From Seneca Investment Managers' public marketing material. Seneca is now part of Momentum Global Investment Management.
As it’s the beginning of the year, this month’s letter will focus on the investment performance over the last year of our three public funds, as well as performance over longer periods. Below are tables summarising both fund and sector performance.
"I believe this combination should continue to produce good numbers"
Firstly, I am very thankful to and proud of my team for producing what are clearly excellent numbers. Fund performance is very much a team effort, given that all our fund managers are responsible for investment decisions across all funds, via their specific research responsibility (Mark: UK equities; Gary: developed market equities/bonds and specialist financial (latter is a sub sector within specialist assets); Tom: emerging market equities and bonds; Rich: specialist assets ex specialist financial; Peter: asset allocation).
Period ending 23.01.19
This team approach, as well as our value-oriented investment style, are I believe the two key reasons for the strong performance in recent years. Naturally, I believe this combination, as well as the many other facets of our investment process, should continue to produce good numbers.
Our investment trust’s performance over shorter periods has not been quite as strong as that of the two OEICs, largely because the fund’s borrowing has detracted during the down markets in the fourth quarter of last year. Over longer periods however, the trust’s performance is not only in line with that of the growth fund but has also exceeded its benchmark. The trust also has a higher strategic allocation than the OEICs to UK equities, an area where we struggled somewhat last year given the general underperformance of mid-caps in relation to large-caps (most of our funds’ UK equity exposure is via mid-cap companies).
In terms of peer relative performance, the trust is in a rather heterogeneous AIC sector, the Flexible Investment sector. It has been of course our recommendation to SIGT’s Board that this is the most appropriate sector for the trust (there are no others that relate to multi-asset) but it does mean it sits alongside some trusts that are clearly not competitors (this is clear simply from the FE Risk Scores of some of these other trusts – one has an FE Risk score 2.4 times SIGT’s!)
It must be noted that all three of our funds got a material boost from the very successful listing in December of AJ Bell, a company in which we had been one of two outside shareholders for many years, but this is only one of a number of reasons, albeit a major one, for the good performance.
Adjusted for volatility our funds’ numbers look even better. For example, the income fund’s FE Risk score is 48 which is lower than that of all 7 funds that are ranked above it over 5 years (the average for the 7 funds is 64). In other words, our funds’ Sharpe Ratios are very strong.
In terms of performance attribution over three years, the tables below show summaries for each of the three funds.
Period ending 31.12.18
Each of our three funds has its own strategic asset allocation (SAA) which the funds then seek to outperform via our active management decisions. The strategic asset allocation for a particular fund takes account of its performance objective (the growth fund will naturally have a higher strategic allocation to equities than the lower risk income fund). It will also take account of income requirements (SIGT has a higher income requirement than the growth fund so has a higher allocation to the UK where we think we can identify higher sustainable yields).
Last year, the strategic asset allocations for SDIF, SDGF and SIGT returned -6.0, -6.7 and -7.2% respectively, largely because of the poor performance of equity markets in the fourth quarter. All three funds, however, substantially outperformed their SAAs, by 6.5, 6.9, and 4.3%pts respectively (note that this is based on gross asset values and thus before fund costs). Much, though not all, of this outperformance was attributable to long-term holding AJ Bell which was listed in early December.
Tactical asset allocation detracted slightly, due primarily to our zero weights in safe haven bonds and US equities (we remain very confident in and committed to both these positions on the basis of material overvaluation).
On the selection front, our infrastructure and property holdings performed well. Our infrastructure holdings returned 5% for the year, very decent given the performance of financial markets more broadly. Our property holdings also outperformed their UK REITs index by around 10%pts. Elsewhere, our corporate bond funds performed very well, coming in flat for the year compared with -4.5% for our high yield index.
As for detractors, our UK mid-caps (outside of the excellent performance of AJ Bell during the last two weeks of the year following listing) struggled in relation to their all cap index. But this was essentially because of the poor performance of UK mid-caps in general, and so we don’t think it should be judged too harshly. UK mid-caps have had one of their occasional difficult periods the last three years. 2016 was difficult because of the referendum, while last year they struggled both because of Brexit related issues as well as the general equity market risk aversion which always tends to hit mid-caps more than large-caps.
While our emerging market funds performed well in relation to their benchmark index, our Continental European funds fared less well. Our new fund manager Gary Moglione has taken over this area and, using his developed market fund selection expertise, is likely to be making some fund changes in this area in the coming months.
Finally, below are fund relative performance charts over ten years. Although the new investment process has been in place for four years, longer term clients may be interested in these charts.
Published in Investment Letter, January 2019
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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