Levitas Quarterly Update - August to October 2022


The first half of August saw risk assets rally, but this was later reversed as a result of likely further interest rate rises. Levitas A delivered positive returns ahead of its benchmark and while Levitas B declined over the month, it too out performed it’s benchmark. In September, the risk assets rally faded as markets refocused on inflation and interest rate risk as well as political missteps from the UK. Both Levitas A and Levitas B declined but remained ahead of their respective benchmarks. October was another volatile month, especially in the UK as the aftershocks of the ‘mini-Budget’ and political changes continued. Both funds declined over the month with performance behind their benchmarks.

Asset class performance

After July’s rally initially continued, by mid-August markets had started to turn amid fears the rally had got a bit far ahead of itself, anticipating that central banks will remain on a tightening path. Equities subsequently declined and bond yields rose.  Performance was mixed over the month with top performing regions being emerging markets and Asia driven by strong performance from China. US and global positions fared reasonably well while the UK and Europe lagged behind. Larger UK companies tended to outperform but were still generally negative. Yields on debt increased dramatically as prices fell with longer duration assets worst hit.

September saw market sentiment soured by US inflation numbers and resulting interest rate fears, while the UK ‘mini-Budget’ sent sterling tumbling and gilt yields rising, forcing the Bank of England to intervene. The movement on gilts was unprecedented with the broader gilt market moving by more than 7% in a single day. Equities generally declined during the month dragging down the performance of both Levitas A and B. Value positions fared slightly better than growth although the top performing equity position was healthcare. International positions in the portfolios are unhedged so benefitted from weaker sterling. UK small and mid sized companies struggled and, while yields on debt rose as prices declined, unhedged international debt positions and exposure to short duration debt were beneficial. Alternatives also performed well.

October was a more positive month for equity markets as markets anticipated the US Fed adopting a more accommodative policy. However, toward the end of the month expectations were dampened as inflation data from Europe came in above expectations. Russia also ended its grain deal with Ukraine potentially increasing upward pressure on food prices. The reappointment of Xi Jinping in China led markets there to fall amid fears the country would become more autocratic, affecting returns from emerging markets and Asia. UK political issues continued with the departure of Liz Truss and Kwazi Kwarteng and Rishi Sunak appointed the third UK PM in as many months. Jeremy Hunt’s appointment as Chancellor calmed markets somewhat as he made clear that stability was his focus. As a result, UK gilt yields fell, and sterling rallied. US and global equities generally performed well, although there were disappointing earnings from the technology sector. Alternatives generally performed well providing diversification away from correlated bond and equity markets.

Positioning and Outlook

In August markets and investors were focused on emerging economic data amid concerns over whether any recession would be short or extended and whether reduced demand from a slowing economy would be enough to slow inflation. Markets swung daily in reaction to data reports and comments from key individuals. This volatility persisted through August and September.

October saw continued focus on near term events and data, in particular decisions by the US Federal Reserve and US inflation data. Any sign inflation beginning to cool or that it may be time to slow the pace of US interest rate rises will be well received. These signs combined with continuing relative stability in corporate earnings could see positive market movements. Looking ahead to 2023 there are still substantial headwinds with the capacity to cause further market shocks.

Fund activity

Levitas B sold out of remaining positions in convertibles in favour of a defensive absolute return fund in August, as well as trimming longer duration fixed income and adding to shorter duration positions. In Levitas A, some equity exposure was trimmed from areas such as global and US trackers, Europe and global smaller companies, in favour of short dated US treasuries which tends to do well in a recessionary environment if we encounter this market outcome.

In September, Levitas A sold the remaining positions in Abrdn Global Smaller Companies as well as R&M Global Recovery and replaced these with trackers on global equity markets. This was a move to be prudent in managing the degree of risk as questions remained about the near term direction of markets. Levitas B sold a corporate bond fund and added an ultra-short duration fund that is highly defensive, but given moves in market yields is providing some income, this further reduced the overall duration of the portfolio. A further position in an uncorrelated absolute return fund was added to provide additional diversification from equities and bonds.

There was no significant activity in October.

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