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

Market News

US equity markets slipped last night – S&P 500 (-0.7%), Nasdaq (-1.0%) – as solid economic readings and higher commodities prices spurred speculation that interest rates will remain higher for longer. The malaise continued in Asia this morning: Nikkei 225 (-0.9%); Hang Seng (-1.3%); Shanghai Composite (-0.3%). The Caixin China Services PMI rose to 52.7 in March, beating estimates. The FTSE 100 is currently trading 0.5% lower at 7,897, while Sterling trades at $1.2575 and €1.1670.

Mary Daly and Loretta Mester said they still expect the Fed to cut rates three times this year, though they’re in no rush. Daly said three reductions are a “reasonable baseline.” Mester said “it’s a close call” on whether fewer cuts will be needed. The 10-year Treasury yield is currently 4.38%, its highest level since November.

Taiwan was hit by its strongest earthquake in 25 years, triggering temporary tsunami warnings along the coast and as far as Okinawa and China. TSMC and UMC evacuated some semi-conductor production lines.

The oil price hit a 6-month high ($89 a barrel) ahead of an OPEC+ ministerial panel meeting later today amid bets that the gathering is unlikely to recommend any oil output policy changes. The US cancelled plans to buy up to 3 million barrels of crude for its strategic reserve after prices rallied.

Gold set new highs ($2,284 an ounce) as geopolitical tensions and a rise in demand from funds and central banks offset the strong dollar and the possibility that US interest rates will stay higher for longer.

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 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.

Total assets in the UCITS vehicle currently stand at around $600m, while the overall trend strategy has assets of just over $1.5bn.

·       The correlation to equities (MSCI World, -0.2) 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 as a result of Russia’s invasion of Ukraine. 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. In the first quarter of 2024, the Fund rose by 8.5%. This leaves the annualised return since inception in 2018 at around 8%. As a result, 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.

The manager recently provided further commentary on the industry for the first quarter:

·       Trend followers have started 2024 strongly, outperforming global equity and bond indices. The SG Trend Index rose 4.2% in March and the index is now up 12.2% year-to-date, its second-best first-quarter performance on record.

·       Year-to-date returns for the largest trend-following CTAs range from +3% to +20%. As is often the case during periods of strong performance for trend following generally, the biggest winners tend to be those strategies operating at the highest levels of volatility and leverage.

·       Slower strategies outperformed faster strategies in January by maintaining short positions in fixed income and non-USD currencies after the Fed’s dovish pivot last November. However, strategy speed has not been much of a differentiator since February, as positioning has been similar across speeds in the most important trends.

·       Long exposure to equities continues to be an important performance driver, with US, Japanese and European indices making new highs. The extent to which caps are kicking in for strategies that limit their long equity exposure will depend on how this exposure is measured and positioning elsewhere in the portfolio.

·       Two other longer-term trends – Japanese yen and natural gas weakness – continued through March. The interest rate differential between Japan and most of the world put downward pressure on the yen, which fell to its lowest level against the dollar since 1990, despite the Bank of Japan hiking rates into positive territory for the first time in eight years. Meanwhile, natural gas prices declined after the warmest winter on record in the US.

·       Fixed income was a detractor for many strategies and there continues to be a lack of opportunities for trend followers in the range-bound metals and industrials sectors, except for gold trending to record highs during the month. Cocoa was the standout performer in March, with prices having more than doubled since the start of the year.

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