TB Wise Investment Mar '08 Short Report
TB WISE INVESTMENT: Fund update, May 2008 This update is based on a review of the fund’s performance in the year to March 17th. INVESTMENT OBJECTIVES The objective of the fund is to provide capital growth over the medium to long term in excess of deposit account returns and inflation. The fund will invest in collective investment schemes, including unit trusts and open-ended investment companies although other investments may also be held, including investment trusts, money market instruments and deposits. The fund will from time to time invest directly in INVESTMENT REVIEW Our performance compared to our sector benchmark (I.M.A. Active Managed) and the FTSE-100 index, have been as follows:-
Source: Lipper. Figures calculated to the close of business on Monday March 17th. The way we manage the fund is as follows. We have created a database of sectors and funds which we monitor continually. We look to invest either strategically in funds of such outstanding quality that they will deliver superior index-beating performance over time, or tactically in areas that are so cheap that they are likely to recover at a faster rate than the market. Index trackers are always on hand as an alternative to active management should our performance fail to deliver added value, so we need to keep a close eye on how our investments, in whatever area they may be, are performing relative to our benchmark FTSE-100 index. When underperformance occurs, we have to decide if it is likely to be temporary, and best ridden out, or whether to sell. This process does seem to work over time. With the exception of 2007, our funds have outperformed the FTSE-100 index every year since 2000.
PERFORMANCE Over the twelve month period TB Wise Investment underperformed the benchmark FTSE-100 index slightly, while giving an overall negative return of around 10%. In the circumstances, it is surprising that the fund didn’t lag behind the stock market by a wider margin. During the year, there have been eight mining companies in the 100-share index, of which four are in the top 20. As a group, the miners have been the strongest sector in the 100-share index, rising over the year by an average of 46.5%, while the index as a whole fell 8.5%. We have continued to avoid the mining sector, partly because the share prices have risen a very long way in a short space of time (Xstrata’s shares, for example, have risen almost tenfold since July 2003) to a point where the current prices can only be justified on optimistic assumptions of future prices and demand. It’s curious that the rising prices of commodities (oil, copper, zinc, wheat, soya beans etc) have not dampened demand by more than they have, but it seems likely that prices will fall back in due course, especially against the background of the anticipated slowdown in world economic growth. In this context, we would prefer not to take the risk of investing in mining shares at current levels, and have sought for opportunities in other areas. TB Wise Investment’s performance relative to the FTSE-100 index for the year has been a gradual decline in the first period, accelerating in the fourth quarter of 2007, followed by a sharp rebound from December 20th onwards. People invest in TB Wise Investment for growth, and it is always disappointing when we are unable to provide growth. We are aware that poor performance affects everyone. When the fund is at an all-time high, all investors in it have made money; conversely, when the fund price is at all-time low, everyone has lost. TB Wise Investment’s price peaked on July 16th 2007 at £1.6923 (A Shares) and £1.7302 (B Shares). At the time of writing (May 7th) investors who came into the fund on July 16th will have seen a loss of 11.75%; July 16th 2007 being the worst day so far to invest in TB Wise Investment. Investors who came into the fund before late October 2006, or after mid-January 2008, have made gains. Investors entering the fund on May 19th 2004 have made gains of 60.5% so far, this being the best day so far to make an investment. We are keen to see the fund price exceed its July 16th 2007 level; at that point we will know that all our fund holders will have achieved at least some growth, which was the reason why you invested in the first place. We believe that there are pockets of significant undervaluation in the world’s stock markets, and that good returns can be made by investing in these areas. THE ECONOMY AND THE STOCK MARKET Much time is spent by analysts attempting to predict the future direction of stock markets. Most make the assumption that if the economy is growing, the stock market will go up, and vice-versa. In the It follows that the two are not entirely interdependent, and if the economy can grow when the stock market doesn’t it follows that the stock market can rise when the economy is shrinking, as happened in the 1930’s depression. When the stock market is flat, there are still opportunities, as one sector will be rising while another falls. There is a loose connection between economic growth and a rising stock market, but it is neither simple, nor linear. So, predictions such as “the price of houses will go on falling for the next year, and that will affect the wider economy, so the stock market will fall further” may not be true. The stock market is in the end a market: if there are more buyers than sellers in a market, then prices will rise, irrespective of the level of growth or otherwise in the economy. There are structural reasons why the stock market may do better from now on. One is that it is cheap compared to the competing asset classes of property and fixed interest. Investors’ love affair with commercial property has ended, at least for the time being. Institutions such as pension funds had a high proportion of their assets in shares in the late 90’s. They have been consistent sellers over the last decade, but that process has more or less run its course now. Also, companies have become much better at defending their share prices through buying shares in. INFLATION Rising commodity prices have fed through into higher inflation. Food and fuel are considerably more expensive than last year. Of the four investable asset classes, cash, fixed interest, property and shares, the latter two tend to perform much better in times of inflation than fixed interest and cash. Why? Because the value of money in a bank account doesn’t grow in line with inflation, and the income from a fixed-interest security doesn’t rise either. Rent, on the other hand, will rise to keep pace with inflation as inflationary rent rises are written into most rental agreements. Company profits also tend to rise in line with inflation, and dividends follow. Commercial property has been on a sharp downtrend recently, following more than a decade of rapid price rises. The stock market was not as overvalued as commercial property, and may come to be seen as the “default” asset class again by institutions, for the first time since the 1990s. TB WISE INVESTMENT This section reviews what the fund holds, and why. SECTORS Rather than starting from the point of view that we are running a diversified global fund, and should have ‘a good spread’ across all sectors, our approach is to look for sectors, or ‘ideas’ which show the potential for growth, avoiding those areas that don’t. We then invest in each of the ideas with the best managers we can find in that area, and then monitor the performance carefully, exiting once the ‘idea’ has reached a full valuation. The list shows our current fifteen investment ‘ideas’, with a brief outline of what is happening in each area. U.K. Smaller Companies We are long-term fans of smaller companies. They are often owner managed, are less institutional, can move faster and grow more quickly. What’s more, there’s a lot to choose from, around 2,500 at present. It’s much easier to find companies in this sector that have been genuinely overlooked or misunderstood by other fund managers. There are some very able and experienced managers running funds in this sector, and we know some of them well. Over the longer term, smaller companies tend to go in and out of fashion. They were in vogue in the 1980’s, fell out of fashion in the 1990-2 recession, and underperformed throughout the 90’s. There followed a renaissance, which peaked at the end of February 2007. At that stage the whole sector was fully valued, and, having enjoyed a very strong run through the second half of 2006 and into 2007, your fund had a clear-out, and reduced holdings right down. Smaller companies then had a period of weakness, and we increased our holdings again, though not to previous levels. During the period of extreme risk aversion, in the fourth quarter of 2007 the sector fell almost vertically. Between July 20th and December 5th, the Hoare Govett Smaller Companies index fell 14.4%, while the FTSE-100 index was unchanged. The current situation presents us with a conundrum. Previously smaller companies have been in and out of fashion for periods of a decade at a time, but in the last year the sector has gone from overvalued to undervalued in a much smaller time frame. The funds we hold are well-managed, look very cheap, and have just begun to recover. In the short term, prospects look highly promising. However, it’s possible that the rally which is developing may not last, and we may have exit sharply. Recent purchases have been into unit trusts, which we can always sell in a hurry. Performance has been held back since July by an unaccustomed period of weakness from Discretionary, our largest The mid-250 index was very overvalued this time last year during the takeover boom, and we exited the sector completely. We have since rebuilt the holding, choosing an investment trust called JPM U.K. Mid-Cap, with an excellent track record, at an attractive discount of 15.0%. Managers in this sector tend to be “value” investors, who hold cheap shares in unloved companies and over time are often rewarded twice, through an attractive dividend payment and capital growth as companies return to favour. The last year has not been good for the “value” style, as the vogue in mining shares and emerging markets has persisted. This area contains TB Wise Investment’s one direct shareholding, in B.P. (4.2%), held because the share price seems anomalously cheap at a time when the oil price is at an all-time high. Added to that is a competent new Chief Executive, Tony Hayward, who is sensibly focussing on cost cutting and safety issues. B.P.’s latest results, announced at the end of April, surprised the market, and the price jumped. Today B.P.’s shares are at the same level as in mid-‘99, when the oil price was $20 a barrel. There is scope for further recovery in this share, we believe.
Jupiter U.K. Growth, (1%) previously a top performer, has had a difficult few months. Two impressive funds have been added. M&G Recovery (2.1%), managed with great conviction and consistency by Tom Dobell, was added in January and March, and Marlborough Special Situations (1.5%), which has produced a return of 19.6% p.a. over the last fifteen years under the stewardship of Giles Hargreave, was added in March. INTERNATIONAL Since the mayhem began in July last year, the funds have made positive returns of 6.9% and 5.6% respectively. The third fund, Rathbone Global Opportunities (2.1%) is managed by a talented young stock-picker who has achieved outstanding results. Private Equity Private Equity companies need two things; a supply of attractive assets at cheap prices, which are the raw material for profitable investments, and a supply of money to finance the deals. With the credit crunch, the supply of finance has dried up. The share price of the sector’s The funds we hold invest worldwide, including the INTERNATIONAL AREA FUNDS
INTERNATIONAL SPECIALIST FUNDS Utilities Property Financials Energy Cash Categories FUND SIZE I would like to thank you for your continued support of the fund through this difficult period. We believe that the indiscriminate selling of the last few months has created opportunities from which we hope you will benefit in the months and years to come. BLOG Tony Yarrow |
TB Wise Investment Mar '08 Short Report
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