February Fund Update
For the month of February, the AIM Global High Conviction Fund returned -5.01% (net of all fees). We estimate that AUD strength detracted roughly -2.7% from our absolute return.
There is no doubt we have entered a period of increased uncertainty, leading to heightened short-term volatility in all asset classes. In such times – driven by macroeconomic and geopolitical developments outside of our control – the key is to remain disciplined and unemotional and look for opportunities first to preserve and then deploy capital when the margin of safety is apparent.
The month of February started with expectations of the pace of near-term interest rate rises increasing to dampen inflationary pressure. This saw short and long-term bond yields rise sharply, leading to a rotation from profitless technology companies and long duration businesses to commodity and low valuation cyclical businesses.
However, as the month progressed and Russia invaded Ukraine, we saw a swift reversal in bond yields, a moderation of interest rate expectations, a sharp rise in energy and gold prices, and a broader risk off move in global equities that was relatively indiscriminate.
The indiscriminate nature of the sell-off in global equities did provide us with stock specific opportunities to deploy cash and switch some capital at the margin to where we see better prospects of generating medium-term total returns.
It is worth reminding our investors that we came into 2022 conservatively positioned in what we consider ultra-high-quality businesses. In October 2021, I wrote a note entitled More Tortoise, Less Hare that summarised the risks we saw in certain richly valued sectors with high levels of retail ownership. While our caution regarding the fragility of these sectors has been warranted, the reasons for the sharp selloff experienced by these types of businesses were different from what we contemplated. We are not experts in geopolitics, and certainly did not predict an invasion of Ukraine would be the event that tipped the scales.
We want to assure you that we have no direct Russian exposure and no direct emerging markets exposure. We estimate that roughly 4% of the revenue share of our portfolio companies come from Eastern Europe, with around 1.4% combined from Russia and Ukraine. We have 71.4% of the Fund invested in US equities in US dollars, with the balance in Canadian dollars (6.9%), Euros (4.1%), British pounds (5.2%), and Japanese yen (7.7%). We also have 4.6% in cash, held in Australian dollars.
At times like these we think it is important to increase the depth of communication with our investors. We want you to know exactly what we are thinking and exactly what we are doing with your money.
On that basis, Etienne, Dan and Andrew have prepared a detailed report below on our businesses that reported, our portfolio characteristics, our portfolio positioning and recent actions, outlining where we have redeployed capital. They also present a summary conclusion of our thoughts.
We hope it gives you comfort that in this period of uncertainty and volatility we are strictly following our investment process, using our decades of experience, and looking for further opportunities to position the fund for solid medium-term returns.
There’s a lot at the moment we cannot control, but we can control what we own on your behalf. Quality is rarely on sale for long periods. We will continue to use these moments of dislocation to further increase the quality of our portfolio.
On a personal note (and most importantly): with the pandemic, floods, and now a war in Europe, we hope you and your families are safe and well.
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