonds (despite their historically low yields) and gold. The selling or price markdowns continued and reached their peak during the week of March 16 when even the US Treasury market exhibited extreme volatility forcing the US central bank, the Federal Reserve, to step in and provide much-needed liquidity.
Market moves in March and the last week of February surpassed those of 2008/9 in terms of speed, but what started out as a pandemic induced sell-off turned quickly into a liquidity event as a dearth of risk-takers, market-makers and buyers caused prices to fall, without necessarily much volume. This leaves markets open to a meaningful bounce in prices at some point. The sheer magnitude of government and central bank support has been impressive and prompted a number of investors to re-enter equity and credit markets. The snapback has been meaningful, not least because not much inventory was accumulated on the way down meaning there wasn’t much on offer when buyers re-emerged. Major economies have hit a brick wall or sudden stop as lockdowns have been enforced following their successful use in Asia and on scientific advice to governments. The speed and magnitude of government and central bank responses has led investors to believe that although a recession will be severe, it will be short-lived, probably for two quarters, with positive economic performance returning in the final quarter of 2020. That seems to be government policy too. Lockdown and preserve health systems capacity, support the economy and employment, endure a short but sharp economic contraction before a measured unwind of lockdown and a resumption of economic activity.
TBAM and Coronavirus
The TBAM team have been working remotely and safely from home. We have tested this operationally on numerous occasions as part of good business planning. Consequently, we have been and are operating as normal and both Funds are being managed as they would be in normal circumstances. We are using Microsoft Teams to keep in contact with each other, our providers and advisers. We are supporting each other, conscious of the importance of mental wellbeing in these unusual times.
We have sound finances and a strong balance sheet and therefore our business operations will not be adversely affected by the current pandemic. TBAM can continue to manage the Dynamic and Growth Funds with an eye to how best to deliver a performance recovery in the months, quarters and years ahead. The coronavirus has not changed the way we mange our business and the Funds although working from home has changed the physical environment.
We are cognisant that such significant events as these can change the dynamics of economies and future winners may not be those that have been the successes of the past. We believe that sustainability and the digital economy will be key beneficiaries in the post-virus world and we are excited about the investment opportunities they represent. We are still firm believers in thematic investing and that will not change.
Working practices may be altered by the current enforced remote working but having already been experienced in flexible working, having the technology to do so, we see little change to the way we physically operate in the future but are always willing to embrace new ideas that benefit the team and consequently our investors.
October 2019 to March 2020
Having been almost fully invested in both Funds through to year end 2019, we began to raise cash in February cognisant of valuations becoming stretched in some equity themes. We had plans to raise cash levels further during the week of February 24th but the outbreak of the coronavirus in Northern Italy overtook our plans as markets fell quickly before the second part of the cash raise took place. Nevertheless, we did raise further cash before the end of February as we believed it was appropriate to do so given the uncertain backdrop. By the end of February the Growth Fund had 15% in cash and Dynamic had almost 20% in cash and gold. They provided a buffer but other asset prices continued to fall.
In early March, we believed equity and credit market declines had, in some cases, overshot to levels where significant value could be acquired for both funds. This was particularly evident in the investment trust market which had seen large price declines on little volume. These were among the strongest rebounders as equity and credit markets gained greater optimism post numerous stimulus packages in the final week of March. Volatility remains elevated though.
Cumulative performance after all ongoing charges to last valuation point in March
Quarter-End Discrete Performance: 12 months ended last valuation point in March
Quarter-End Rolling Performance Periods: 3 years ended last valuation point in March
Published CPI based on latest available data (produced 31 March 2020). Source FE: Total Return (Bid to Bid, Tax UK Net). Past performance is not a reliable indicator of future results. The formal performance benchmark for the T. Bailey Growth Fund is the IA Global Sector Mean. The formal performance benchmark for the T. Bailey Dynamic Fund is CPI+3% per annum. Please see Prospectus or KII documents for more details of fund objectives.
Every effort is taken to ensure the accuracy of the data in this document but no warranties are given. All sources T. Bailey Asset Management Limited unless otherwise stated. This document has been produced for information purposes only and represents the views of T. Bailey Asset Management Limited at the time of writing. It should not be construed as investment advice, and no investment decision should be made without first seeking advice. Please note that T. Bailey Asset Management Limited does not provide financial advice to private individuals. If you have any doubt whether the T. Bailey funds are suitable for you and you wish to receive advice you should contact a financial advisor. Full details of the T. Bailey Funds, including risk warnings, are published in the Prospectus, Key Investor Information documents and Supplementary Information document. The Funds are exposed to global financial markets and are therefore subject to market fluctuations and other risks inherent in such investments. The manager may enter into derivative transactions for efficient portfolio management purposes (including hedging). The value of your investment and the income derived from it can go down as well as up and you may not get back the money you invested. Investments in overseas equities may be affected by changes in exchange rates, which would cause the value of your investment to increase or diminish. Capital appreciation in the early years will be adversely affected by the impact of any initial charges, and you should therefore regard your investment as medium to long-term. Past performance is not a reliable indicator of future results. Issued by T. Bailey Asset Management Limited. T. Bailey Asset Management Limited is authorised and regulated by the Financial Conduct Authority No. 190291 and is a member of the Investment Association. Registered address as above.