Morning Note: Market news and an update on BH Macro.

Market News

With US markets closed last night, the focus shifted to Asia where equities traded lower – Nikkei 225 (-1.1%); Hang Seng (-0.9%); Shanghai Composite (-1.3%) – in a sign of caution ahead of US jobs data that will help shape the outlook for interest rates. Several Federal Reserve officials confirmed the central bank may hold rates at current levels for an extended period. Cuts may only resume when inflation meaningfully cools. Non-farm payrolls are expected to have grown by 165k in December, while the unemployment rate is forecast to be 4.2%.

The 10-year Treasury yield held steady at 4.7%, while gold rose for a fourth straight day and currently trades at $2,678 an ounce. The yellow metal has hit new highs in multiple currencies.

The FTSE 100 is currently trading a touch lower at 8,320. Monetary Policy Committee member Sarah Breeden brushed off this week’s jump in gilt yields and the pound’s slide, saying she supports further rate cuts. Sterling currently trades at $1.2288 and €1.1936, while 10-year Gilts yield 4.8%.

President-elect Trump is planning a flurry of executive orders on everything from immigration to energy policy on his first day in office in an effort to quickly implement his agenda

Brent Crude trades at $77.40 a barrel and is enjoying its longest run of weekly gains since July as the market tightens. US stockpiles at the Cushing storage hub are at their lowest since 2014. Citi has raised its Q1 forecast to $71/a barrel from $65.

Source: Bloomberg

Investment Fund Update – BH Macro

Diversification across asset classes is a critical element of managing your investments. At Patronus, when we construct a portfolio, we look to allocate a proportion of capital to so-called ‘anti-fragile’ investments that provide shelter in difficult times when other (‘fragile’) asset classes (such as equities and bonds) are struggling to a generate positive return. We believe BH Macro is one such investment.

BH Macro is a London-listed closed-ended investment company that invests substantially all its assets in the ordinary shares of Brevan Howard Master Fund. Following the 2021 merger with BH Global (Brevan Howard’s other listed investment strategy), a larger, more liquid, entity with the same investment policy was created. There are sterling and dollar classes available and total company assets currently stand at around £1.6bn. Fund fees are made up of a fixed component (management fee and operational services fee) of 2% and a 20% performance fee subject to a high-water mark.

The objective of the fund is to generate consistent long-term appreciation through active leveraged trading on a global basis. The strategies mainly focus on economic change, monetary policy, and market inefficiencies. Exposure is predominantly to global fixed income and currency markets, employing a combination of macro and relative value trading strategies. The fund seeks to achieve positive returns, uncorrelated with other markets and with low volatility. The underlying philosophy is to construct strategies, often contingent in nature, with superior risk/return profiles, whose outcome will often be crystallised by an expected event occurring within a pre-determined period of time.

The decision to hold the shares depends on whether the fund will provide capital protection during periods of market stress. In this regard, it has a good track record when equity markets are falling and has shown correlation with market volatility. Since inception in 2007 to the end of 2024, in the 20 worst performing months for equities, BH Macro has produced 18 positive monthly returns. Over the same period, the annualised NAV return is 8.7%, with volatility (i.e., annualised standard deviation of returns) of 8.1%.

Risk management has helped reduce the number and extent of negative outcomes. Risks are minimised by diversifying exposures, sensible trade construction, and strict stop-losses. As a result, capital has been protected when things have not gone the manager’s way and drawdowns have been significantly lower than other assets classes.

In 2020, the fund really proved its worth in the face of the challenges arising from Covid-19, with the NAV rising by 28% while the FTSE 100 fell by 11.6%. Again in 2022, when there was a marked pick-up in risk and volatility following Russia’s invasion of Ukraine, the fund generated another outstanding performance, rising by 22%, compared to an 8% decline in global equities in sterling terms and a 15% drawdown in UK bonds.

In 2024, the NAV rose by 6%, versus a 9% gain for the FTSE 100 and a 2% decline for UK bonds. Most of the performance came in September (+5.1%) and November (+7.0%). The gains were generated across trading in currency (long dollar and volatility positions), fixed income (directional trading of euro rates and government bonds), and digital assets.

We would highlight that the BH Macro share price has been more volatile than the NAV, with significantly larger drawdowns – a risk of the investment trust structure. There are several reasons why the shares have moved from a premium to a discount over recent years.

In February 2023, and in response to persistent requests from its shareholders, the company placed £312m of new Sterling shares to increase the liquidity of the stock and spread the company’s fixed costs over a wider base. However, the move caused some indigestion, and the shares moved from a 19% premium to a substantial 19% discount at its low point in March 2024.

The overhang was exacerbated by the merger of two of the company’s largest shareholders, Rathbones and Investec. Although The Takeover Panel has given clearance that the combined entity is not under any obligation to make sales of the stock, it has gradually reduced its holding from 29% at the start of 2024 to 21.66% on 15 November 2024.

At the same time, BH Macro has started to buy back its shares, an accretive move given the discount. During 2024, the company increased its Annual Buyback Allowance (ordinarily 5% of the shares) in respect of the year, allowing it to repurchase further shares without incurring the additional fees ordinarily payable to the manager under the Management Agreement. Since the programme was initiated, and up until the end of 2024, the company has bought back 33.2m shares, 9.4% of the total.

The buyback has been accretive to the NAV to the tune of 1%. It has also had a positive impact on the size of the discount – moving from 19% to 7% at present – and the share price which is 25% above the March 2024 low point.

Another discount control mechanism is the Class Closure Resolutions which can be triggered if the average month-end discount to NAV for a share class exceeds 8% over a calendar year. In this case, if 75% of shareholders vote in favour of a closure, it would trigger a 12-month notice period required to redeem the shares.

We remain very positive on the company given its portfolio diversification attributes at a time when the geopolitical and macro-economic outlook remain very uncertain and an extended period of calm (and lacklustre returns) like that between 2013-17 is very unlikely to be repeated. We believe there are several factors that may drive the shift towards structurally higher interest rates and more economic volatility, all of which provide a rich opportunity set for macro trading. Clearly, the new Trump presidency falls into this category, with the potential for uncertainty in central bank monetary policy, bond markets, and currency.

Furthermore, the current discount to NAV provides an added incentive to purchase the shares at this level.

Source: Bloomberg