Published: 31st October 2023 (1 Min Read)

The Capital Preservation Strategy turned in a positive return in the third quarter of 2023 of just under 1%. However, as conditions described in previous Commentaries have not significantly changed, this result was mostly down to one holding which we describe later.

With inflation continuing to fall gradually across the globe, it looks increasingly likely that we have reached a peak in interest rates, at least for now. The issue we face today is how long interest rates will remain at current levels before we can expect them to start falling back. In recent testimony, the Fed made it clear that risks of reducing interest rates too soon would not be taken lightly, and a similar position was taken by the ECB after a fall in inflation across the EU. While talking the talk is an important part of monetary policy, central bankers must also have in their mind the risk of potentially holding out on higher interest rates for too long and precipitating a recession as a result.

On Saturday 7 October, however, a new factor entered the equation in the form of the horrific attacks by the Hamas terrorist group against Israeli families and festival-goers. It is too early to say what the broad implications for markets are likely to be but the deterioration in the geopolitical climate has already signified a rise in oil prices. Should other countries in the region, most notably Iran, become involved, we could see a rapid escalation in tension, which could feed through quickly to markets. This may in turn require a more accommodative monetary stance to be taken by the world’s central banks, which, with higher energy prices, could unwind some of the good work done thus far on inflation reduction.

The Capital Preservation strategy saw positive contributions from most of its bond holdings over the quarter although its allocation to alternatives suffered from the widening of discounts on the closed-end investment companies. While the Net Asset values (NAVs) of INPP, HICL and BH Macro barely moved, the cost optics of these funds, together with industry consolidation raising fears of selling pressure, have pushed discounts out to unprecedented levels.

This share price to NAV disparity was particularly notable in Round Hill Music, the music royalties company, where the discount to NAV had moved out to over 40%. This may well have been a factor early in September in Concord Cadence, part of Alchemy Copyrights, bidding $1.15 per share for the whole company. As this represented a 63% uplift in the price, we let the holding go, somewhat regrettably as its high-quality portfolio of music royalties provided excellent diversification for the portfolio overall despite its large discount. The resulting funds were used to build a new position in Guinness Global Equity Income, probably the first outright global equities fund to be held in the CP strategy since inception in 2008. We have held this fund in our Balanced portfolios for several years and found its ability to generate steady returns with relatively low volatility made it a suitable replacement.



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Risk warning: You should remember that the value of investments, whether pooled or direct equities, and the income derived therefrom may fall as well as rise and you may not get back the amount that you invest. In the event that you require a level of income higher than that generated by your portfolio, you should be aware this will dilute the capital value of your portfolio. Past performance is not a guide to the future. If you are in any doubt of the suitability of an investment for your particular circumstances, you should contact an investment manager for tailored advice.
Article written by
John MacMahon