Latitude Horizon Fund
THE OBJECTIVE OF THE LATITUDE HORIZON FUND IS TO DELIVER CAPITAL APPRECIATION OVER THE LONG TERM BY HOLDING A CONCENTRATED PORTFOLIO OF STOCKS, WHILST LOWERING THE EQUITY RISK THROUGH A SELECTION OF NON-EQUITY INVESTMENTS.
The moves of last week were expected, but impossible to time. As ever in times of extreme market stress the only thing which went up was correlation, and there were no places to hide. According to a Goldman Sachs report every major asset class fell as stocks tumbled from their highs, so the only way to protect portfolios was with individual investments, as opposed to market exposure. We were fortunate that some of our idiosyncratic value stocks (in particular Nokia, Royal Mail and TDC) performed very well, buoying the portfolio as the tide went out. As a result the Horizon Fund is down roughly a tenth as much as the global market*, which is a strong result given the circumstances. Obviously this is a very short time frame in which it is hard to draw conclusions. Likewise we think it is difficult to infer what will happen next until we have more data points, but our simple thoughts are as follows.
The global economy remains strong, and monetary conditions are easy while fiscal conditions are easing. Valuations are somewhere near fair value. Taking the S&P 500 as an example the forward Price Earnings ratio is now 16.5x compared to a twenty year average of 15.5x, while bond yields are at 2.8% compared to a twenty year average of 3.8%.
This means equities are still relatively attractive versus bonds, and that bond yields and growth are key for the future of the market. On our estimates, each 50bps rise in yields requires around 13% earnings growth for the market to remain at the same relative valuation. With current spending plans in the US combining with tax cuts that 13% feels easily achievable for the next year or two.
However, equities discount many years into the future, and that remains less certain and somewhat ominous. Since 1980 rates in the US have never risen 4% without triggering a recession. Taking into account the implied negative rate from QE, estimated to be c.2.5%, we are not far from a cumulative 4% tightening cycle, even at these low nominal levels. In short, unhelpfully, everything remains in the balance but it’s important to remember that, rationally, equities are less risky now than they were a week ago. Attempting to time markets is futile, and we believe a focussed yet diversified approach is the most favourable for these markets.
A quote from Voltaire springs to mind as a mental model for the future: “Doubt is a very unpleasant condition, but certainty is absurd”.
* Latitude Fund -0.5% ytd, MSCI World in GBP -6.0% ytd (as of 8th Feb 2018)
|Fund Launch Date||1st November 2016|
|Legal Structure||Irish Domiciled UCITS V Fund - ICAV|
|Regulator||Central Bank of Ireland|
|Regional Exposure||Global, primarily developed markets|
|Benchmark||The fund is not benchmarked|
£ - A/I IE00BDC7CZ89 / IE00BD37NY30
$ - A/I IE00BD37NZ47 / IE00BDC7JY67
€ - A/I IE00BDC7CX65 / IE00BDC7CW58
|Management Fee||1% per annum|
|Administrator||SEI Investments – Global Fund Services|
|Custodian||SEI Investments Trustee and Custodial Services (Ireland)|
|Firm Compliance||Optima Partners|
12-13 St James’s Place, London, SW1A 1NP
+44 (0) 207 087 9273