The endearing philosophy encapsulating the three strategies has always focused on the added value to investors by seeking the highest order of service aimed at building medium to long term wealth. Recently, the strategies embarked on an optimization process to find and invest in funds from around the globe that have provided consistent risk-adjusted returns for investors. The basis for this decision stems from the robust investment thesis of these fund houses that yielded consistent results with respect to their respective benchmarks.
In terms of our investment credo, we seek to allocate capital in line with a view that compliments the long-term nature of these three strategies. The long-term aspect to any investment, including the MFPs cannot be stressed enough. Investors need to be cognizant of the pitfalls that exist for any shortermism that may prevail during unfavorable market conditions. The pandemic fallout in March is a classic example of how investors that became overly risk-averse lose out as a result of the extraordinary volatility experienced at the time. Long-term investors at the time saw it an opportunity to add risky positions, whilst short-term investors only panicked and sold off their fundamentally sound investments. In taking the longer view, investors are able to understand the long-term implications which will pivot the overall asset allocation. This is an anchor point for the overall management of the MFPs, which has yielded results over the recent market turbulence.
Asset allocation developments in the past months
During the year, we have made several adjustments to the asset allocation in order to manage the various market conditions that prevailed during the period. The details of which have been communicated throughout the year. In brief, at the beginning of March, all strategies reduced their exposure towards High Yield Debt and Equity, as they posed the greatest downside risk. Following the market correction which reached its worst point at the end of March, the asset allocation was then re-adjusted in order to take advantage from the cheap valuation environment at the time. This occurred during the month of April, as all strategies reallocated towards risky assets, primarily through an overweight position in High Yield debt. The justification for this move was driven by the unprecedented level of support communicated by central banks around the globe. The scale of fiscal support by key governments necessitated central bank intervention to lower yields in order to reduce the cost of capital on the piling debt as a result of the pandemic support measures. On top of the low short-term rates, Central Banks reinstated their asset purchase programme in order to substantially increase money supply in the real economy which seeks to further support low interest rates with the aim of achieving inflationary pressures in the medium term.
Asset allocation going forward
During the beginning of July, the MFPs upped the notch on the risky bucket by consolidating the conviction on High Yield Debt and also bridging the gap on its equity exposures with a clear preference towards the US market. This came on the back of the firm commitments on both the fiscal and monetary front that provided an unequivocal stance that the real economy will be supported come what may. This was seen as a catalyst for market valuations for both key asset classes for long term growth, that is, High Yield and Equity.
High Yield Positioning
Our preference towards High Yield has been consistent since April’s re-allocation towards this sub-asset class. The rationale for this exposure stems from the abnormal market conditions that prevailed during the period, in which credit spreads (excess interest paid over high-quality debt to compensate for the issuer’s credit risk) reached excessive levels considering long term averages. The shock in interest rates was understandable during the beginning of March, as markets got struck by unprecedented uncertainty on the forward path for real economies. Simply put, a sudden stop in economic activity was an unforeseen event even for the most stringent risk models. However, as central bankers provided unprecedented support to credit markets to ease financial conditions; this acted as a trigger for us to exploit market valuations at the time. Indeed, since April, High Yield debt tightened by more than 500bp. This translated to capital gains over and above the accrued interest income over the period to the benefit of the overall valuation for investors.
Ever since the beginning of the year, our belief centered on an allocation which favours the US. Our proprietary models gave a clear basis of outperformance by the US economy when compared to the Eurozone. Invariably, business profitability increases in a thriving economic environment, hence the allocation. This acts as a catalyst for equity valuations as both growth rates and discount rate risk premia all adjust to reflect these changing favourable dynamics. In our view, if the US was outperforming the Eurozone pre-Covid19 on a real economic basis, this should continue in a post-Covid19 world assuming that the US effectively handles this multivariate crisis. Even though, there has been some differences on the way the US handled the Health crisis, on the fiscal and monetary front the US provided greater direct support to the economy.
All this continued to boost US prospects when compared to the Eurozone. On the Eurozone’s side of things, a landmark deal was struck during the month of July with a coronavirus recovery package which will see hard-hit member states receiving €390bn in grants with both Italy and Spain being the main beneficiaries. The remaining €360bn of the €750bn package will be offered in loans that shall trickle to further easing financial conditions. This provided a sense of economic relief for the ailing countries within the region for both credit and equity markets. A recent decision by the German’s ruling coalition to extend the job support package until the end of next year has been met with great enthusiasm by markets, as it assures a cushioning to the shock protruded by the pandemic. The resultant support from policymakers has been the consistent theme that complimented our long-term vision for global economies. In this regard, we will remain vigilant on the road ahead as market risk remains the core driver for long term wealth generation for investors.
Current Distribution Yield: 1.50%*
Fixed Income Duration: 5.09*
Current Distribution Yield: 1.79%*
Fixed Income Duration: 3.40*
Fixed Income Duration: 1.63*
*All figures quoted are as at 31st August, 2020
The commentary is issued by Calamatta Cuschieri Investment Management Ltd (CCIM), being the Investment Manager of the Managed Fund Portfolio (MFP) which is a managed product issued by Calamatta Cuschieri Investment Services Ltd (CCIS).
CCIS and CCIM are licensed to conduct investment services business under the Investment Services Act by the Malta Financial Services Authority.
The MFP is subject to the terms and conditions which are available from CCIS. This is not a capital guaranteed product and the value of investments, can go down as well as up. The capital invested and income derived can fluctuate and the value of investments depends on the performance of the underlying UCITS funds, as selected in the investment plan. Investors may not get the full amount invested. Past performance is no guarantee or indicator for future performance. Quoted figures do not take taxes and charges into account. Some of the funds in the portfolio invest primarily in equities and non-investment grade bonds that carry a greater element of risk than investment grade bonds.