The Global Fund (USD) gained 0.55% in December bringing the YTD return to 5.23%.
In December, two thirds of the managers in the portfolio made gains. At the theme level, three material positive contributions accounted for the bulk of the return. One of our nine themes detracted, and then by less than 20bps.
All along the credit curve, spread compression was a big story in 2009.In High Yield, spreads fell by two thirds. This year will not see a rerun, but a different set of appealing opportunities is showing through. The distressed cycle is at or near its peak, weighty refinancing schedules loom over the market and deleveraging is a continuing priority for man. Credit Spreads in Transition is weighted at 19% in January. The manager line-up now covers Asia in depth, as well as the US and Europe. It covers corporate securities, financial sector paper and some US Residential Mortgage backed bonds. With the addition of the newly created Culross Long Term Alpha Fund, it incorporates some exposure to stressed and distressed securities, especially in the US. One by-product of the boom in structured credit is that the tool kit available to specialist credit managers is much wider than it was. Spread relationships between cash bonds, indices and CDS are a simple example of the opportunities that can be accessed in corporate credit today. Managers now have flexibility over the precise net exposures they choose to run. Prior to the crisis, the skills and systems required to make a success of investing in the anomalies that arise in this environment were not found outside the Investment Banks. Not only is this is no longer the case, but the banks do not have the capital to act as they might wish.
December’s profitable theme return in Relative Sovereign Opportunities was a composite of three positive and two negative manager results. Although the Fund made money in this theme in 2009, it has been frustrating to see this pattern recur during the year and cost us a proportion of the opportunities available. However, the story is not over. Greece has drawn attention to the changes taking place in the old order of creditworthiness. Record prospective public sector deficits are a big problem and, at the very least, will reduce the potential for western economies to grow. In those geographies in which growth does show through, markets face the withdrawal of the fiscal and monetary stimulus that produced the good news. Will this be well handled and skilfully timed; will it be co-ordinated? Meanwhile, Asia has resumed its growth path, unconstrained by significant personal or public sector debt. Our view is that there will be sharp regional and national differences in the post crunch consequences of loose policy. These differences will drive the behaviour of exchange rates, interest rates and sovereign credit spreads as well as equity markets. Our theme is designed to focus on this and carries a weighting of 8% from January 1st.
The third contributor to the December result was Japan Corporate Event Opportunities. We will be down to three managers here by the end of January. Their emphasis is on short term anomalies rather than the macro outlook.