As we write we are hearing that there are tentative signs of a peace plan between Russia and Ukraine, based on a Ukrainian declaration of neutrality and limits to her armed forces, let us hope that this works out.
Since early January, markets have been poisonous in practically all areas and Tenax has taken some pain, more than we like to deliver. We have often observed that all funds (no matter what they say) are exposed to a multi-asset class event, as indeed is Tenax; exactly what we have been living through these past ten weeks. Tenax has suffered a 3.4% fall, not quite at March 2020 levels, but rivalling the experience of late 2011.
Our feeling is that recent moves in risk assets, including credit markets, have ‘priced in’ some serious pain, markets are callous, it is time to ‘move on’. First, the table of Tenax’ asset mix for the year to date, see chart, right.
Cash and FRNs
Having around 40% of the portfolio in FRNs and cash served to cushion the Fund from the worst of the volatility of this period. We still like our FRNs, their yields are rising and set to rise more with moves in base rates but we have begun to reduce exposure in favour of risk(ier) assets as the latter have become significantly more attractive.
Fixed Interest (Credit)
Credit spreads have widened significantly and sovereign rates, having dipped after the invasion, are now higher than at their Valentine’s Day peak, UK ten-year at 1.6% and, more marked, the US ten-year has climbed to 2.2%. We await a decision from the Federal Reserve tonight and the Bank of England tomorrow, base rates are still expected to rise, but by how much?
Returns on offer in (short-dated) credit have been transformed (and are fully reflected in the pricing of the Fund). The redemption yield on this third of the portfolio is now 3.82%, with average pricing now ‘below par’ i.e 95.9p compared to 100p par. What a change from the miserable returns that have been on offer for the past couple of years. Finally, some rather good news.
We have quietly been adding to holdings over the past few weeks, for example: Marks & Spencer 3.75% 2026 and Travis Perkins 3.75% 2026, acquired at prices between 98p and 99p, redemption yields between 4% and 4.25% on four-year paper. We have also bought Berkely Group 2.5% 2031 (incidentally, a green bond) below 90p and Heathrow 2.625% 2028 at 96p. Happy to build these positions into these attractive yields, this is the first time for ages that there has been so much choice in bonds trading below par. Our suspicion is that the Bank of England will be lifting rates over the next year/eighteen months but that they will struggle to get them much over 1.5%/2% over the period.
The infrastructure holdings have had a good period, generally steady against the weak equity market, SDCL Energy Efficiency has been a notable feature, up over the year to date. The need to invest in energy efficiency has rarely been clearer. We have slightly reduced BBGI International after a good move back up and are continuing to edge-up exposure to battery storage firm, Harmony Energy Efficiency.
Exposure is a shade lower here following sale of our short-dated TotalEnergies USD convertible in late January and the market weakness generally. We also sold the Swiss RE USD convertible around the same time, but have subsequently bought this holding back as the stock fell sharply (with all the financials) over the course of February.
We have not made any changes here, but the sector has been pushed around with the market. The holdings we have are on discounts to current NAVs (still quite depressed asset values) of between 20% and 30%, looking good value.
Equities have clearly been in the eye of the storm as, first, there was the ‘switch to value’ out of quality growth and then the invasion. Incidentally, we consider that it is nonsense to suggest that ‘value’ is the place to be in inflationary times, these capital heavy, low margin, cyclical businesses struggle in such times as they have little pricing power, face rising debt costs and quickly run out of cash flow. We strongly favour quality, low debt, high margin businesses with pricing power – for reference, see Warren Buffett’s 1982 essay on the topic.
Having added to a few positions in January, we started to buy again around 7th March when we judged that the moves were beginning to look extreme. Examples include Croda International (at 33% off the December price), Unilever (their high was last June, we paid 25% less), and Halma (peak in January, we bought 30% lower).
Otherwise, AstraZeneca have been a bright spot, up over the year to date and Smith & Nephew have not suffered too much. London Stock Exchange finally produced some good figs and are also up over the year as are Aviva, also on good figs. The banks have been on an extraordinary roller-coaster, worried about being caught up in sanctions or having Russian exposure somewhere (and despite rates being on the rise again). Barclays hit peak in January then promptly sank 35%, Standard Chartered gained 30% from end-December to mid-February, then collapsed, currently they are up over the year.