May MPS Update

Market Summary

Developed equity and bond markets lost ground in April, as expectations for interest rate cuts in 2024 were pushed back in the wake of higher-than-expected US inflation data. North American equities fell over 3% in sterling terms, while Japanese and European equity markets also finished down for the month. Government and corporate bonds posted negative returns, with commercial property similarly impacted by the prevailing higher-for-longer narrative. However, the news was not all bad for diversified portfolios, with the UK stock market up over 2% and emerging markets also finishing in positive territory.

While April was a more challenging month for investors than those experienced of late, the decline in global equities should be viewed in the context of the strong gains posted since October’s lows.

Indeed, the MSCI World index was up over 17% in the six-month period to the end of March 2024. Seen in this light, a few weeks of consolidation should not be too concerning in itself. Furthermore, inflation in the UK and Europe appears to be returning to target, and although the situation is admittedly proving more stubborn in the US, there are signs of economic cooling that would help ease price pressures. Bonds and equities have taken heart from recent data, rallying from their April lows.

Against this backdrop, our headline positioning remains unchanged, comprising a tactical tilt towards equities coupled with an overweight allocation to developed government bonds.

Strategy Returns

Strategy returns in April were negative, albeit less so than one might perhaps have anticipated. Despite the headline moves seen across financial markets, most portfolios saw falls of less than 1%. There were several factors behind this.

• Midday pricing on the final trading day of the month was one of them, with US stock weakness on 30th April
  occurring after the funds’ valuation points. This move will therefore feed through into May’s strategy figures.
• Elsewhere, positive returns from the strategies’ alternative investment holdings also helped to offset some of the falls seen elsewhere.
• However, of most significance was the strong performance of the strategies’ UK equity exposure, which finished over 1% ahead of the broader UK stock market in April, delivering a total return of 3.6%.

The UK Conundrum

While the large weighting to commodity and financials companies within the index was a key factor for the UK’s outperformance of other regions in April, there were also a number of takeover approaches for companies we hold, further supporting strategy returns.

One of these was for Darktrace, the UK-based cybersecurity company we’ve owned on behalf of clients since October 2022, which has been bid for by private equity firm Thoma Bravo. Elsewhere, Australian mining and metals giant BHP initiated discussions for an informal all-share offer for Anglo American, which has been rejected by the latter’s board.

Whatever the outcome of these particular cases, they can be seen as part of a growing trend of corporate activity in listed UK companies, prompted by the relatively inexpensive nature of our stock market and the discount on which many quality companies are trading versus their peers. This certainly prompts mixed feelings. It can create opportunity for active managers and the possibility for sharp (and short-term) uplifts on the value of holdings, but in the absence of a healthy IPO market it results in a diminishing opportunity set available to investors in the UK stock market. The loss of attractive long-term investment opportunities therefore further reduces the appeal of the index.

In addition to outright bids, you’ve also had several companies decide to move their listing overseas, or announce that a move is under consideration, including some significant index heavyweights. As such, the dwindling nature of the UK stock market is an area very much in the spotlight, with a clear call to ensure the UK remains an attractive environment for companies to come to market.

Trading Activity

We were active at the security-level in April.

• Across the alternatives investment allocation, we added selectively to the strategies’ listed infrastructure exposure, an asset class where we see a number of attractive opportunities for long term investors.
• In Europe we also added to existing bank and energy positions, trimming consumer staples and real estate names.
• In the US we topped up our positions in NVIDIA and META, reducing our holdings in Google’s parent company Alphabet, Apple and global snack giant Mondelez, amongst others, to fund these moves. We also added a dedicated allocation to US small- and mid-sized companies by incorporating a new holding in the Artemis Smaller Companies fund. Not fantastic timing given April’s wobble, but we like the prospects for the exposure with a longer timeframe in mind.

The thesis here is a combination of factors: smaller firms in the US tend to perform especially well in a falling rate environment, and more domestically-focused businesses – as small and mid sized companies often are – tend to do better when there are clear signs of a recovery in consumer confidence. Recent government-led incentives are also likely to benefit domestic companies, while valuations for quality companies down the market cap look very attractive against the broader market. We see the fund as offering a clear, consistent and historically successful approach to ‘small cap’ investing that is complementary to our other, largely stock-specific ideas within the allocation.

You can find out more about our MPS strategies, and how we executed them this May, on our YouTube channel.