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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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Fund and Market Overview
In November, the Elite LWM East-West Value Fund snapped a 5-month winning streak and posted a loss of 2.2%. This was largely the result of a fall in the value of the USD vis-à-vis GBP, which impacted our US, Hong Kong and Chinese stocks, and an accounting issue that affected one of our British holdings, Aero Inventory. (Of which, more later.).
Major markets were mixed. The Nikkei (-6.87%) was by far the worst performer. In Europe, the French CAC (2.01%), FTSE 100 (2.90%) and German DAX (3.90%) performed strongly. The star performers were in the US, where the Dow Jones (6.51%) and the S&P 500 (5.74%) fared superbly.
Individual Stock Performance
Our best performing stocks in November were Dynasty Fine Wines (China, +12.38%), Volcom (US, +4.76%) and Pfizer (US, +4.05%).
Our worst performing stocks were Aero Inventory (UK, see below), Blue Scope Steel (Australia, -9.95%) and Canon (Japan, -5.54%).
All figures are in local currencies.
Over the last 2 months, substantial increases in the prices of many of the shares we hold have caused us to re-review the entire portfolio. On the back of this we have sold a number of the shares that we believe no longer represent good value.
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Aero Inventory (AI.L) provides services to airlines such as Qantas and Air Canada. A star performer on London's AIM market, the company was in the process of moving to a full listing on the London Stock Exchange when its accountants started to raise questions about levels of stock in one of its warehouses.
Trading in the shares was suspended whilst the accounting issue was investigated. However, because the company's stock levels were used as collateral for its loans, the issue has put the company in breach of its loan covenants and its banks have withdrawn support. This has pushed the company into administration.
At the time, Aero Inventory's shares were trading at 264p and it comprised 2.64% of our portfolio. We had last reviewed the stock in early October. Other institutional investors in Aero Inventory include HSBC, Landsdowne Partners, Henderson Global Investors, Gartmore and AXA.
The administrators have already received more than 20 offers for the company.
The worst-case scenario is that we receive no value for the shares. To be as conservative as possible, we will carry the shares at zero value until the administration process has been completed.
Given that the price of the Fund already accounts for this worst-case scenario, investors in the Fund may benefit once the Aero Inventory situation is resolved.
For those interested in finding out more, a good overview of the unfolding situation can be found here and here. |
Could the credit crunch have been just a bad dream?
Maybe....
Given the incredible surge in global markets since early March, a sense of relief has settled in. Risk appetites have recharged. Equities and precious metals are surging. Residential property markets are showing signs of recovery.
So are we in a new, post credit crunch reality? Are we now comfortably adopting to an existence whereby nothing is really different, except that government debts are maybe 60 - 100% higher than they were 2 years ago? Are equity markets cleared to move back towards new overall highs?
In a way, the answer could be yes. So much of the financial markets are based on confidence. The more consumers can be persuaded that things will improve, the more likely they are to spend money on goods that keep factories open and employees in work. Continued employment make mortgages more affodable, thereby providing support to property prices. As a result, banks' residential and commercial property assets increase in value which improves their capitalisation ratios, meaning they require less support. Liquidity increases and everything refloats. Everyone's a winner.
And why should projected debt levels of 100% or more for western countries cause alarms given that Japan has had debts in the region of 150-200% for years?
Whilst Japan's economic performance over the last two decades hardly inspires enthusiasm, the answer could well be that western countries will manage the payments due on anticipated debt levels without too many concerns.
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But just when you thought it was safe to go back into the water, Dubai World, one of several heavily indebted entities linked to the Dubai state, announced it was seeking to restructure its debt repayments. Creditors (including a number of British banks) had assumed / hoped that the debts would be backed up by Dubai and, ultimately, Abu Dhabi.
The credit crunch just keeps on giving.
The reality is that no matter the confidence that inflates asset prices, you can't simply erase the debt. And there is so, so much debt around.
In November, US bank Wells Fargo forecast a new decline of 10% in US residential property prices. 300,000 foreclosures are occurring each month. Problems, especially with regards commercial property debt, have caused more than 125 US banks to fail so far this year. Another 550+ are on the danger list. And the UK is not immune - Savills, Jones Lang Lasalle and Bloomberg have all forecast falls in UK residential prices in 2010. Both commercial and residential properties still have the ability to wreak havoc.
These are slow motion crises - you can see them coming from a long way away but are powerless to do much about it. They were years in the making and cannot be undone by a few months of government expenditure inspired confidence.
And what if...?
Even in the most optimistic scenarios, projected government deficits mean that there is a huge amount of debt that will need to be sold over the next few years. Someone needs to buy it. Interest rates may well need to rise in order to entice buyers, in which case, any recovery could be rapidly choked off.
Some worry about deflation, some inflation. With deflation, at least interest rates can remain low. But if prices and wages are falling, then even at zero interest rates could be too high in real terms, choking economic activity. Worse, in a deflationary environment, debt is not eroded but increased with the passing of time. Not a comforting thought given the indebtedness of consumers and governments. Paying off debt would become paramount. New investment / expenditure would be more expensive in terms of the opportunity cost of just leaving money in the bank to appreciate in value. Why buy today when it will be cheaper tomorrow?
On the other hand, with inflation, interest rates have to rise in order for prices to be controlled. But that will put up mortgage rates and cripple the ability of companies, households and governments to service their debts.
Whilst the incredible stimulus measures adopted by central banks have so far done a great job in propping things up, what happens if things deteriorate again in the near future and governments cannot afford to do anything but reduce spending and / or raise taxes? Are we just putting off the pain that must inevitably engulf us, and racking up huge levels of debt for future taxpayers in doing so?
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At Lowes Wealth Management, we tend not to worry about what global markets are doing. We simply look to follow principles laid down by Graham and Buffett, seeking out the 25-35 best value companies from around the world.
By focusing only on finding established, undervalued companies with low debt, you tend to automatically navigate around hype-driven bubbles. Also, you are not obliged to incur heavy exposure to economies such as the UK, where the economic headwinds look so daunting.
As value investors, we are naturally contrarian. We don't seek to slavishly follow markets and we won't always get things right. But the principles that we use have been in continual use for more than 70 years and have consistently outperformed markets over the period.
In fact, when value underperforms, it tends to be when markets are losing sight of the fundamentals.
Over the last 4 years we have dramatically outperformed all major global markets, with lower volatility. By viewing cash as a viable asset class, we have been able to protect our investors when opportunities are rare or when macro conditions have been at their most worrisome. As can be seen from the graph above, the secret to successful investment management is not to generate spectacular returns. It is to generate decent returns whilst avoiding spectacular losses.
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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Performance Figures Prior to the Launch of the Fund
Prior to 1st December 2008 (the launch date for the Elite LWM East-West Value Fund), the performance figures quoted for the underlying strategy are the gross returns of our entire equity portfolio over the period beginning October 27th 2005. From 27th October 2008 to January 5th 2009 we were 100% in GBP cash for the transfer of clients' assets into the Fund. We measure only the performance of the money that was invested on behalf of our clients. We factor in any cash received in the form of dividends from stocks purchased and any realised cash that was held resultant of the sale of a stock. We do not however factor in sums received for investment that did not enter the investment cycle.
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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.
This communication is confidential and may be covered by legal, professional or other privilege. The information herein is solely for the intended recipient(s). Any other access is unauthorised. If you are not the intended recipient(s) please immediately delete it from your system. Any disclosure, copying or distribution, as well as any action taken or omitted to be taken in reliance on information herein, is strictly prohibited. This Material and its use may be restricted by law in some jurisdictions, and persons who receive or otherwise interact with it are required to inform themselves and to comply with any such restrictions. Specifically, the information herein is not for distribution to the United States or Switzerland, and it does not constitute an offer or a solicitation of an offer to buy or to sell securities in those countries or to sell securities to or for the benefit of any United States or Swiss resident.
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