Interim Management Statement

RNS Number : 4112Z

BACIT Limited

05 February 2014

 



BACIT Limited

Interim Management Statement

BACIT Limited ("BACIT") is a closed-ended investment company, registered and incorporated in Guernsey (registration number 55514). BACIT was admitted to trading on the London Stock Exchange's main market for listed securities on 26 October 2012. Shares in BACIT trade under the ticker BACT.L.

BACIT targets attractive medium to long term returns by investing in leading long-only and alternative investment funds with proven managers and across multiple asset classes. BACIT only invests where the relevant investment manager provides investment capacity on a ''gross return'' basis, meaning that BACIT and its subsidiaries (the "Group") do not bear the impact of management or performance fees on its investments.

This statement is released to comply with Disclosure and Transparency Rule 4.3 of the Financial Conduct Authority, and covers the period from 30 September 2013 to the date of this announcement. 

The Management Team have provided the following report:  

Review of the period

"During the fourth quarter of 2013 BACIT's unaudited net asset value ("NAV") increased by 3.35%. Over the same period the FTSE All-Share (Total Return in £) increased by 5.46%, and the HFRI Fund of Funds Strategic Index (£) rose by 1.54%.

From launch to 31 December 2013 BACIT's unaudited NAV has increased by 15.6%, and the company has paid a 1.0p dividend. During the same period the FTSE All-Share (TR in £) has risen by 22.91% and the HFRI Fund of Funds Strategic Index by 9.66% (in £), and 12.23% (in US$).

During October 2013 BACIT raised a further £200m in a C Share issue. We had invested 70.9% of the proceeds of these shares at 30 November, and the C shares converted into BACIT ordinary shares at the end of the following month. At 31 December 2013, 85.9% of the fund was invested, across 29 underlying funds and 21 managers. BACIT has also made a commitment of €20m to Permira V. This, together with the undrawn commitment to M&G InfraCapital II, represented 7% of NAV at the year end.

With the investment of the C share proceeds, we added to holdings in thirteen funds, and introduced three new managers to the portfolio. These three have the ability to invest long and short their respective markets: US and European equities, energy and metals, and macro instruments in G10, with an emphasis on rates and foreign exchange.

At 31 December 2013 the list of investments was as follows:

	% OF NAV
Polar Capital Japan Alpha Fund	7.6%
Majedie Asset UK Equity Fund	5.7%
BlackRock UK Special Situations Fund	5.5%
Sinfonietta Fund	4.9%
SW Mitchell European Fund	4.7%
Salt Rock Master Fund	4.5%
Polygon European Equity Opportunity Fund	4.5%
Tower Fund	4.4%
Portland Hill Overseas Fund	3.5%
Maga Smaller Companies Fund	3.4%
CG Portfolio Fund plc Dollar Fund	3.2%
The SFP Value Realization Fund	2.9%
Russian Prosperity Fund	2.9%
Polygon Mining Fund	2.8%
Infracapital Partners II	2.8%
HC Fund	2.8%
WyeTree European Recovery Fund EUR	2.5%
Chenavari EU Regulatory Capital Strategy	2.2%
AIMS Diversified Fund	2.1%
Cumulus Energy Fund	2.0%
Prosperity Russia Domestic Fund	1.8%
WyeTree RRETRO Fund	1.7%
Polygon Convertible Opportunity Fund	1.6%
Henderson Agricultural Fund	1.5%
Thyra Global Technology Fund	1.2%
Chenavari EU Real Estate Strategy	1.1%
BlackRock Natural Resources Growth & Income Fund	0.9%
Optimal Australia Fund	0.7%
SW Mitchell Emerging European Fund	0.5%
	85.9%[1]

As developed economies' equity markets rose more rapidly in value than other assets during 2013, so BACIT's exposure to them grew as that part of the portfolio became larger. We reduced the long bias of the portfolio during the second quarter of the year by making allocations to long-short managers, and we repeated this exercise on a larger scale with greater impact with the investment of the proceeds of the C share issue.

Given this, the BACIT NAV has grown less rapidly than the equity indices of the major advanced economies, notwithstanding almost universal outperformance of their indices by our underlying long only managers and the similarly excellent returns of the hedged managers.

At 31 December 2013 the breakdown of the portfolio by principal asset class of investment was as follows:

	% of NAV
Equities	54.7%
Macro	9.4%
Commodity	8.4%
Credit	7.4%
Fixed Income	3.2%
Infrastructure	2.8%
Cash	14.1%

And the geographic focus of the funds into which BACIT invests was split as follows:

	% of NAV
Europe ex-UK	23.2%
Asia-Pacific	16.0%
Europe & US	15.3%
UK	11.2%
Emerging	9.6%
US	8.4%
Global	2.1%
Cash	14.1%

Advanced economies' equities contributed the bulk of portfolio gains during the fourth quarter, with the main European, UK and Japanese markets each rising by more than 5%, driven by growing real world and investor confidence, and resulting in multiple expansion in almost all markets. Only in Japan did earnings grow fast enough to leave markets on a lower multiple than they started.

The portfolio is oriented towards UK, European and Japanese equities with managers who are experienced stock-pickers. They have rotated long books away from expensive, defensive, international names into domestic companies positioned to benefit from restructuring, operational gearing, and regional rehabilitation. Corporate activity is also picking up in Europe, and we introduced a manager whose expertise encompasses merger arbitrage. In Japan the focus remains on the reflation trade, through SMEs, financials and exporters, and assumes compensatory policies will offset the consumption tax increase on 1 April 2014.

Historically the rate of change of broad based money has been a key driver of asset prices. The ending of a five year expansion of Central Banks' balance sheets is now in sight: whilst the BoJ continues to expand its holdings at an unprecedented rate, the US Fed has started to move in the opposite direction. In anticipation of the opportunities that this multi-year normalisation is likely to create, we have doubled the fund's exposure to macro funds to 9.4%, adding a manager whose expertise lies in the G10 countries. Both of the macro managers in the portfolio made money during the quarter.

The CRB commodity index lost 1.88% but BACIT's commodity managers, able as they are to invest long and short, made money. With the investment of the proceeds of the C share raise we added an energy and metals trader to the portfolio.

European credit both in the listed and unlisted spaces, in property and in SME lending, generated solid returns. Consensus does not believe that the €31tr of assets on European banks' (unconsolidated) balance sheets are comprehensively marked to market, and depending on whether, when and how this is confronted, this does remain a tail risk to markets, but for our managers this regulatory-driven deleveraging of the banks continues to create opportunities. While index-linked securities had a challenging final quarter in a difficult year, we added to European mortgage holdings during the quarter, and the portfolio of US securitised mortgages also made money on the back of an increasingly vibrant housing market.  

BACIT took up the remaining available capacity with its infrastructure investment, M&G Infracapital II, during the quarter, as well as meeting a capital call from this fund, which is now completing its third investment.

BACIT's policy to leave US$ denominated investments unhedged remains unchanged. During the quarter this translated into lower returns for BACIT shareholders as the US dollar depreciated by 2% against Sterling. At 31 December 2013 this split was as follows:

Denomination of Share Class into which BACIT is invested	% of NAV
US $ (unhedged)	48.6%
UK £	27.7%
€ (hedged back into £)	9.7%
Cash	14.1%

Economic Backdrop

The outlook for the global economy is as benign as it has been since the crisis, with expectations of global growth around 3% for this year and rising next, muted inflation, near-zero default rates and falling unemployment in most of the developed economies. Systemic risk has abated, and consensus forecasts are for a convergence of emerging and advanced economies' growth rates.

The Fed's delay of the tapering of asset purchases following the market's 'taper tantrum' in June, suggested its board is fully cognisant of the risk of triggering an economic contraction, either via an emerging markets ("EM") crisis or through one in the bond markets at home. However, as Central Banks' balance sheets have expanded, annual net issuance of new securities has averaged just $1-1.5tr since US QE started, versus $3-4tr in the previous five years. As this expansion slows, there are some asset classes and geographies which we expect to be more vulnerable to sharp corrections than others, in a world where dealers' inventories are structurally lower. This has been a significant factor in asset allocation since the fund's inception.

The portfolio has to date been light in EM and in US liquid credit, where junk and cov-lite issuance hit record highs in 2013. EM can be a macro-focused decision, but as one of our managers recently wrote, management quality and stock-picking are even more important in EM than they are in the advanced economies. We have been cautious about the fall-out from QE, the impact on EM exchange and interest rates, balances and reserves, and so we have invested only selectively in this space. However, in the right hands currency devaluations can present an opportunity as exporters benefit in such a scenario, and both our managers have played that card. Given that EM economies now represent half of global GDP when converted at purchasing power parities, we expect this part of the portfolio to grow in time.

Since the Quarter End

The current quarter started confidently for risk assets, though that changed during the last ten days of January as Chairman Bernanke's final FOMC meeting saw the Fed cut market support further. As we have previously noted, it would make no sense for the Fed to trigger a contraction, or worse, through a sell-off in the 10 year Treasury or a crisis in emerging markets. However, a growing consensus that the UK will be the first major advanced economy to raise rates, in Q414, with the US expected to follow in 2015, apparently before inflation kicks in - witness the falling labour market participation rate in the US - suggests that progress from here will play to stock-picking skills.

We invested a further 3% of NAV at the start of February, meeting the first capital call from Permira V, and investing in a long-short credit fund. The latter increased BACIT's exposure to the European recovery through SMEs, without taking on interest rate or cyclical spread expansion risk.

BACIT anticipates that it will shortly be making the first payment of £797,500 into the CHK1 cancer treatment project at the Institute of Cancer Research ("ICR"), and subject to specific milestones being hit, a further £1,265,000 will be invested. Other initiatives are currently being discussed and we anticipate making further investments into the ICR's early stage drug candidates during the course of the year.

We are in discussions with a number of funds which would offer the portfolio exposure to opportunities BACITis currently not able to access, and our door remains firmly open to talented managers with a history of delivering asymmetric returns.

We look forward to updating you following BACIT's financial year end at 31 March, but until then we leave the last word as one of thanks to BACIT's managers, for delivering another quarter of absolute returns."

BACIT Management, 5 February 2014

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[1] Rounding means that sums may not add

 

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