The H Fund (USD) gained 1.92% in April bringing the YTD return to 5.25% and the rolling annual return to 18.91%.
All six active themes made money in April, but Credit Spreads in Transition (35% of NAV), Asian Consumer Power (12.4% of NAV) and Energy Market Opportunities (8% of NAV) contributed the lion’s share.
Events in Europe have exerted a pronounced influence on financial markets everywhere since the end of April and created a degree of dislocation in the process. The May 9th Euro area liquidity fix was of sufficient size to startle market participants, but many of the details relating to its implementation have yet to be clarified. Neither are the deficit reduction plans announced in Spain and Portugal entirely clear in their scope. The final outcome of this story depends not only on the capacity of the Club Med countries to adjust their economies but also 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 weak sovereign borrowers. If, or more likely, when one of them is forced to restructure, the loss will be borne by the Euro bloc and the impact on private sector institutions reduced.
Relative Sovereign Opportunities produced a gain in April even though three of our four managers had small losses. The theme first appeared in the portfolio in April 2009. Events are playing out along the lines envisaged in our thematic analysis then, as sovereign credit and currency markets occupy centre stage. Yet, although the theme results are positive, they are frustratingly modest.
Both managers in Energy Market Opportunities made money. Oil rose to a 19 month peak in $ terms in early May but has since slipped back in line with the general weakness in commodity prices. The loss of life and the environmental impact of the accident in the Gulf of Mexico have been well documented, but its likely influence on future oil production is a bigger story. Recent discoveries have either been in politically challenging geographies or in deep water. Inhibitions on the development of these fields will further underpin future real energy prices.
Of our Asian Consumer Power managers, one nimbly took his profits in April on his Chinese bank and property stocks. A second sees enticing opportunities in consumer goods stocks as prices retreat. Current Chinese policy initiatives represent another chapter in the story of engineered growth by sector and by region. This time, less developed inland regions are favoured over coastal areas, and the construction of smaller cheaper homes is favoured over higher end projects. Equity market deflation is a side benefit. To adherents of the philosophy of the ‘invisible hand’, growth manipulation policies may appear unsatisfactory. But the key point is that for policy makers in China, a miss on the upside is much less dangerous than an unplanned slowdown.