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Elite LWM East-West Value Fund
Performance & Market Update
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The latest factsheet for the Elite LWM East-West Value Fund, which includes top holdings, diversification and performance figures, can be accessed by clicking this link.
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June marks the end of the first 6 months
of trading activity for the Fund. Despite our strong focus on risk reduction
and the Fund's performance being significantly held back as a result of the
rise in the value of the British Pound (of which, more later), over the first 6
months of the year the Fund has outperformed the FTSE 100 whilst maintaining a
much lower level of volatility.
This month, we examine the Fund's performance in detail, including a breakdown
of the individual performance figures for each of the stocks that we have
purchased, in both base currency and in GBP terms.
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Overview of Fund and Global Market Performance
But first,
a brief overview of the performance of global markets and the Fund in June:
After the
heady rises since March, June saw investors take a pause for breath. Major
global markets posted mixed results. The German, UK and French indices fell by
2%, 3% and 4% respectively. US markets were largely flat whereas the Nikkei was
up more than 4%.
Despite a
continued rise in the value of GBP (which had a strong negative impact on the
Fund's performance), the Elite LWM East-West Value Fund posted a return of
0.02% for the month.
Out of the
stocks held by the fund, the best performers were Blue Scope Steel (Australia, +34.76%),
Aero Inventory (UK, +20.8%) and Hong Kong & Shanghai Hotels (Hong Kong,
+12.93%).
The
performance of Blue Scope Steel was boosted by our taking advantage of a rights
issue that allowed us to purchase additional shares at considerably below the
current market price.
The worst
performers were Grupo Continental (Mexico, -12.4%), British Petroleum (UK,
-5.53%) and Asia Satellite (Hong Kong, -1.88%).
All performance
figures are in local currencies.
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Six-Month Performance Overview
In the first half of 2009, global markets fell dramatically through January and February, recovered strongly in March, April and May and then largely dithered throughout June.
Our ongoing concerns over market fundamentals led us to adopt a very cautious investment strategy. This was designed to enable us to gradually increase exposure to global markets.
The following table shows all of the shares that we have purchased since the launch of the fund:
(Remember that when fully invested the Fund typically holds only 25-35 stocks.).
With the benefit of hindsight, our cautious approach worked well in January and February. Global markets fell in the region of 20% whereas the Fund fell by only 5%. But then from March to the end of May the Fund's high cash holdings meant that performance lagged resurgent markets.
The following graph and table shows the performance of the Fund versus major markets:
Over the first 6 months of the year the Fund has lagged markets such as the Nikkei, MSCIW and S&P 500 but has either kept pace with or outperformed the likes of the Dow and FTSE.
We tend to be very cautious in our investment approach. In this (as in many ways), we agree with Warren Buffett who said: "The first rule of investment management is don't lose money. The second rule of investment management is don't forget the first rule!"
As a result of this cautious approach the volatility of the Fund since launch has been much lower than that of global markets.
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Impact of the Rise in GBP
Over the first six months of 2009 the
British Pound (GBP) has risen strongly in value against almost all major
currencies.
We purchase stocks from around the world and these stocks are often priced in
currencies other than GBP. For non-GBP holdings there is a currency effect as
well as the normal daily fluctuation in the value of the shares.
For example, if we buy a share in the United States (priced in US Dollars),
then a rise in the value of the pound vis a vis the USD will mean that the
performance of the stock will be negatively affected. Equally, a fall in the
value of the pound vis a vis the USD will mean that the performance of the
stock will be positively affected.
Over the first 6 months of 2009 the rise in the value of GBP against major
currencies has had a strong negative effect on the Fund's performance.
The scale of this effect is apparent from the following table which lists all
of the stocks that we have purchased to date, together with performance for
June and since purchase in both base currency and GBP.
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Performance of All Holdings in Base Currency and GBP
(Performance figures do not include dividends)
As can be seen from the table, the performance of our US, Hong Kong, Japanese and Mexican stocks is considerably worse in GBP than in their base currencies.
Since purchase, our best performer, Canon, is up nearly 43% in Japanese Yen but only 23.77% in GBP.
Grupo Continental is up 3.82% in Mexican Pesos but down -9.33% in GBP!
In addition to the negative impact on the performance of individual stocks, the rise in GBP meant that we incurred losses on our cash holdings in US Dollars, Euros, Japanese Yen and Swiss Francs. Also, the options premiums that we received and the collateral that we set aside to cover these options has all been held in US Dollars and has therefore also fallen in value in GBP terms.
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Should We Have Hedged Currency Exposure?
Obviously,
with the benefit of hindsight, we would have had considerably better
performance over the last 6 months had we have hedged our currency exposure.
However,
our experience is that over the longer term currency movements tend to even
out. In late 2005 a rise in the value of GBP suppressed our returns. But in
late 2008 the collapse in the value of GBP more than compensated.
The bottom
line is that hedging currency exposure incurs a charge. Given that we believe
that over the longer term (and all equity investors should be long-term
investors) currency impacts tend to even out, the cost of hedging currency
exposure is difficult to justify.
Remember,
the impact of currency changes can be both positive and negative.
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The Next Six Months?
Whilst we continue to be cautious concerning current economic fundamentals, we believe that a gradual acquisition of high-quality companies will yield tremendous returns over the longer term.
Our classical value investment strategy has consistently outperformed stock markets since its creation around 80 years ago. We believe that in the future, when we do have the benefit of hindsight, we will come to see 2009 as an excellent year to acquire a range of superb companies at knock down prices.
Kind Regards,
Justin Lowes
Lowes Wealth Management
www.loweswealth.com
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Lowes Wealth Management (LWM) is the exclusive provider of investment advice to the Elite LWM East-West Value Fund. The objective of the Fund is to significantly outperform all major markets whilst maintaining a comparatively low level of investment risk.
The Fund uses a classical value investment strategy which has been employed by Lowes Wealth Management since October 2005. Over the period the strategy has outperformed all major markets with lower volatility.
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Important Notices:
This communication constitutes neither an
offer to sell nor a solicitation of an offer to purchase/subscribe to any
investment. All information and attachments (the "Material") are provided
by Lowes Wealth Management ("LWM") as part of its internal
research activity. This Material is solely for informational purposes, and
LWM makes no representations as to accuracy or completeness. LWM is not
responsible for errors contained herein and shall not be liable for any
consequences arising out of reliance upon same. Opinions herein
constitute the present judgement of LWM, which is subject to change without
notice.
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