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A Review of 2015

Updated: May 18, 2022

From Seneca Investment Managers' public marketing material. Seneca is now part of Momentum Global Investment Management.

As we approach Christmas, this month’s letter will be a little shorter and thus I hope easier to digest, at least easier than the average Christmas feast! Furthermore, since January’s letter will include my market outlook for 2016, I thought that this issue should look back at 2015, particularly with respect to how our three public funds have performed. Of course the year is not over yet and anything (or nothing!) can still happen in the weeks remaining, but at least as far as our peer group standings are concerned there should not be much change between now and the end of the month.

"Research coverage is thinner among mid-caps so the opportunities to find under-valued situations are more prevalent"

In what was a fairly trendless and thus tricky year for markets, our three funds performed well in both absolute terms and relative to their respective peer groups in the calendar year to 4 December. Given our strategic asset allocations, our expected long term real returns for each asset class, our fund costs and the value added we expect to generate from tactical asset allocation, stock selection and fund selection, we would hope over the longer term to achieve a real return of around 5% per annum for the CF Seneca Diversified Income Fund and 6% for both the CF Seneca Diversified Growth Fund and Seneca Global Income & Growth Trust.

In the 49 weeks so far, we have achieved, in nominal terms, 4.9%, 5.6% and 7.2% for the income fund, the growth fund and the trust, respectively. Given that the UK consumer price index rose just 0.2% in the ten months to October, this means that the performance of our funds in real terms has either been very close to or exceeded our long-term return expectations.

Furthermore, the three funds have performed considerably better than their respective peer group average (see table 1). It should be noted that in the case of the investment trust and its peer group, the performance and volatility numbers are based on total shareholder return, a measure of net asset value including dividends rather than share price including dividends. Also, the volatility number is the volatility of daily total returns which is then annualised.

Finally, I have also included for comparison purposes four other IA sectors that may include multi-asset funds and thus which should be considered relevant.

What is also pleasing is that our funds’ volatility has been considerably lower than that of the respective peer group. The primary reason for our good performance has been our exposure to UK mid-caps. All our funds invest directly in the UK, which not only helps to keep our costs down but by focussing on the mid-cap space exposes us to better idiosyncratic and systematic returns than would be the case with large-caps. Research coverage is thinner among mid-caps so the opportunities to find under-valued situations are more prevalent. Furthermore, we would expect mid-caps to continue to outperform large caps over time – since March 1995, mid-caps have outperformed large-caps by 131% (4.1% per annum) and have outperformed in 72% of rolling 12 month periods.

Within overseas equities our biggest tactical position is a 5 percentage point overweight (in all three funds) in Europe ex UK which was worked largely because the majority of the exposure has been in currency hedged funds. At the end of 2014 we felt that the likely direction of monetary policy would be positive for equity markets but negative for the Euro which indeed has been the case.

As for fixed interest, we maintained our zero position in G7 government bonds. This position detracted in 2014 but has started to work in 2015. The DB Global Government Hedged GBP index has returned 1.4% this year and although this is still the right side of zero, it is less than previous years and also less than other areas of the fixed interest market we have been exposed to such as high yield.

Our fourth asset class is what we call ‘alternatives’ where we invest in specialist funds such as renewable energy, asset leasing, REITs, private equity, loans and reinsurance (note that we do not invest in hedge funds, structured products or tangible assets such as precious metals, art, coins and stamps). Our REITs have performed particularly well this year, with Assura, GCP Student Living, LondonMetric and Tritax Big Box all posting double digit returns. We think ‘alternatives,’ which is well represented in all our funds’ strategic asset allocations, is an area that will continue to enhance both the return and risk characteristics of our funds.

Finally, as a result of the good performance in 2015, our 3 and 5-year quartile rankings have improved. These are of course the periods on which we should ultimately be judged (see table 2).

Published in Investment Letter, December 2015

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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