An update from our co-investment manager, Tony Foster - 18 May 2020
Over recent weeks, we have seen some of the most extraordinary developments in modern history. Major global economies are being severely impacted by the coronavirus pandemic and financial market volatility has been at levels seen at the peak of the 2008-09 crisis.
We made a number of changes to our portfolio as the outlook became increasingly uncertain. Our first response was to aim to reduce risk in the portfolio and we cut our exposure to equities and emerging market (EM) bonds by five per cent of portfolio assets each in early March. We made a further reduction to our EM bond position later in the month. These actions added to the relative resilience of our portfolio.
As some asset prices reached very attractive levels, partly as a consequence of market panic and indiscriminate selling, we reinvested around half of the cash raised in the first half of March. We increased our exposure to listed social and renewable infrastructure companies and added a listed music royalties investment, Hipgnosis Songs. Other additions to the portfolio in April included Supermarket REIT and GCP Asset Backed Income Fund.
Our longer term, unlisted investments – in areas such as development infrastructure, litigation finance and farm land – are a key part of our investment approach. We are in regular contact with our managers of these investments to assess the health of their underlying assets. Even though many of these are, we believe, relatively unaffected by the coronavirus, the magnitude of the economic and financial dislocation of recent weeks is such that individual assets are likely to be impacted – whether this is in operational terms or via the appropriate metrics normally used to value assets. This is especially the case in private equity and, in accordance with our valuation process, the 31 March portfolio valuation (as well as subsequent daily NAV updates) included an adjustment to the carrying value for a small number of investments. This adjustment amounted to less than 1% of net asset value.
Our current view is that financial markets may have passed the point of maximum panic but, until the economic outlook becomes clearer, we may not have reached the point of maximum pessimism. Much depends on the length of the lockdown in each country and how the global economy ultimately recovers from this period. We are working closely with our economists and strategists to understand the different scenarios and potential outcomes from here. As yet, we have not added to our equity exposure: the uncertainties are still too great. In our view, a better risk-adjusted return, often including an attractive level of income, is on offer from alternative investments.