Following last week’s update from our CEO Sue Round, we thought it helpful to provide additional commentary from our Charity Fund Managers on how we have responded to the recent market turbulence.
We hope that you find these summaries helpful, and look forward to welcoming any additional questions you may have. In the meantime, for more information please do get in touch by email at charities@edentreeim.com or call us on 0800 032 3778.
The Amity Balanced Fund is invested in a mix of UK and overseas equities, and UK bonds. The equity portfolio has fallen sharply in value amid the economic and financial shock caused by the coronavirus. The extremely difficult economic conditions and high degree of uncertainty has already led to profit warnings and dividend cuts, and we can expect these to increase over the next few months.
Fortunately, a significant portion of the equity exposure is invested in more defensive and less volatile areas of the equity market including; utilities, telecommunications, infrastructure and green energy funds, which should be more resilient and more able to maintain dividend payments than the wider market.
The fixed interest portfolio has also experienced volatility, leading to declines in the value of some bonds. At the present time we have no reason to believe that income levels from the fixed interest portfolio will be impacted.
Overall, the income generated by the Amity Balanced Fund will fall below the previous year’s level, with a drop in the amount due to be paid at the end of March, with a further fall to be expected in June.
The longer term picture is harder to access, given the uncertainty over the duration of the economic shutdown and the effectiveness of governments and monetary authorities in containing the situation. The fund has a June year-end and the economic consequences are likely to continue for longer, which will result in an impact on dividend payments from equities. Therefore a reduction in income from the fund should be expected to continue into the 2020/21 period. However, as our CIO Rob Hepworth commented, we continue to remain optimistic that markets will recover and that our clients will be best served by maintaining a long-term approach.
The last few weeks has clearly seen an unprecedented change in business conditions globally and this has had serious short-term detrimental effects on stock markets. The Global Financial Crisis and Great Depression both took three years to play out, whilst this crisis has taken only three weeks. However, history shows that pandemics, although destructive, do burn themselves out rapidly within a matter of a few months, not the year or more some commentators seem keen to imply. Governments are also doing everything in their powers, in terms of both monetary and fiscal policy, to alleviate economic turbulence.
The fund has not escaped the market turmoil, with notable impact on capital value, but it has held up relatively well against its benchmark across most periods. However, the extremely difficult economic conditions and high degree of uncertainty has already led to profit warnings and dividend cuts. We can expect these to increase over the next few months and it seems few sectors will be spared. The healthcare sector has historically stood up well on the dividend front during previous economic downturns, and we feel comfortable with the fund’s large overweight position.
The fund has a June financial year-end and the economic consequences on the impact on dividend payments from equities is likely to continue into the 2nd quarter of the calendar year and beyond, so a reduction in income from the fund should be expected. As with the Amity Balanced Fund, the longer term picture is harder to access given the uncertainty of the duration of the market volatility and effectiveness of governments in responding to the crisis. Above all it is important for investors to continue to prioritise high quality businesses and critically those with strong financials, which will enable them to not only survive, but to thrive once conditions return to normal. It is such companies that we see as key to our investment criteria for the fund, and this strategy has served us well in the past.
The Amity Short Dated Bond Fund’s highly rated securities (90% Single-A and above) and shorter relative duration have proved to be defensive attributes in the recent market sell-off. From an asset class perspective, the fund’s combined 20% exposure to Supra-nationals (e.g. The European Investment Bank) and AAA-rated Floating Rate Notes have also proved beneficial in March, in relation to the wider bond market and sector peers that have larger allocations to short-duration BBB-rated or High Yield debt, where credit risk premia have risen more considerably.
We have typically sought to take advantage of the market dislocations to establish positions in high quality debt. To that end, we have been able to secure some AA-rated bonds with an average duration of 2 years at yields of just over 2% - incrementally increasing both the fund’s average credit quality and its yield without increasing its duration. Cash exposure is also high. We believe this should continue to bolster the fund’s defensive qualities in-line with its overall objective of capital preservation.
The sterling bond market, like most other core bond markets, has experienced a sharp sell-off not just in credit but also in sovereign debt over the last month. The sharp re-pricing of credit risk has adversely impacted short-term performance. The Amity Sterling Bond Fund’s holdings in subordinated Financials and Retail bonds weakened as the wider corporate bond market fell and market liquidity conditions deteriorated over the last two weeks. Over the past year we have raised the overall credit quality to the present average of BBB+, offsetting the adverse impact on being underweight in lower-yielding AAA-rated debt.
The fund’s objective of achieving an attractive level of income via high quality securities biased it away from higher-rated debt, with credit spreads and yield levels at cyclical lows. We have always preferred to utilise periods of market dislocation and sell-offs to add to high quality credits at attractive levels.
We are still at the early stages of determining the global and domestic economic impacts of COVID-19, as well as the state intervention measures taken to mitigate its spread. However, a recession in the short term is all but inevitable. As such, our focus is now on maintaining higher than normal cash exposure as well as adding to defensive sector holdings such as Consumer Staples, using the widening in credit spreads to obtain income without materially adding to the fund’s interest rate sensitivity.
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