Tony Cousins is the CEO and CIO at Pyrford International, the managers of the Nedgroup Investments Global Cautious Fund. Tony provides an overview of the Fund’s performance and positioning as well as how capital has been preserved in the portfolio.
Fund performance and highlights
The portfolio had a good quarter delivering 1.9% in total. Our short duration positioning in bonds protected the Fund from losses in the rising yield environment. As bonds yield rise, bond prices fall, but longer duration bonds fall much more sharply. The declines in the indices was for the entire yield curve. If you’d been holding longer duration bonds, those losses would have been in double digits. We had positive contributions from all asset classes with the largest contribution from equities contributing 15.6% to overall performance for the quarter. The US equity portfolio outperformed the local market by +7.7% driven by a switch in leadership to more value oriented stocks. Currency hedging was marginally positively (hedge AUD, +1.3%). The portfolio maintains a significant 45% non-USD unhedged exposure. Over the quarter, the dollar fell against the two largest exposed currencies -0.9% v GBP and -1.3% v CAD. A negative was our low allocation to equities as markets continued to rise.
Capital preservation mindset
The protection of capital is very dear to our hearts. Protecting capital in your early years is very important, because if you suffer losses and withdraw money, your subsequent pot will shrink quite markedly. We implemented this in the quarter with a further reduction in equities in January. When markets fell very sharply last March, we increased the equity weighting within the portfolio. The facts changed and we changed our point of view and bought equities when they were cheaper. By June, the valuation attractions had dissipated, so we reversed our position. As equities continued to rise in January 2021, we took a decision to take more risk off the table and reduced the equity weighting in the portfolio to 20%. We did this because markets going into the correction were expensive at about 20 times earnings. They fell to about 15 times earnings when we bought more. Since that point they continued to get more expensive as market levels went up and earnings fell away. Today, equities are selling at 30 times earnings, which is a very rich proposition with significant downside risk. This is well in excess of anything seen in the last decade and is concerning and we acted accordingly. We entered 2020 with a dividend yield of about 2.3% getting up to 3% in the market fall. This has now declined to a very slim 1.7% as equities have risen and dividends have been cut. These were cut in a global aggregate basis, which was not even around the world. Europe has suffered more than Asia and the US with dividend cuts of 25% while the UK experienced cuts up to 35%. Markets have continued to rise leaving you with a very meagre yield on equity portfolios and one of the key reasons we reduced our equity weighting. Market rises have been driven predominantly by the US. US valuations are particularly stretched. The S&P market capitalization to US GDP measures the size of the stock market relative to the economy. It is now outside two standard deviations away from its 30-year average, which is concerning to us. In the US, the rise in the market has been led by technology. The growth index relative to the value index has been in a very sharp bull market, which has been coincidental with the fall in bond yields. Bond yields have now started to rise and the trend of the bull market in the growth and index value has gone into reverse with the downturn we’ve seen in 2021. We are a value investor and buy stocks because they represent good quality and value. In this environment, value is doing better, particularly in the US, which is why we were able to outperform so much in Q1.
Equities represent 20% of the portfolio with the majority in non-US equities. Our largest position in non-US equities is in Asia ex Japan. This is the market which has weathered the Covid crisis best and returned to growth the fastest and is where we’re seeing sustained recoveries. We think in the long term these markets have the best economic fundamentals, best demographics, strongest productivity growth, the lowest debt penetration and the highest savings ratios. One mustn’t forget that 58% of the world’s population are Asian and currently account for 31% of world GDP, but only about 13% of world stock markets. One thing we’ve been pursuing in the portfolio is the inexorable rise in Asia and this continues. We expect the imbalance between population GDP and market cap to be corrected. This will take many years, but is a positive tailwind behind Asia. Bonds, both US (32%) and non-US (45%) are very low duration at 1.47 years to protect the portfolio in a rising yield environment. The overseas unhedged currency exposure is relatively high at 43.6%. We manage this within a risk parameter of 0-45%. The advantage for a USD investor is that the USD is a very expensive currency on purchasing power parity. As that is corrected, it will be a return driver in unhedged overseas currencies. We hedge the most expensive currency, which is the AUSD and which proved profitable in Q1. Cash in the portfolio is at 3%.