Astute Fund Overview - October 2024
Welcome to the latest Astute Fund Overview. This is our opportunity to share with you how the latest market moves, and economic events relate to our outlook, and also to the positioning the VT Astute funds.
We prod and interrogate all of our holdings on an ongoing basis, ensuring that, if we were to build the funds today, starting afresh, that we would have enough conviction in each holding to select it again. Of course, this doesn’t always lead to portfolio changes, occasionally, the best thing to do is not to do anything at all.
Whilst the last few months didn’t cause any huge broad shifts to our outlook, there was plenty of opportunity to tweak our holdings either to take advantage of a lower cost holding or take profits in some areas and feed opportunities in others.
Since our last update, inflation in many key regions has continued to trend towards central bank targets of 2%, with UK CPI inflation dipping to 1.7% for September. The environment of falling inflation and benign growth has given central banks confidence to hold rates at restrictive levels and now begin to reduce interest rates.
Due to increased conviction in the area, we increased our exposure to the broader US market. Inflation in the US continued to fall over the summer, with core inflation (the part of inflation that is usually considered the most stubborn or sticky) refusing to climb back upwards. This led investors to price-in that the Federal Reserve was going to cut interest rates, and also helped to boost equities in the first half of this year. As it became increasingly clear to us that the US would cut rates in the back half of this year, we sold one of our defensive style holdings, global listed infrastructure, to top up exposure to the broad US equity market. As we see a market cycle turnaround, we believe this holding will stand to benefit.
This sale also freed up capital to allocate to an active position in emerging market equity. ‘Emerging Markets’ covers an asset class of countries that are continuing to develop and seeing economic growth, but perhaps don’t meet all of the definitions of a fully developed economy. Think China, India, Taiwan, South Korea and Brazil – due to the very nature of the asset class containing thriving countries with growing economies, some of those listed may soon struggle to meet the definition of a not-fully-developed economy. Valuations (or prices of companies) in this space are at attractive levels, and we believe there is a strong opportunity for stock picking that we can take through our M&G Global Emerging Markets holding.
In addition to tweaking our exposure to emerging market company shares, we also tweaked our exposure to emerging market company debt. The risk-return profile on emerging market debt is attractive, given a relatively high yield achievable. We wanted to maintain our exposure here, but interrogated the market to understand if we could improve it. We replace our holding Ninety-One EM Blended Debt with another holding, Nomura Emerging Market Corporate Bond, taking advantage of a low-cost seed share class. We believe that this asset class has huge upside potential, standing to benefit as the US continue to cut interest rates.
We took the opportunity to take profits on our US Treasuries due to market mispricing. Heading into August, the release of weak labour market and economic data led markets to price in an emergency rate cut – that is an unusual and extreme intermeeting rate cut. Whilst we firmly believed that rate cuts were almost imminent, an emergency rate cut was both highly unlikely, and unwarranted. Furthermore, we believed that markets were overreacting, predicting more rate cuts this year than is likely. This showed itself in markets by a slump in long dated US Treasuries yields (and a climb in their price). Due to this we opted to take profits here and used the proceeds to take advantage of a dip in US equity prices. We did this specifically by purchasing lower cost ETFs.
We’re happy with our current positioning as we head into the US election, which remains a big focus for us. Later this week, I’ll sit with our Chief Investment Officer Dr Scott Osborne to discuss the US election, and we’ll bring it to you next week.
See you then.