The Global Fund (USD) gained 1.03% in April bringing the YTD return to 3.12% and the rolling annual return to 7.92%.
The portfolio put in a robust performance in April. Credit Spreads in Transition (20% of NAV), Energy Market Opportunities (11.4% of NAV) and Japan (4.2% of NAV) all did well. No themes lost money.
However, the market mood has changed dramatically since the beginning of May. The Euro area liquidity fix, agreed on Sunday May 9th was of sufficient size to create an atmosphere of ‘shock and awe’ in financial markets. Military jargon is appropriate to this saga because, in tha aftermath of the Greek refinancing crisis, we are now in a budget deficit reduction ‘arms race’ where fiscally challenged Governments feel that they must enforce greater and greater stringency in order to keep the ‘bond market vigilantes’ at bay. Where will it end? This depends on two things; the capacity of the Club Med countries to craft and implement credible plans to adjust their economies, and on the willingness of their populations to accept the pain of these adjustments in order to repay lenders in full.
By agreeing to intervene in debt markets, the ECB has surrendered its independence. Even if it sterilises the monetary impact of these purchases, the Central Bank will end up as a major creditor of the PIIGS. If, or more likely, when there is a subsequent debt restructuring, the loss will be socialised and the impact on private sector institutions reduced. The ECB’s ownership is spread among the EU’s 27 members pro rata by GDP. But losses (and profits) are the responsibility of the Euro area’s 16 members.
Apart from having a completely inappropriate name, the ’1997 Stability and Growth Pact’ which ushered in the Euro era was part of an entirely misconceived operational framework. The lack of an adjustment mechanism was supposed to be a discipline to force member countries to stick to the rules. But this failed to allow for the possibility that states with limited respect for rules would simply ignore them. They could borrow at the same rates as sound credits, while both markets and their Euro area fellows overlooked the weakness of their public finances. No regulatory mechanism operated, either official or commercial. The Germans meantime, were busy managing the politics of trade deficits. They succeeded in promoting the idea that deficits were sinful and surpluses virtuous, making their own economy more competitive as their neighbours slowly priced themselves out of the game. At this point, winning the game looks like being almost as painful as losing., though at least Euro weakness will help exporters.
Our Relative Sovereign Opportunities theme produced a modest gain in April. It first appeared in the portfolio in April 2009. and events are playing out along the lines envisaged in our thematic analysis. Although the theme results are positive, they are frustratingly modest.
At the end of the first week of May, we reported that widespread financial market stress was reflected in an estimated 1% fall in the value of the Fund. At the end of the second week of the month the number is closer to 1.25% but it is important to note that this estimate is based on incomplete information, as our managers do not report uniformly intra month.