Portfolio Changes, 18/03/2022
Reduce Blackrock EM and Add Jupiter Asian Income
We have made a further change (see last bi-weekly communication re Ruffer) to portfolios during the last week trimming Blackrock Emerging Markets, with the proceeds being reinvested in long-term core holding, Jupiter Asian Income. Although conviction in Blackrock’s strategy has not waned (has outperformed its benchmark in all but a handful of quarters since Gordon Fraser took over in 2017), we thought this move was prudent from a risk management perspective with core Emerging markets likely remaining volatile for the foreseeable. Although not the motivating factor, we were able to sell into strength seen over the latter half of this week.
Despite the reduction of the position, we retain high conviction for Blackrock’s EM strategy, though it is certainly worth discussing its underperformance year to date. As we have preached previously, performance in isolation is not a good cause for an investment decision with buying and selling based off past performance a flawed way to handle capital. It is much more important to analyse the decisions made by the fund manager, in the context of their investment process, that leads to this performance. As outlined below, although certainly not ideal, no investor gets the desired outcome from every decision and in this particular instance we can fully sympathise with the decision-making process which has driven this short-term underperformance.
Blackrock Emerging markets key points:
- The fund was overweight Russia going into the conflict, a position which they had held over the previous eighteen months. Although, in the managers words, they ‘got this one totally wrong’, they were not alone with their positioning, with our macro advisers TS Lombard also believing this to be a good allocation of capital.
- Putin’s invasion of Ukraine was considered extremely unlikely, a viewed shared by more than market commentators. Additional thoughts from the team:
- Lots of shared history and family connections: One third of Russians have a friend or relative who live in Ukraine; believe this sort of event more reminiscent of an event of bygone eras.
- Thought it would be difficult to hold a country of 40 million people, especially after Russian experiences in Afghanistan.
- The team did a lot of due diligence around this, meeting contacts in Russia in the weeks leading up with consensus from these meetings that invasion was very unlikely to happen. (Blackrock has one of the most well-resourced Emerging Markets teams in the business.) Still struggling to see why this conflict broke out, especially as Ukraine was never going to realistically join NATO.
- The team followed their normal process with regards to risk management and portfolio construction, never having more than a 5% active position in Russia (relative to benchmark); normal for the fund to run 3-5% active overweight in preferred counties. Not an exceptionally large bet.
- Even post invasion the team did not predict losses of 99.9% on local Russian assets; a combination of incorrect positioning and extreme price action which was not accounted for.
- End of January – 4.4% active Russia versus benchmark and 7.7% absolute.
- Day before invasion, February 23rd; 3.2% active and 6.5% absolute
- 2nd March (day before meeting with fund manager) – 0.1% Russia exposure and a -1.4% active versus benchmark. Position size largely reflects price action with some securities being sold post invasion.
- At time of meeting the strategy listed as 8% behind benchmark – Notable that benchmark still contains Russia exposure– Some of this underperformance will come back once this gets deleted from index (at zero).
- Almost all this underperformance comes from this overweight position in Russia and Kazakhstan. The rest of portfolio roughly in line.
- Will keep assets for now – May have some considerable value in the future. Once they trade again, not sure what will do with assets – ‘Foolish to box themselves’ into a plan.
- Idea of selling assets at zero to a Russian third party does not really make sense; balancing ethical with fiduciary duty.
Jupiter Asian Income – Jason Pidcock
The manager employs a bottom-up fundamental approach combined with macro-economic considerations when constructing the portfolio. Experience has taught him that to achieve investment success in Asia, macro-economic factors must also be considered in the investment process. The manager prefers highly liquid securities with a focus on balance sheet strength.
The fund was well positioned in the run up to the invasion and has held up since. YTD the fund has benefitted from large holdings in both mining and energy companies (BHP). Gold exposure (via listed company) and consumer staples stocks have also proved to be relatively defensive. The technology hardware holdings owned by the fund have outperformed their internet counterparts.
The manager has positioned the portfolio to be robust in a higher inflation environment and defensive in an economic downturn. This is further reflected in the manager’s country selection with majority of capital allocated towards developed markets (30% in Australia and 19% in Taiwan). The relatively low weighting to China also stands out. Exposure to Russia and Ukraine is immaterial.