Levitas Quarterly Update - May 2022 to July 2022

May was a volatile month although, improved performance towards its end helped risk assets and while performance for both Levitas A and Levitas B declined they remained in line with or ahead of their benchmarks. In June, risk assets suffered further falls, driving absolute performance of both funds lower, with Levitas A falling just behind its benchmark and Levitas B remaining ahead. July saw a rallying of risk assets which benefitted performance of both Levitas A and Levitas B which finished the month ahead of their respective benchmarks.

Asset class performance
May began with markets declining heavily as fears over inflation and interest rates loomed large. Encouraging corporate data from US consumables and an slight easing of the US Fed’s view on inflation led to a reappraising of potential for interest rates and economic risk and as such risk assets rallied. ‘Deep growth’ assets such as Scottish Mortgage struggled but value sectors such as UK larger companies, Asia and funds with dedicated international bias performing well. Short dated bond s continue to fare much better than longer dated debt.

After a steady start, markets sold off heavily in June after US inflation data inched higher once again. This was reflected in the performance of longer duration assets as markets priced in higher inflation and a longer risk of recession. There was some relief towards the end of the month as unsteady economic data brought into question the Federal Reserve’s ability to continue with aggressive rate rises. Unlike previous months, declines in June were broader and assets which had held up well such as UK large cap also declined, as did value assets which had been outperforming for much of the year. Pockets of strong performance could be found however, with Asian and Emerging Markets aided by strong performance from China as they economy reopened. Areas such as healthcare and sustainability also had a strong month.

July saw US and European 10 year bonds fall, while growth equities in particular have seen a small recovery. Investors have dialled back their expectations for tighter monetary policy ahead and assets which were struggling for the year as a whole generally performed well in July. A number of funds delivered greater than 10% returns. US and Global positions were also assisted by a strong dollar and and a comparatively weak Sterling. Breaking from the trend of much of the year value assets such underperformed more growth-focused assets. Yields on bonds declined quite heavily benefitting full duration assets at the expense of the more cautious funds exposure to shorter duration. It was also a better month for areas such as property and convertibles as well as more aggressive assets such as high-yield debt.

Positioning and Outlook

Economic data dominated the outlook in May as markets watched for signs of rapid deterioration which could result in a recessionary environment. At the end of June, a new picture was emerging with bond markets leading a rally, but equities sold off. This pointed to concerns about the impact of a weakening economic backdrop and investors continued to be focused economic data.

Looking ahead, much depends on whether the market concludes that we may see a short or deep recession, and whether reducing demand as a result of a slowing economy is enough to cause inflation to recede. Markets remain volatile, swinging day-to-day from concerns about sticky inflation to concerns about economic risks. Energy prices in Europe remain highly elevated amid uncertainty about Russia’s energy supplies which poses as significant risk to economic growth. All of this reinforces a negative outlook for the developed Europe-excluding UK region.

Fund activity
In May, exposure to domestic UK positions was further reduced, with larger cap UK assets favoured over UK mid and small sized companies. Slightly more value bias positions in areas such as the US were also added. There were no significant changes in June. In July, Levitas B sold out of Jupiter Dynamic Bond in favour of JPM Unconstrained due to diversification benefits of the JPM fund. Levitas B also sold out of RWC Asia Convertibles due to concerns over the impact of the bond floor on the broader convertibles market and replaced this with a Brevan Howard fund that concentrates on delivering absolute returns from the bond market. This Brevan Howard fund was also added to Levitas A to provide some volatility dampening.