The Global Fund (USD) gained 2.55% in May bringing the YTD return to 3.11% and the rolling annual return to 2.35%.
All themes made money in the month as did 90% of the managers in the portfolio.
Policy action in March and April has delivered its intended consequences. The condition of the Banks is steady; in fact some are repaying State aid. Short term interest rate markets work reasonably well and capital markets are open, providing a source of funding for large enterprises as well as Governments. But there are some unintended consequences too. Ballooning financial asset prices have reignited risk appetites, with the fear of being locked in being displaced by fears of being left out of the rally remarkably quickly. The S&P 500 was up 5.5% in May, Citigroup’s high yield index up 6% and an index of Defaulted Public Bonds up 18.3%. The US$ fell 5.5% in the month, although it is not certain whether this counts as intended.
Behind the apparent progress, there are still challenges. Markets were cheered by the news that US unemployment rose by only 345,000 in May. Yet this pushed the jobless rate to 9.4%, the highest level since 1983. A total of 6m jobs have been destroyed in this recession so far. One of the main drivers of job growth is the welfare of the small business sector which employs many times more people than the Companies that make up the S&P index. S&P Companies can now sell equity and raise debt once more. Small business has no access to these markets, relying instead on the Banks. Bank lending to the sector has been on a declining path for the past 12 months. The bankers are following the mantra –if you can’t sell the loan to the Government, don’t bother making the loan in the first place. Set alongside the damage wrought by continuing declines in housing and commercial real estate, this paints a picture of Banks which remain on the defensive. A Banking system that works is a necessary condition for sustained recovery; this will restrain growth and limit employment.
Reflecting these reservations, we seek balance in the relationship between our themes. A quarter of our portfolio is invested in ‘hedging themes’ or held in cash. Global Financial Sector Dislocation is a hedging theme made up of managers who invest in equities long and short. They have begun to see value in certain Banks, but hold to the view that the sector is not yet fixed. A further 26% is in the Relative Sovereign Opportunities theme, in the hands of managers whose object is to distinguish between those countries, currencies and industries most likely to thrive and those most threatened by the impact of the big changes taking place today. Two of these managers made money in May, two did not, but the theme was positive overall. Inflation/Deflation Uncertainty which accounts for 9% of NAV was the theme that made the largest contribution in the month. One of these managers is particularly tuned into the impact of the liquidity that has been pumped into the Global Economy in recent months. He would argue that, even if the longer term tussle between these opposing forces is yet to be resolved, recent liquidity creation was bound to reflate the value of financial assets and has successfully set his book up this way. Although the rationale varies, the net market exposure of the Japan and Energy themes (totalling 18% of NAV) is also limited.