Morning Note: Market news and an update on the Winton Trend Fund.

Market News

Fed Chair Powell flagged rising risks to jobs while avoiding rate-cut timing. Janet Yellen echoed Powell’s comments, saying the labour market is now less inflationary. The 10-year Treasury yields held steady at 4.30%, while gold has moved up to $2,374 an ounce.

US equity markets were little changed last night – S&P 500 (+0.1%), Nasdaq (+0.1%) – and were mixed in Asia this morning: Nikkei 225 (+0.6% to another new high); Hang Seng (-0.2%); Shanghai Composite (-0.6%). Japan’s producer prices rose 2.9% in June, the fastest pace in almost a year. Meanwhile, China’s Consumer Price Inflation rose by only 0.2%, versus the estimate of 0.4%, underscoring the risk deflation poses to the economic recovery. Factory-gate prices fell 0.8%, extending a run of declines that began in 2022. The data reinforce the need for stimulus and may compel the PBOC to cut its one-year rate in September, Bloomberg Economics said.

The FTSE 100 is currently trading 0.2% higher at 8,156, while Sterling buys $1.2798 and €1.1824. The oil price slipped to $84 a barrel. The US expects global oil demand to grow by 1.8 million b/d in 2025, almost double the rate estimated by the IEA.

Samsung’s largest labour union declared an indefinite strike, a surprise move that raises the risk of production disruptions. The action coincides with the company’s biggest product launch of the year in Paris.

In France, Edouard Philippe, called for parties of the centre and centre-right to join forces to form a new government. The good news is that France’s economy is expected to maintain steady growth this year, easing the budgetary challenges facing the next government.

Source: Bloomberg

Fund Update – Winton Trend

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 the Winton Trend Fund is one such investment.

Winton Trend is an actively managed fund which seeks to achieve long-term capital appreciation through a trend following strategy. The manager invests in a diversified portfolio of financial contracts (derivatives) that provide a return linked to the performance (up or down) of certain share indices, bonds, commodities, and currencies. Although the fund has a relatively short track record (since July 2018), it has performed very well in times of market stress.

Total assets in the UCITS vehicle currently stand at around $1.0bn, while the overall trend strategy has assets of just over $2.1bn.

·       The correlation to equities (MSCI World, -0.2) and bonds (Bloomberg Global Aggregate, -0.4) is low.

·       The fund employs a low leverage of leverage.

·       The annualised volatility is the rate at which the price of a fund increases or decreases for a given set of returns. It is measured by calculating the standard deviation of the fund’s monthly returns. It is currently just under 10%. The manager seeks to mitigate against sharp reversals – positions decrease when volatility increases; the system naturally takes profits.

·       Despite periodic bursts of outperformance for faster systems, Winton believes the evidence still suggests stronger performance for slower systems over most investment horizons. The fund continues to trade a blend of speeds with the twin aims of maximising risk-adjusted returns and portfolio diversification.

·       The fund is relatively low cost: 1.05% OCR (of which Management fee is 0.80%) and no performance fee.

We believe the decision to hold the fund depends on whether it will perform well and provide capital protection during periods of market stress. Clearly, 2022 was such a year, with a marked pick-up in risk and volatility as a result of Russia’s invasion of Ukraine. The fund achieved an 18% positive return – outstanding in the context of the heavy fall in both equities (-8% for the MSCI World stock Index in Sterling terms) and UK bonds (-15% for the Bloomberg/Barclays Bond Indices UK Govt 5-10 Year Index). On this measure, a typical 60/40 equity/bond portfolio was down by 10.8%.

In the second quarter of 2024, the fund was flat, leaving the first-half performance up 8.5%. The annualised return since inception in 2018 is around 8% and the fund remains one of the top-performing managed futures funds over the past three and five years.

The manager has previously highlighted that although trend-following strategies are often associated with strong performance in difficult times for the stock market, the strategy can also perform well at the same time as equities, as the first quarter of 2024 illustrated. What is more important for trend followers is the diversity of the trends on offer – the strategy tends to perform strongly when there are large moves relative to volatility in markets across multiple sectors. Managers can therefore increase the consistency of a trend-following strategy’s returns by maximising the range of idiosyncratic trends in which the strategy can participate.

Year-to-date returns for the largest managers in the industry ranged from flat to +15%, with slower strategies leading the pack in risk-adjusted terms due largely to their outperformance of faster strategies at the beginning of the year.

So far this year, the fund generated performance from a diverse range of sources:

·       After trending upwards through much of the first half of the year, weakness in metals weighed on trend followers’ returns in June. In Q2, the fund was on the wrong side of the crude oil sell-off.

·       The fund has benefitted from the up-trend in equities. However, the manager has ensured the exposure has been measured given investors often buy the fund to help diversify equity risk.

·       The weakness of the yen has been a gradual multi-year downtrend with occasional bouts of strength. The fund’s short position was a source of profits as the latest leg pushed the yen to its lowest level against the dollar since 1986.

·       Cocoa has also been a source of performance, with the fund on the right side of violent short-term trends during which profits have regularly been taken.

At the end of June, the two largest long positions were gold (1.3%) and Sterling/US dollar (1.1%); the largest shorts were yen/US dollar (1.9%) and 3-month interest rates (1.1%).

We remain positive on the fund given its portfolio diversification attributes. At a time when the geopolitical and macro-economic outlook remain uncertain and the prospects for other asset classes remains unclear, we believe an allocation to Winton Trend could continue to help mitigate any losses suffered elsewhere in portfolios.

Source: Bloomberg