In March the fund was down 20bp and over the first quarter up 2.3% which compares favourably to
MSCI Emerging markets and MSCI world which were both down over the same period. The first quarter
dividend was GBP0.095895 which was slightly above Q1 2024 and gives a trailing twelve-month yield
of 6.5%, a yield spread over UK inflation of just under 4%.
Almost by definition, aggressive corrections are caused by ‘a surprise’. Whilst Liberation Day was
perfectly well flagged, there’s been a cocktail of factors which combined have caught markets
off-guard and caused one of the most dramatic periods of volatility since Covid.
First of all, the size, methodology and breadth of the announced tariffs were certainly not what
was anticipated. The announcement was also coincidental with OPEC announcing an increase in oil
production by roughly triple the expected increase. Although this ‘oil shock’ didn’t get as much
press, the subsequent weakness in the crude market furthered the growing perception of a global
economy heading into recession. The final element has been the somewhat variable aftermath of the
tariff rates which, whatever one’s views on the policy direction, has undermined the sanctity of US
‘safe-haven’ assets. This caused some very unusual price action – a weakening dollar concurrent
with falling equities, whilst bond yields, the Euro, Swiss Franc and gold were all rising.
Such events inevitably trigger rapid de-risking of highly levered positions (e.g. carry and basis
trades) with the contagion spreading to other asset classes, in a textbook example of Buffet’s
aphorism “You only find out who’s swimming naked when the tide goes out”.
As indicated last month, given the ‘known unknowns’ we were tilting exposure back towards more
defensive and interest rate sensitive positions and trying to side-step the more obvious areas
vulnerable to tariffs. As a result at the end of the quarter we had the lowest exposure to
Information Technology and the highest exposure to Communications since the fund’s inception. We
were also taking profits in areas that had preformed particularly well in Q1 such as Greece and
Central Europe, so cash levels were high.
At time of writing, the indicated gross forward yield of the fund has increased by around a percent
to just over 8%, in part due to the price correction but we have also been adding on weakness to
higher yielding positions where the dividend has good visibility and is backed by a strong balance
sheet.
The tariff conundrum is primarily an Asia-centric issue and there are significant parts of our
universe where it’s either less relevant, not relevant at all, and in a few cases potentially could
even be beneficial, but trade deals are complex negotiations and it’s unlikely we’ll see a
comprehensive resolution over the coming months.
As this fund is not constrained to Asia or an EM benchmark, we continue to focus on other areas
where we see stock-specific, idiosyncratic investment opportunities, and where the price discovery
process remains rational. Whilst price weakness in India and some of the smaller Asian markets is
presenting some interesting opportunities, at present these are mainly in the EMEA
and Latin American markets.
