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Cirilium Active Commentary - July 2020

Suitable for retail clients.

In this month's edition:


Market review

Governments around the world tentatively reopened economies, but at the same time, many countries faced a resurgence in coronavirus cases, prompting concerns that a ‘second wave’ was already underway.

In the UK, Chancellor Rishi Sunak delivered his summer statement in which he announced a VAT cut for the hospitality sector, the introduction of a jobs retention bonus, and a reduction in stamp duty. Despite the economic stimulus measures and extra precautions, the FTSE All Share index ended the period delivering a total return of -3.6%. By the end of the period, 10-year UK government bond yields had reached new lows, with the ICE BofA 1-10 Year UK Gilt index returning 0.3%over the period.

Several European countries witnessed a spike in coronavirus cases including France, Spain, Belgium, and Luxembourg. With the pandemic still very much a threat in the region, the MSCI Europe ex UK index generated a total return of -1.6% during the period.

Data published in July by Eurostat revealed that the eurozone economy contracted by a record 12.1% in the second quarter compared with the first quarter – the sharpest decline since 1995. Spain recorded the biggest decline, as its economy shrunk by 18.5% in the second quarter. The data showed that Portugal’s economy contracted by 14.1%, while France saw a decline of 13.8% in the second quarter. Talks between the UK and EU about a post-Brexit trade deal continued, but the EU’s chief negotiator Michel Barnier warned that “significant divergences remain” between the two sides.

Across the Atlantic, the US earnings season got underway. The US Commerce Department published data that showed GDP in the second quarter shrunk by 32.9% on an annualised basis, making it the fastest quarterly contraction on record. Shortly after the economic data was published, President Donald Trump tweeted the 2020 presidential election should be delayed, calling into question the accuracy of the postal voting system, as Democratic nominee Joe Biden continued to lead the polls.

The US dollar had its worst month in a decade, with the US dollar index (DXY) falling more than 4% over the month and falling by 5.5% versus sterling. The currency effect masked what was otherwise a strong month for US dollar assets in local currency terms. The MSCI USA index consequently delivered a total return of -0.3% in sterling terms as the equity market focused on better than expected corporate earnings but this was eclipsed by the fall in the currency, dragged lower by mounting coronavirus cases and rising tensions between China and the US. At its two-day meeting towards the end of the period, the US Federal Reserve left its policy unchanged, noting that it remains committed to deliver more stimulus if required. The ICE BofA US High Yield sterling hedged ndex ended the period delivering a 4.5% return, while the ICE BofA US Treasury sterling hedged index, recorded total returns of 1.1% in sterling terms. This is compared to the returns of the unhedged indices where the weakening of the dollar against sterling pushed both indices into negative territory in sterling terms.*

Chinese stock markets rallied further in July, even as the country battled to contain a slight increase in coronavirus cases and trade tensions with the US rose. The National Bureau of Statistics reported 3.2% year-on-year GDP growth for the second quarter, following a contraction in the first quarter. The positive economic data helped buoy the MSCI China index which ended the period up 3%. Emerging market currencies climbed over the period as the US dollar declined in value, weighed down by worries about the economic recovery. This helped emerging market equities, with the MSCI Emerging Markets index returning a positive 2.6%.

The gold price extended its rally during the period, surpassing $1,900 per ounce (oz) and eventually hitting a record $1,945.16/oz, beating the previous high set in September 2011 of $1,921/oz. 

(All performance figures in sterling terms and rounded to one decimal point, unless otherwise stated)

*Currency hedging of foreign investments removes the risk of currency fluctuations affecting the returns on your investment. Under normal circumstances, in the Cirilium Blend Portfolios we currency hedge our foreign bond holdings.

Performance review

Returns were extremely mixed across financial markets for the month, starting July well before fading towards the end of the period. This was partly down to the strength of the pound, especially versus the US dollar and Japanese yen, an outperformance of 5-6%, which when combined with the decline in the FTSE All Share index, made for a disappointing outcome for UK investors. If you held UK assets, these saw a general decline in value, while overseas assets were penalised by the strong pound. However, overseas equity markets performed much better in local currency terms.

The lower risk Cirilium Portfolios delivered positive absolute and relative performance for the month driven by the returns from fixed income. Our approach of using currency hedging for our overseas fixed income exposures, which aims to offset potential losses when switching the returns from local currencies back into sterling, was also a positive return driver during July.

Within equities, we enjoyed positive relative performance from our global and UK holdings, but it was Europe, US, and emerging markets where we saw positive returns in both absolute and relative terms. Technology stocks helped push US equity markets higher in local currency terms, despite the gargantuan decline in GDP, highlighting that the stock market is not reflecting the underlying economy.

Notable performers in the portfolios included the Miton European Opportunities Fund, the Miton US Opportunities Fund, and our positions in Berkshire Hathaway and the Pacific North of South EM [emerging markets] Equity Fund. The two Miton holdings benefited from a further gain in quality growth stocks, while Berkshire Hathaway began to benefit from its large holding of Apple, which rose more than 16% in US dollar terms over the course of the month. The Pacific North of South EM Equity Fund, which is not held in Cirilium Conservative, benefited from emerging markets being the strongest performing region during July.

The fixed income holdings were the primary source of returns in July, with the strongest performers among those exposed to emerging market debt and credit markets. Within the emerging market debt space the 1167 Global High Income and 1167 Global Total Return Funds delivered strong performance, while our flexible bond managers including the Allianz Strategic Bond, Henderson Strategic Bond, and Hermes Unconstrained Credit Funds all delivered strong returns.

Within alternative fixed income, the Fair Oaks Income Fund performed well as it benefited from a partial recovery in sentiment, while corporate activity saw the discount to net asset value – where the share price is lower than the value of the underlying assets – narrow for some of our closed-ended holdings, namely Hadrian’s Wall Secured Investments as well as UK Mortgages, which helped relative performance.

Meanwhile, in the alternatives space, returns were a mixed bag, although overall the holdings largely offset each other. Specifically, positive returns across our hedge funds exposure were offset by some of our investment trusts witnessing a widening discount to net asset value (NAV) (meaning the share price fell even lower) including Ediston Property, Harbourvest Private Equity and Riverstone Energy. The latter fund was responsible for the Cirilium Adventurous Portfolio posting a small negative over the month, although it has bounced back a little at the start of August.

Investment activity during the month was largely driven by general portfolio maintenance, such as a small reduction in ‘value’ strategies – those that focus on undervalued companies – in favour of more quality growth and secular growth strategies. We implemented this move amid signs that coronavirus infection cases had begun to increase, which is likely to hold back the potential recovery in value stocks. To see a more sustained recovery in value we will need to see a more sustained tackling of the coronavirus. 

We also reduced some of our Merian fixed income holdings in the month, due to manager changes following Jupiter’s acquisition of Merian, where we’ve recycled the proceeds into our existing core strategies and some additional passive exposure across both equities and fixed income to provide us with broad market exposure while we await a better entry point in our preferred assets.


The UK Chancellor’s summer statement provided further evidence of the government’s desire to kickstart the economy, however, with local lockdowns and appearances of a potential second wave in some parts of Europe, the initial boost to investor sentiment from the sheer speed and size of monetary and fiscal stimulus has waned slightly towards the end of the month.

Practically, we remain positive on equities, but we still have a modest equity hedge in place for the moment. We retain confidence in our managers, but we are making changes across the portfolio. We favour diversification, but we are slimming down the portfolio.

Significant uncertainty remains over when economies can fully and sustainably reopen and how quickly they will rebound. The longer infection rates remain high and social distancing is required, the more likely there will be more lasting impacts on the economy. Central banks and governments have so far helped cushion the blow to the global economy and markets, but success will be measured by the extent to which companies avoid solvency problems and workers return to employment.

Paul Craig

Portfolio Manager

Rasmus Soegaard

Portfolio Manager


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