Reports

April 2023 (click here to download)

VAM Fund

In last month’s commentary, the Manager discussed the turmoil created in the financial sector by the failure of Silicon Valley Bank (SVB). Despite assurances that the failure of SVB and the similarly-exposed Signature Bank were isolated incidents, the end of April saw the third largest failure of a US bank as First Republic collapsed after a bank run saw over $100bn in deposits withdrawn. It was very speedily seized by the regulator and then immediately sold to J.P. Morgan, wiping out shareholders but preserving deposits.

The Manager believes that despite the UBS collapse in Switzerland, the crisis remains primarily an issue centred on US small and medium-sized regional banks. In terms of the VAM Fund, exposure to the financial sector remains well diversified as well as geographically spread, mitigating any major effects of the current sector volatility.

The end of April was relatively subdued as investors waited for the Fed meeting in early May. The most recent 25 basis point raise was the 10th in the last 14 months and took the Fed Funds’ rate to its highest level for 16 years. The equity market appears largely convinced that this is the last raise and that interest rates will begin to be cut fairly soon. This belief somewhat contradicts the relatively hawkish stance taken by the FOMC which makes the decision on whether to raise or cut rates. Chairman Jerome Powell previously intimated in his commentary that inflation had not reacted to the rate rises as quickly as he had initially expected. While the Manager has seen significant falls in headline inflation as energy prices and food costs have fallen sharply, wages have remained surprisingly strong and unemployment low. Powell continues to state that the Fed will react to the data as it comes in, but will not automatically continue with the rate rise escalator.

Why is this important? It is probably the case that barring any major exogenous influence, the most important factor affecting the direction of the markets for the rest of the year is the action of the Fed. It continues to traverse a precarious line between needing to raise rates to stem inflation and not being able to be too aggressive due to the possibility of causing a hard landing for the economy, and the systemic issues present in the small and mid-cap banking space.

Many deposit holders who were frustrated at the low interest rates being paid on their accounts by the regional banks withdrew those deposits in order to buy money market vehicles which are both safer (being ring fenced from bank balance sheets) and higher yielding. This exodus inevitably snowballs as baseline rates increase and is then exacerbated by fears that those banks are being destabilised as a result.

The longer-term issue with this is the US government’s undertaking to indemnify all deposits in case of bank collapse. If we do see more bank failures, the impact could be to the tune of hundreds of billions of Dollars if not more. This would necessitate aggressive bond sales in order to fund the guarantee which could then further complicate the inflationary backdrop.

Europe and the ECB is still lagging the US in its efforts to control inflation, and we may see a prolonged period of both higher rates and higher inflation as it plays catch up, and tries to gently put the brakes on the region’s various economies to stem runaway price increases and consequent recession worries.

From a more fundamental perspective, the health of companies across the US markets can be gauged by their most recent earnings results. We are now over half-way through reporting season with more than half of the companies of the S&P 500 having reported Q1 earnings. The number of firms that beat their EPS estimates is 79%, while those beating revenue estimates was strong at 73%. This is better than the pre-pandemic average of between 60% to 70% of companies beating EPS estimates. The encouraging thing for investors is that many of the earnings surprises were substantial and come from across all sectors.

Many investors are feeling much more positive about the direction of markets given those strong earnings. The Manager shares some of that positivity, with the caveat that there may be short periods of volatility while the market continues to stabilise after a difficult year for all asset classes in 2022. It believes that there will be good opportunities to increase exposure to growth assets as the market fluctuates, and continues to be vigilant and on the lookout for such opportunities.

VAM DISCRETIONARY FUNDS

VAM Cautious Fund

Coping with the current top-down environment

Demand and supply conditions in the major advanced economies remain out of balance: inflation, interest rates and growth are likely to remain volatile in 2023/24. Asset market pricing implies a rapid fall in inflation to Central Bank targets, cuts in policy rates, and only a moderate slowdown in economic and corporate earnings growth. The Manager thinks this understates the potential for higher-than-expected inflation, higher-than-expected interest rates, and/or lower-than-expected growth. The Manager believes diversity with downside protection and active management continues to be the best way to maximise the chance of investment success.

VAM Balanced Fund

Coping with the current top-down environment

Demand and supply conditions in the major advanced economies remain out of balance: inflation, interest rates and growth are likely to remain volatile in 2023/24. Asset market pricing implies a rapid fall in inflation to Central Bank targets, cuts in policy rates, and only a moderate slowdown in economic and corporate earnings growth. The Manager thinks this understates the potential for higher-than-expected inflation, higher-than-expected interest rates, and/or lower-than-expected growth. The Manager believes diversity with downside protection and active management continues to be the best way to maximise the chance of investment success.

VAM Growth Fund

Coping with the current top-down environment

Demand and supply conditions in the major advanced economies remain out of balance: inflation, interest rates and growth are likely to remain volatile in 2023/24. Asset market pricing implies a rapid fall in inflation to Central Bank targets, cuts in policy rates, and only a moderate slowdown in economic and corporate earnings growth. The Manager thinks this understates the potential for higher-than-expected inflation, higher-than-expected interest rates, and/or lower-than-expected growth. The Manager believes diversity with downside protection and active management continues to be the best way to maximise the chance of investment success.

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South African Investors: This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Boutique Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this Fund. Boutique Collective Investments (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).

Disclaimer

VAM Fund, Cautious, Balanced and Growth Funds are compartments of VAM Managed Funds (Lux).

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