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 market dislocations during the previous quarter created significant set of investment opportunities.

In early January, we continued deploying the fund’s resources towards the most oversold names in the Timber space. In February, we started to gradually decrease the portfolio’s sensitivity to the economic cycle internationally, while keeping significant exposure to U.S. economy. We reduced positions in the Timber, Energy and Water sectors while reinvesting in the more interest rate dependant areas of the market such as water utilities and we are considering increasing exposure to broad infrastructure as well. We added to our positions in the U.K. as ongoing political uncertainty is depressing companies’ valuations and the GBP.

We are focusing on quality growth companies globally while allocating and/or keeping portfolio’s resources invested into sectors that we see as presenting both relative value and absolute return opportunities. U.S. and Canadian timber related companies, water infrastructure and technology players and selected positions in energy are currently offering the most appealing propositions. In most cases, due to depressed earnings expectations, valuations for those companies are expensive when compared to recent history and have probably already priced in the impacts of significant economic slowdown. We saw a decrease in the distribution yield of the portfolio as valuations improved from Q4 levels and we continue considering new opportunities using that particular angle. We took profits in gold royalty companies while increasing allocation to Gold bullion as the stronger U.S. dollar is neutralising the tail winds from lower interest rates globally. As realised volatility on the S&P 500 declined significantly form December levels, we gradually exited our macro hedges in January and in February with an important profit before entering into an out-of-the money put-spread position in March which we partially financed by selling a short dated out-of-the money call. Cash stood at 7.9% at quarter-end.

During the quarter, we slightly reduced the portfolio’s bias to European and Canadian equities as higher valuation metrics in the U.S. are accounting for higher growth rates and more space for policy mistakes. We are keeping exposure to sectors in other regions where companies are 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. As the weakness in timber REITS and wood producers persists, we continue exploring for undervalued opportunities in the sector as we believe that elements for a significant revival in underlying housing demand have not been discounted by the market yet. We expect the fund’s cash level to decline from current levels if a broad market decline occurs during the coming months while increasing portfolio’s exposure to commodities and selected equity sectors.

 

The numbers and portfolio references mentioned above pertain to the Silk Sustainable Real Assets Fund