Hawksmoor mulls investment trust exposure in Q3 ‘frustration phase’

‘We are in a very difficult phase for investment trusts in general’

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Hawksmoor IM produced modest outperformance across its three fund-of-funds in Q3, in a period which manager Daniel Lockyer labelled a ‘frustration phase’.

In a Q3 performance update, Lockyer also revealed the firm had pondered whether to stick with some of its investment trust exposure, with Phoenix Spree Deutschland and Digital 9 Infrastructure proving to be detractors to performance over the three months to the end of September.

The firm’s £38m Global Opportunities fund delivered a 0.8% positive total return, while the IA Flexible Investment sector fell 0.1%.

Meanwhile, the £242m Vanbrugh fund returned 0.3% over the three months to 30 September, while the IA Mixed Investment 20-60% Shares sector dropped 0.1%. Hawksmoor’s £136.5m Distribution fund was up 0.6% over the period, compared to the sector average fall of 0.2%.

Across the three funds, the largest detractors came in the Digital 9 Infrastructure, TM Crux UK Special Situations, Phoenix Spree Deutschland, Allianz Index-Linked Gilt, and Cordiant Digital Infrastructure funds.

See also: Momentum’s Parfect: ‘Terrifying’ FCA guidelines are forcing a shrinking allocation to investment trusts

In August, all three funds reached a low point, falling almost 2%, which they recovered from throughout the month of September before another decline at the end of the month. Senior fund manager Daniel Lockyer said October has also proven to be a weak month, with almost every asset class other than gold in negative territory.

“We have been in this frustration phase before,” Lockyer said.

“We’re underperforming on a one-year view but we really are hanging on in there in the face of some difficult headwinds for our style, where momentum continues to be the trade that does well. And assets that we like and our process leads us to keep on getting cheaper.”

‘Difficult phase’ for investment trusts

Lockyer said the Hawksmoor team has thought “long and hard” about its equity in some of the investment trusts, including Phoenix Spree Deutschland and Digital 9 to determine whether the trust themselves are an issue, or simply the timing.

“The comfort we’ve taken from this is we have focused on the assets,” Lockyer said.

“The assets in all these cases are very good, very strong, it is the current market reaction to what’s going on within them… We are in a very difficult phase for the investment trusts in general. There is an element of interest rates driving some of these real asset prices down way beyond the fundamentals that we believe. And we are working through to make these better for all of us.”

Hawksmoor’s Global Opportunities fund, the newest of the three launched in 2018, is still outperforming its benchmark, with a total return of 27.7% since its inception, placing it in the second quartile in its IA sector.

The Vanbrugh and Distribution funds have also stayed above benchmark, with returns of 194% and 109.1% respectively since their inception.

“Since the regime of high interest rates came in at the beginning of 2022, the funds are performing relatively well,” Lockyer said. “But we are frustrated at the recent performance.”

Increasing equity exposure

Currently, the fund holds close to all-time lows in cash, but is increasing its equity exposure, now at about 45% from 35% a year ago. Fund manager Ben Mackie said Hawksmoor is particularly excited about the UK and Japan equity markets.

“The UK equity market is trading significantly cheaper than its long-term average and also on one of the biggest discounts in history relative to other global equities,” Mackie said.

“We absolutely accept that valuation is not a particularly good market timing tool, but we do think the price you pay for an asset is probably the key determinant of medium- and long-term returns.”

Mackie said recent reform in Japan has made the market more attractive for investing, and despite the “false dawns” of the past, are finding comfort in the Tokyo stock exchange’s crackdown in outlining policies and initiatives.

Recognising the recent struggles of investment trusts, Mackie said Hawksmoor has reduced its investments significantly since 2022, and what funds it does hold are put into deeply discounted trusts. Currently, the weighted average discount of the trusts in Hawksmoor funds sit at -29% and -28%, while the Numis IT Universe sits at -17%.

“There are inevitably going to be where our funds underperform,” Mackie said.

“Those periods for us are as frustrating as I’m sure they are for you, but historically these sort of more fallow times have been the periods in which we’ve sown the seeds of future returns. We’re certainly in one of those sowing phases right now.”

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