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Cirilium Active monthly commentary - April 2021

UK: Suitable for retail and professional clients.

Market review

As the reopening of economies around the world continued to gather pace with ongoing vaccine rollouts, equity markets delivered strong returns again in April. During the period, the developed markets-focused MSCI World Index was up by 4.3%, driven by strong returns in its largest constituent, the US, with the MSCI USA Index rising by 5.1%.

Having introduced a $1.9trn (£1.4trn) stimulus package in March, US president Joe Biden announced plans for a further $2.3trn infrastructure-focused package and another $1.8trn towards social and community causes in April, which helped buoy markets further. However, both packages are likely to face opposition to some of the spending and taxation proposals they contain.

Nevertheless, the US economy grew at an annualised rate of 6.4% during the first quarter, according to the Bureau of Economic Analysis, and could accelerate further as life begins returning to normal.

The US economy grew at an annualised rate of 6.4% during the first quarter, according to the Bureau of Economic Analysis, and could accelerate further as life begins returning to normal.

Growth companies were back in favour in April as the MSCI World Growth Index was up by 6%, with its value counterpart up by just 2.9%. But the MSCI World Value Index continues to lead year-to-date, having made 11.8% to the growth benchmark’s 5.3% gain.

Larger companies outperformed in April, with the MSCI World Large Cap Index gaining 4.4% while the MSCI World Small Cap Index was up by 3.6%. Once again, however, smaller companies which are more geared to their national economies outperformed their larger counterparts year-to-date, with the smaller companies benchmark up by 12.4% compared to a rise of 8.5% for the MSCI World Large Cap Index.

The situation was reversed in the UK where, thanks to its tentative steps  towards reopening which allowed ‘non-essential’ retail and some of the hospitality sector to reopen, smaller companies saw greater share gains than larger ones. As such, the mid-cap FTSE 250 Index rose by 5% during April, while the blue-chip FTSE 100 Index advanced 4.1%.

Elsewhere, there was strong performance from the MSCI Europe ex UK Index, which returned 4.4%. However, the MSCI Japan Index made a loss of 1.9% as the country moved back into lockdown following a rise in coronavirus cases. Meanwhile, emerging markets performed solidly with both the MSCI Emerging Markets Index and the MSCI AC Asia ex-Japan index adding 2.1% and the MSCI China gaining 1%.

Meanwhile, rising commodity prices and indications of supply chain bottlenecks further stoked inflation worries. Despite this, government bond yields fell over the month, bucking the trend of the previous quarter. In the corporate bond space, the Bloomberg Barclays Global Aggregate – Corporate Index was up by 1.1% while the Bloomberg Global High Yield Index rose by 1.6%.

Performance review

Equities provided the lion’s share of returns during the month. Regionally, it was managers within the UK, Europe and US that delivered the best returns and contributed most to performance.

In the UK, the Montanaro UK Income Fund and the Mercantile investment trust were the notable winners as their respective portfolios benefited from increasing confidence of a wider reopening of the UK economy together with a focus on quality businesses.

In the US, it was a combination of the size of our regional exposure together with broad outperformance across our managers that provided a similar contribution to returns as for the UK, with Berkshire Hathaway and the Miton US Smaller Companies Fund among the most notable gainers.

In Europe, the resumption in the outperformance of ‘quality growth’ stocks resulted in a strong month for the Miton European Opportunities and the Montanaro European Income funds. Elsewhere, returns were disappointing in Japan and muted in Asia and emerging markets save for the strong performance of the Pacific North of South Emerging Markets Fund.

Within alternatives, it was another strong month for our listed private equity managers, notably HarbourVest and ICG Enterprise, which performed well during the period and continued to report positive portfolio developments. In addition, Riverstone Energy enjoyed a sharp narrowing in the trust’s discount to net asset value (NAV) as investors considered that the improving economic backdrop was likely to benefit underlying portfolio companies.

Within fixed income, investment returns were far more muted, although Honeycomb and Raven Property preference shares both performed well.

In terms of investment activity, it was another busy month. Although the focus was a continuation of that from the first quarter of 2021, namely adding to our ‘quality’ value exposure and reducing risk across the board, primarily in the lower-risk portfolios.

Major purchases included adding new holdings in the JO Hambro UK Dynamic Fund and the SPDR S&P European Dividend Aristocrats exchange-traded fund (ETF). These accounted for nearly 70% of total purchases for the month.

They were funded by a reduction in regional markets that had performed well, including Asia and emerging markets, and strategies that had performed well, including growth, small/mid-cap and closed-end funds.

For example, the holdings in Fidelity Special Values, Mercantile and Montanaro European Smaller Companies (all closed-end funds) were reduced in favour of the two major purchases noted above. In addition, we took the opportunity to switch the Wells Fargo US Investment Grade Credit Fund into the Wells Fargo Global Investment Grade Credit Fund. This accounted for most of the remaining 30% of our purchases in April.

In terms of risk reduction, activity included reducing exposure to closed-end funds where discounts to NAV had narrowed, clipping profits from equity managers as markets made new highs and a small reduction in alternatives and fixed-income assets that had performed well last year.

As a result, there has been a further increase in cash for the Cirilium  Conservative and Balanced Portfolios and, to a lesser degree, for the Cirilium  Moderate Portfolio. We are reluctant holders of cash in an environment of  building inflationary pressures, but we are willing to be patient given the potential for capital loss outweighs the low level of yields in the near term, as was demonstrated in the first quarter of the year.

Outlook

The developed world looks to be well on the road to recovery, both in terms of the health of its residents and its economies and, over the coming months, we should see encouraging data to support this positive direction of travel.

Ironically, even bad news is likely to be taken well in the short term as this will only encourage central banks to remain ‘fast and loose’ with their monetary policy.

The big question for investors will be to what extent inflationary pressures are “transitory” (as central bankers are flagging), or whether the growth impetus leads to more persistent price increases.

Policymakers have worked tirelessly to provide enormous support to financial markets over the last year. The challenge now for central banks is to convince investors that they will continue to provide support, even when the global economy is booming – these are unchartered waters.

This backdrop means we’re continually asking ourselves whether the current ‘boom’ is sustainable – in which case we might see a further rise in ‘value’ stocks and a decline in government bonds – or whether this is just a temporary ‘reopening bonanza’. If it’s the latter, it’s likely to be followed by the long-term structural decline in global economic growth, which would favour ‘growth’ stocks and government bonds, even at these low yields.

Only time will tell; in the meantime, we take comfort in diversification across regions, asset classes and investment strategies, a line-up of exceptional managers and the flexibility to make changes whenever and wherever necessary.

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Paul Craig

Portfolio Manager

Hinesh Patel

Portfolio Manager