The Long and Short of it: Review of markets September 2019
I spent 3 out of 4 weeks in September out of the office. One week marketing and two weeks on a late summer holiday. Despite being out of the office I learnt a great deal.
On our first holiday as a family I realised holidays would never be the same again. It turns out babies have no appreciation of pretty rural French villages or sympathy for the activity of reading a book sprawled out on a deck chair. I never appreciated how true the saying, “coming back to work for a rest” is!
Whilst marketing at a large investor event, clients were asked a question along the lines of “which asset class/region you think you will allocate most to over the next 12 months” [insert drum roll] UK Equities! To put this into context the BAML Fund Manager survey has had the UK as the least loved region for the past 41 months, a record for the survey. It seems that investors are finally starting to acknowledge the cheap valuation of the market presents an opportunity for the bold investor – Buffet’s maxim of being greedy when others are fearful is ringing in my ears!
Prime Minster Johnson will have come to an abrupt realisation in September; it is easier to criticise from the bench than it is to lead. A series of events has left him hamstrung: the Conservatives lost their majority, lost seven commons votes and suffered the embarrassment of the Supreme Court’s unanimous ruling that prorogation of the Commons was unlawful. The PM and his government have their backs to the wall but they are fighting, pitching parliament as a barrier to fulfilment of the people’s will. Attorney General Geoffrey Cox said “This Parliament is dead” in a furious speech against parliaments machinations to prevent a hard Brexit. It seems likely PM Johnson will be forced to ask the EU for an extension before fighting a general election.
Perhaps the most remarkable thing to happen in the month was the short value rally. It was short lived but should serve to remind investors how concentrated positioning in growth is, and that this could be painful if we see a regime change.
As I’ve said in a number of previous blogs this does not feel like the right environment to be taking big macro bets. The average active UK Equity fund manager is 30% overweight small and mid-cap (SMID) cap stocks. We feel the scale of this risk is not appropriate given the macro environment (Brexit and late cycle).
The low interest rate environment has driven a search for yield and companies have come up with innovative sources to offer investors. Some make more attractive equity investments than others.
Intermediate Capital Group. A fund manager running closed ended private debt and mezzanine finance funds. The company has successfully re-orientated its business away from using its own balance sheet and towards running third party assets. It stands out in fund management as being able to attract large flows whilst raising fees due to its dominant position in a niche markets. The company now has good visibility on future fees from existing assets and strong fund raising momentum continues to build a bigger base for the future.
Funding Circle. Operates platforms for small and medium sized businesses to access loans from investors. The company takes a fee from the interest rate paid by the borrower. The company have blamed macro uncertainty for weak credit demand. However, their targets were extremely ambitious from IPO and the market has shown no patience for over-promising and under-delivering. Downgraded guidance has meant the company is now expected to be loss making and burn cash well into the 2020s, which has spooked the market, leading to the shares falling 79% since IPO.
JPM UK Equity Plus first took a short position in the week after the IPO.
Callum Abbot is a portfolio manager for the JPM UK Equity Plus Fund