QUARTERLY UPDATE & OUTLOOK REAL ASSETS
We just published our latest quarterly update for our Real Assets Investment Strategy
About Real Assets: A diversified investment strategy that invests in liquid real assets classes such as equities, commodities, inflation-protected bonds, listed globally. The portfolio is allocated between different sectors (Water, Timber, Energy, Gold, Inflation…) that are representative of the underlying macroeconomic trends and benefit from fundamental strengths in demand while having few substitutes and constrained supply.
HIGHLIGHTS FROM THE REPORT AND THE OUTLOOK
We started the quarter with a relatively modest cash level as the clear dichotomy between global markets and the U.S. stock market has created a very unusual and potentially unstable environment. As stock market, commodity and bond yields peaked early October, we started to gradually increase portfolio’s sensitivity to the economic cycle, both in the U.S. and globally. Throughout the quarter we reduced and/or exited some of our positions, in the Water sector in particular, and recycled funds selectively into sectors (energy, timber) and companies that have been indiscriminately hit during the sell-off. More specifically, we reduced exposure to slower growth companies with rich valuations while reinvesting proceeds into sectors and companies where we think analysts’ consensus and market sentiment became overly bearish. We kept on increasing the distribution yield of the overall portfolio, in particular by adding to integrated oil & gas and energy infrastructure sectors.
We continued to exit the most expensive positions in our water technology and water utilities sleeve. We took profits and reduced exposure both to gold and broad commodities. The disconnect between the economic reality and leading indicators (the world economy is not in recession) and stock markets behaviour resulted in a series of dislocations in the correlations between different markets and assets classes during the quarter. As realised volatility on the S&P 500 didn’t reached the levels seen in February, we exited our macro hedges with a profit in October and in November. Late December, we tactically bought an out-of-the-money call option which we partially financed by selling an out-of-the-money put option to capitalise on an extremely distorted volatility surface on the U.S. stock market. Cash stood at 5.3%.
The portfolio still has a clear bias to European and Canadian equities as the valuation metrics are currently less expensive than other regions, while offering similar or higher earnings growth potential.
We continue using a very dynamic approach in energy equities where increasing U.S. oil and natural gas production, coupled with infrastructure, trade and geo-politics related factors are met by healthy levels of global demand. The recent weakness in timber REITS, wood producers and in water infrastructure is increasing the appeal of the sub-sectors. We expect the fund’s cash level to decline from current levels while over-all equity exposure to increase over the quarter.
The numbers and portfolio references mentioned above pertain to the Silk Sustainable Real Assets Fund