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 began the quarter with a relatively elevated cash level as we started taking profits in the most cyclical segments of the portfolio. In April and early May, we continued to increase the Fund’s cash while deploying the portfolio’s resources selectively towards the most undervalued sectors of the investment universe. At the end of May, we reinvested in the Timber and Water sectors. In June we increased allocation to energy equities and broad commodities based on the view that rising geo-political tensions are not fully priced in by market participants while global monetary support should lead to a moderate growth in demand. We kept our exposure to the U.K. stable as political chaos in the country is significantly compressing valuations of local assets.
We continue to focus 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 infrastructure are currently offering the most appealing propositions. While Q1 results exceeded expectations on average, we believe that the macro-economic environment and the sharp reversal in monetary policies globally will translate into a period of increased uncertainty in earnings but that an outright recession will be avoided. We saw another decrease in the distribution yield of the portfolio as valuations continued to increase. We maintained our exposure to gold royalty companies while reducing allocation to gold bullion as part of our risk management framework.
As realised volatility on the S&P 500 increased in May, our macro hedges contributed significantly to portfolio returns. We kept our macro-hedge overlay stable while adding selectively to other out-of-the-money positions in Europe and in the U.S. We covered our short dated out-of-the money call in May. Cash stood at 5.6% at quarter-end.
During the quarter, we kept the portfolio’s bias to European and Canadian equities stable on relative valuation considerations and we increased exposure to Japan as a stronger than expected Yen created significant head-winds for local equities.
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 have been met with healthy levels of global demand. As the weakness in wood producers persists, we continue to deploy portfolio resources to the sector as we believe that actions taken by the industry and the current interest rate environment should translate into better than expected returns in the coming quarters. We expect the fund’s cash level to stabilize at current levels if policy makers succeed to avoid a broad market decline in the coming months.
The numbers and portfolio references mentioned above pertain to the Silk Sustainable Real Assets Fund