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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 September, the Elite LWM East-West Value Fund once again performed strongly with a gain of 4.50%.
For major markets, only the Nikkei (-3.42%) was negative. The FTSE (4.58%) was the best performer, followed by the CAC (3.88%), the DAX (3.85%), the MSCIW (3.81%), the S&P 500 (3.57%) and the Dow Jones (2.27%).
The Fund's strong performance comes despite the fact that we continue to hedge against downside risk. If markets do fall back then we should protect our investors against the worst of the losses.
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The benefits of employing downside protection can be seen in our total strategy performance since we began trading in October 2005:
There is no point in enjoying strong growth if you lose it all during the next market collapse.
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Individual Stock Performance
Our best performing stocks in September were Volcom (US, +17.01%), a designer and retailer of surfing and skateboarding clothing, Hong Kong & Shanghai Hotels (Hong Kong, +16.43%) and new purchase Tianyin Pharmaceuticals (US, +12.06%). (Tianyin is a Chinese company listed in the US.).
Our worst performing stocks for the month were home furnishings company Sangetsu (Japan, -4.06%), Asia Satellite (Hong Kong, -4.05%) and Canon (Japan, -1.63%). Canon is our best performer overall, having gained 63.8% since purchase.
All performance figures are in local currencies.
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To Protect or Not to Protect?
Since the Fund started trading in January we have maintained a high level of cash and downside protection. This is due to our ongoing concerns over the underlying issues affecting major global markets.
The benefits of this protection could be clearly seen in early March, the low point for major markets.
As of 9th March, the FTSE and the Nikkei were down 20%, the Dow Jones and S&P 500 were down 25%, the German DAX was down 23% and the French CAC was down 21%. The Elite LWM East-West Value Fund was down only 6%.
Since this point markets have rallied at an unbelievable pace. Our ongoing caution has meant that now, whilst the Fund is up 10.7%, it is lagging behind most major markets which are typically up 14% - 17%.
So, looking forwards, does it make sense for us to persevere with an element of downside protection?
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Walking a Tightrope...
Over the last 12 months central banks have pumped literally trillions of dollars into the financial system. This unprecedented injection of capital averted potential economic meltdown. The terrifying systemic risk that was apparent after the collapse of Lehman seems to have been overcome.
The way in which government support has been deployed has meant that banks that were too big to fail have been made even bigger. Systemically important banks have either effectively or explicitly been given guarantees that they will not be allowed to fail - their solvency has been underwritten by taxpayers. In order to stimulate the flow of credit governments have loaned capital to banks at virtually zero cost, allowing banks to make huge profits and recapitalise their balance sheets.
Governments have subsidised cars, houses, jobs, loans. This largesse has boosted consumer spending and allowed firms to refrain from sacking people at the current time. This means that fewer jobs have been lost - which means that consumers are more confident about their employment situation and their ability to pay their mortgages - which means that they spend more and that downward pressures on housing abate - which means that less people fall into negative equity and fewer walk away from their houses - meaning that foreclosures are lower which supports housing prices - meaning that banks' assets have to be written down less savagely thus strengthening their balance sheets - which means that they can loan more freely - which means that companies have more access to credit - which means that fewer companies go bust - which means that fewer jobs are lost...
The virtuous circle turns and turns.
But at some point central banks have to stop injecting capital. Unless western governments can convince potential creditors that they will not allow inflation to run away, thereby eroding the scale of their massively increasing debts in real terms, then potential creditors will demand more return (i.e. higher interest on government debt) in order to purchase the debt. But if this happens then rising interest rates will increase the cost of capital meaning that, for example, mortgage repayment rates will rise and push more people into foreclosure. As a result rising interest rates could easily lead to any economic recovery being snuffed out.
Alternatively, if central banks really do put their collective feet down so as to head off rising inflation, they must stop stimulating their economies. They must also cut government spending and raise taxes. But if done too soon then this reduces investment and cuts spending, thereby choking any recovery.
For either scenario the possibility of the virtuous circle turning extremely vicious is all too likely.
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Some Inconvenient Truths
The current recovery has largely been driven by government stimulus measures. When government subsidies for purchasing new cars were withdrawn in the US, demand for new cars fell off a cliff. There is a great deal of discussion as to how important it is that western consumers (particularly US) sustain their spending. But if successful, such a policy will reinforce one of the key factors that led into the credit crunch. Western consumers have to save more and spend less. This is one of the things that must happen for a fundamental recovery to be possible. But in the short to medium term additional saving and less consumption by consumers threatens to exacerbate the current situation.
Recessions that follow banking busts are typically deeper and more damaging. Should the current perceived recovery be genuine, we will have come out of this recession several years earlier than has historically been the norm. And the banking bust that led into this recession was far worse than any that has occurred since the Great Depression.
Also, the simultaneous housing market collapse suggests that genuine recovery is far from a foregone conclusion. If you look at the last housing bust in the UK in 1989, it was six years before housing prices bottomed out in real terms. And the scale of the recent rise in prices was much larger than each of the previous busts. So far we are around 3 years from the peak and house prices in the UK are still overvalued when compared to long-term levels.
Of course, this time it could be different...
US commercial mortgages are a slowly unfolding train wreck. Unemployment is still rising. Government debt is increasing wildly and most governments are far from producing convincing plans as to how they will eventually unwind stimulus measures and rein in spending without derailing the economy. Many banks are still far from solvent - bank 'stress tests' were a smoke and mirrors exercised designed to pull the wool over investors' eyes and inspire further confidence in markets.
There has been a lot of encouraging economic data, but the underlying issues that led to the credit crunch have not been tackled. Given the scale of determination by authorities to see markets rise, a further rally in the short term cannot be discounted. But a recovery generated by printing money may well be a recovery in name only. Unless the fundamental issues are tackled the risk is that the greater the short-term rally, the greater the likelihood and potential magnitude of another sharp correction.
So does it make sense to continue to build protection into our strategy at this time?
We think so.
Kind Regards,
Justin Lowes
Lowes Wealth Management
www.loweswealth.com | |
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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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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
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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