We continue to make progress focusing the fund’s portfolio towards the few areas of the market which, we believe, continue to offer valuation appeal and to the economic sectors with enough internal momentum to withstand the growing global headwinds.
As we highlighted in our previous update, this strategy has not delivered the returns we had anticipated over the past couple of years. The suspension did have an immediate impact on performance in the short term with the fund underperforming its benchmark significantly (FTSE All Share Total Return Index) during the first 28-day period.
The situation improved during the second 28-day period in July, with the fund outperforming, albeit marginally.
However, over the latest 28-day period of suspension the fund has underperformed its benchmark – which can be primarily attributed to the share price decline of two of the fund’s larger holdings, Burford Capital and Industrial Heat.
The price of Burford’s shares declined sharply after it came under fire in a report from a US-based investment firm. The company has since provided a comprehensive rebuttal of all the allegations.
Meanwhile, Link, supported by analysis from IHS Markit, reviewed our unquoted holding Industrial Heat as a part of Link’s six-monthly review process and determined that progress had not been at the pace anticipated at the time of the previous reviews. On Friday, Link issued a valuation adjustment for Industrial Heat. This has not been as a result of a “triggering event”1as defined in Link’s Fair Value Pricing policy. We are not responsible for unquoted valuations across any of our funds. Link is ultimately responsible for the pricing and valuation of unquoted stocks and it is assisted by an independent valuation company, IHS Markit, in the valuation process. The change in valuation will be reflected in the fund’s closing NAV as at 23 August 2019.
Neil continues to reposition the portfolio while still reflecting the same investment strategy. To reiterate, that strategy is founded on a belief that the global economic environment is not as robust as equity markets are implying. We continue to believe that macroeconomic data is supportive of this thesis.
The suspension and the circumstances that led to it, may have had an impact on the price of some of the fund’s assets in the short term. Identifying situations where price and value diverge has been at the centre of Neil’s investment approach over his entire career – and is still determining a strategy that he believes is appropriate for the economic and market environment that confronts us.