Our last portfolio update was published on 23 March 2020 at the current market bottom.
Since then, equity markets across the world have rallied erasing some of the losses year-to-date. For the FTSE All Share, the quarter’s performance (-25%) is one for the history books, with a three-month loss of this magnitude not seen since 1987.
Similar losses were experienced across the world. The Dow Jones Industrial Average (DJIA), which measures performance of 30 of the largest US listed companies, fell by 23%. Since 1896, the DJIA has recorded a quarterly loss over 20% on eleven occasions out of a possible 495 quarterly periods. The data, therefore, suggests an occurrence like this is a one in eleven year event. While we have not experienced a quarterly fall over 20% in 33 years, we are reminded by history that outcomes of this kind are the by-product of a complex system like a financial market.
We cannot control how participants in financial markets choose to price the assets we own on a day to day or quarter to quarter basis. What we can do is attempt to determine the value of the assets we invest in on your behalf and decide if today’s price is attractive relative to that value.
Our assessment of that value may be too optimistic, so we attempt to pay significantly less than this to give ourselves a margin of safety. In today’s markets, what we can offer is a sober analysis of value, and the courage to act on our views. Act we have and act we will.
High conviction response
Despite the late rally in markets as the quarter ended, we have continued to add to both equities and specialist assets, which trade at very attractive prices relative to our assessment of their fundamental value.
In addition to investing in existing UK equity holdings, we are finding new opportunities trading on extreme valuations which will also provide some diversification to how and where our collection of UK businesses generates their revenue. We have spent a significant amount of time assessing the solvency of each business we invest in, analysing both debt profiles and eligibility for government support, if required.
Within our overseas equity allocation, we have seen the reopening of two funds for new investment. To ensure long term performance isn’t compromised by having too much money to manage, the managers are very careful to control the size of their funds. The opening of these funds for investment tells us that today’s opportunity is an attractive one as does our own internal analysis of their holdings confirms this, and we are adding to the funds.
Within specialist assets we have been selectively rotating from some of the stronger performers into those where the disconnect between market prices and value remains very wide. This kind of activity reminds us of the quote used by Benjamin Graham at the start of his book ‘Security Analysis’: “Many shall be restored that now are fallen, and many shall fall that now are in honour.”
Good as gold
Finally, an important part of the portfolio is our allocation to gold assets. Physical gold provides two benefits to the portfolio. Firstly, in a world of central bank induced monetary debasement, gold has proven it can maintain its purchasing power. To demonstrate this, we can take a trip to a country that suffered one of history’s more notable periods of hyperinflation, Germany.
Now, isolated in our homes, we can only dream of a visit to Munich’s Oktoberfest, sadly now confirmed cancelled for 2020.
If you had visited in 1950, a one litre stein of the festival’s finest Bavarian beer would have cost you (the equivalent of) 0.82 EUR. In 2018, you would have paid 11.10 EUR for one litre. That’s over a 1,200% increase in the number of euros you would need in your pocket to achieve the same level of merriment as 1950.
If instead, you decided to pay in gold, one ounce would have enabled you to buy just under 92 litres of beer in 1950. That same ounce would have bought a similar volume of beer in 2019 – therefore requiring no more ounces to buy the same amount of happiness*.
The purchasing power of gold has been vastly superior to that of paper money and we believe it remains attractive to own in a world where paper money is being created in significant quantities by central banks.
Owning a currency that is not seeing an erosion to its purchasing power gives us an important form of liquidity to invest when the valuations of income producing assets are attractive, liquidity being the second benefit of owning gold**.
Value investing is at its most challenging during difficult periods of performance. As investors in the funds alongside our clients, we endure these periods alongside them.
Our investment process and conviction in our value investing philosophy is what instils confidence that we will, in the end, come safely to port, despite today’s storms.
“If a man knows not to which port he sails, no wind is favourable.” – Seneca the Younger.
Tom Delic is fund manager at Seneca Investment Managers
* Enjoy Bavarian beer responsibly
**We invest in physical gold via the Invesco Physical Gold ETC