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

Market News

US equity markets fell last night – S&P 500 (-0.6%); Nasdaq (-1.6%) – driven by a sell-off in tech stocks. This morning in Asia, markets were mixed: Hang Seng (-0.9%); Shanghai Composite (+0.2%); Nikkei 225 (holiday). The FTSE 100 is currently trading 0.2% higher at 7,742.

The 10-year Treasury yield has crept back up to 4%, reflecting tempered expectations of rate cuts this year. The dollar held gains ahead of the release of the Fed December meeting minutes today. The tone of the minutes is expected to be hawkish. Still, that may not be an accurate reflection of the full discussion of the December meeting, nor would it rule out near-term rate cuts, Bloomberg Economics said. Gold trades at $2,060 an ounce.

An early rate cut by the Bank of England would help kick-start business confidence, which ended 2023 in a “relatively depressed place,” the Institute of Directors said. Its Economic Confidence Index worsened in December to minus 28. Sterling trades at $1.2644 and €1.1543.

The oil price has fallen back to $75.50 a barrel. The US has become the world’s biggest LNG exporter for the first time, with last year’s shipments reaching 91.2m tons. Qatar, the top supplier in 2022, saw its volumes shrink for the first time since at least 2016, with a 1.9% decline dragging the nation into third spot behind Australia.

Source: Bloomberg

Alternative Asset 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 investments that provide shelter in difficult times when other asset classes 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 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.

·       The correlation to equities (MSCI World, -0.3) and bonds (Bloomberg Global Aggregate, -0.4) is very 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 over 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: 1.06% OCR (of which Management fee is 0.8%) 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. The fund achieved an 18% positive return, outstanding in the context of heavy falls in both equities (-18.1% for the MSCI World stock Index) and bonds (-16.2% for the Bloomberg Global Aggregate Bond Index). On this measure, a typical 60/40 equity/bond portfolio was down by 17.3%.

After a subdued start to 2023 and a weak final quarter (c. -2.9%), the strategy generated a positive return (+2.1%) for the year. As a result, the fund remains one of the top-performing managed futures funds over the past three and five years. The annualised return since inception in 2018 is c. 7.3%.

The manager recently provided further commentary on the industry:

·       In 2023 the SG Trend Index returned -3.7% over the full year, but this headline number conceals a great deal of dispersion. Single manager returns ranged from -10% to +10% depending on trading speed, risk management, and whether diversifying signals were included. This contrasts with 2022 when the industry was overwhelmingly positive, and the main source of differentiation was the amount of leverage used.

·       Slower strategies outperformed faster strategies over most of 2023, although performance between model speeds converged from the end of November. Slower strategies were more profitable in stock indices and commodities over the full year, while faster strategies performed better in fixed income, particularly from November.

·       Agriculture, energies, currencies, and stock indices were positive contributors for most trend followers from a sector perspective. But results depended heavily on market selection and weights. For instance, excluding or placing a smaller weight on capacity-constrained markets such as cocoa, cattle and sugar would have been detrimental to performance in agriculture.

·       Results in fixed income were negative across the board. Losses, however, accrued at different times of the year for different model speeds. Slower strategies benefited from maintaining short positions in the sector when yields recovered after March, but the same models were less responsive to the decline in yields from November.

·       The sharp reversal of the fixed income downtrend during March was a pivotal moment for many trend followers in 2023 and revealed differences in how managers approach risk management. Those who place too much emphasis on targeting a constant level of portfolio volatility experienced heavy losses, since the correlation relationships on which their volatility forecasts rely changed suddenly as bonds rallied and equities declined.

·       Rolling three-year equity-bond correlation turned positive during 2022 for the first time in 20 years. And, except for a brief flight to safety in March, equities and bonds continued to rise and fall together during 2023 in response to speculation around the path of interest rates. This creates a portfolio construction challenge for which trend-following funds like Winton offer a solution.

As a result, we remain positive on the fund given its portfolio diversification attributes. At a time when the geopolitical and macro-economic outlook remain very 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