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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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In May, all of the stocks in the fund's portfolio gained in value. However, these gains were more than offset by a sharp rise in the value of the pound. As a result, the fund was down 1.7% for May.
Notable movers included Hong Kong & Shanghai Hotels (+18.17%), Pfizer (+13.7%) and Canon (+7.46%). (All figures expressed in local currencies). None of our stocks were negative for the month.
The average dividend yield on the stocks that we hold is 5.70%.
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Pound for Pound
The scale of the rise in GBP against a selection of currencies that we hold is shown below:
(May 1st - May 31st. Source Oanda - www.oanda.com)
As we focus on long-term returns, we tend not to worry about short-term currency fluctuations. Experience has shown us that investing across a diversified portfolio of major and minor currencies evens out the impact of such changes over the longer term. An example was the rise in the value of GBP around the end of 2005, which suppressed our returns in GBP terms. However, the subsequent fall in the value of GBP in the second half of 2008 more than compensated.
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Green Shoots or Black Storm Clouds?
When Kermit the Frog sang, "It's Not Easy Being Green", he probably wasn't referring to the difficulty of maintaining a contrarian investment position. Nevertheless, of late, market events seem almost designed to test contrarian investors' resolve.
Whilst the media gushes over the green shoots of economic development, those of us who are more focused on the fundamentals have been taken aback by the scale of the recent rally given the appalling economic backdrop.
But our concerns over downside risk and the heavily defensive portfolio position we have adopted as a result, have meant that we have dramatically lagged global stock markets since the current rally began in early March. Could we simply be wrong? Is the worst of the rally behind us? Or is it simply that markets have been, once again, gripped by irrational exuberance?
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Reasons to be Cautious
We believe that further, major falls in global markets are all too possible. Many of the most worrying catalysts are to be found where things began, in the USA.
Examples include...
12% of mortgages in the US are now either delinquent (at least 1 month behind) or in foreclosure. The foreclosure rate jumped from 3.3% of all US mortgages (Q4 08) to 3.85% in Q1 09. Now, for the first time, it is prime loans (rather than Alt-A or sub prime) that are the largest share of new foreclosures.
At the same time, massive supply of government bonds (issued to support stimulus measures and quantitative easing) are causing the rate on longer dated bonds to rise. This is increasing mortgage costs. For example, the average 30-year mortgage rate in the US rose from 5% to between 5.25-5.5%. Having already fired off almost all of its conventional ammunition, the Federal Reserve will find it difficult to bring rates back down. The drop in interest rates was a major factor easing the pressure on foreclosures as families in distress could refinance at lower rates.
In addition, the next few years will see massive numbers of negative amortization loans being reset. These mortgages could only work in a booming housing market. The payments were not sufficient to cover the interest, let alone reduce the principal. Each month the unpaid interest was added to the overall debt. After a set period, the repayments increase massively to cover both interest and the increased overall debt. But with house prices having fallen so much, a significant number of such borrowers will be in negative equity, making a further round of foreclosures very likely.
Unemployment continues to increase rapidly. Even though the pace of increase has slowed somewhat (latest figures suggest it may have dropped to 500,000 for May), jobs are still being shed at a frightening rate. This will increase the pressure on the housing market, whilst at the same time reducing household expenditure and therefore retarding business activity (which means that companies lay people off and the vicious cycle turns again).
For banks, credit card and commercial loans are the new big worry.
US credit card writeoffs are estimated to be $94 billion this year alone. Tightening lending standards means that some $320 billion in credit was withdrawn by the biggest 3 card issuers alone, again hitting consumers ability to spend.
Nearly $600 billion in commercial property loans are due to be refinanced in the next few years for properties that have dropped drastically in value. The scale of additional collateral that would be required to secure new financing terms means that much of this debt will probably go bad.
As a result of their exposures to such loans, some 2,000 of the 8,000 US regional banks are expected to fail.
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Maintaining a Defensive Stance
Because of such concerns, we continue to maintain a very defensive stance. We hold a lot of cash spread across GBP, USD, EUR, JPY and CHF. Our gradual accumulation of high quality companies involves a focus on companies that have low debt and pay decent dividends.
In short, we continue to guard against the worst, whilst carefully investing in undervalued companies so that, when sustainable recovery does arise, we will be poised to benefit dramatically.
Over the longer term, in order to succeed in investment management, you have to buy at lower prices and sell at higher prices. This means that you must buy when others are selling, and sell when others are buying.
Whilst it may not always be easy to be green, it does tend to be highly profitable over the longer term!
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.
This communication is confidential and may
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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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