The Global Fund (USD) lost 0.82% in April bringing the YTD return to 2.05% and the rolling annual return to 30.44%.
In the month of April, the S&P rose 4.7% and the Nikkei 10.6% with the other major within this range. Representative Investment grade corporate bond spreads fell from over 120bp to less than 80bp. Equity markets continue to make progress so far in May. Is this a turning point? In mid March, the three biggest threats facing the US and Global economies were systemic collapse, slowing GDP growth and inflation. Mr Bernanke deserves respect for comprehensively banishing systemic fears in the US. He has also reduced the Dollar cost of credit for those who can still borrow. But the supply of credit is severely constrained and the other two threats remain, undiminished.
The decline in residential real estate markets continues to erode the balance sheets of consumers in the Anglo Saxon economies. Commercial real estate markets are also weak. Defaults on corporate bonds and Bank debt in the US had reached $10.8 bn by the end of April. Only $4.2 bn of defaults were recorded in the whole of 2007. High energy prices act as a tax, transferring wealth from the consumer to the producer and squeezing margins for manufacturers. The same holds for high commodity prices. Food price inflation is changing the political landscape, especially in poorer countries. These problems will not last forever, but for as long as their significance is growing rather than shrinking it is difficult to endorse the optimism that characterises equity markets today.
Three of our themes made money in April. The US Recession managers benefited from the equity rally and, in some cases, saw valuation anomalies from March unwind. They made strong returns. The experience of the managers making up the Asian Consumer Power theme was similar. Although the manager experience was not consistent, the Debt Market Opportunities theme was also profitable.
Four themes detracted from the month’s result. Our European economic change theme lost money, mainly due to a small number of stock specific events. Markets stopped worrying about Global Financial Sector Dislocation during April. Curiously, the management of major global Banks continue to demonstrate their concern by announcing capital raising programmes. The terms on which new equity is being sought by the banks make no sense if you expect the economic climate to improve. Dislocation Insurance produced a small net loss, substantially as the result of a reversal in the yen. Two of the five managers in the Credit spreads in transition theme made money, but negative results from the other three made the theme a net drag on the performance for the month. We see early signs that the era in which credit moves ‘en bloc’ is coming to a close. In the end credit judgements are not complicated. Either the borrower can pay or not. This metric is coming to dominate the credit market again. We have populated the theme with managers who we believe have the skills to make these stock specific credit judgements in an environment that will offer them great opportunities.
The remaining three themes had a broadly neutral impact in the month. At the manager level, the ratio of profits to losses was 50/50.