Interim Management Statement

RNS Number : 7924L

BACIT Limited

15 August 2013

 



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 31 March 2013 to the date of this announcement. 

The Management Team have provided the following report:  

Review of the period

"During the second quarter of 2013, BACIT's unaudited net asset value ("NAV") increased by 0.90%. Over the same period the FTSE All-Share (Total Return in £) declined by 1.66%, and the HFRI Fund of Funds Strategic Index (£) rose by 0.07%. From launch to 30 June 2013 BACIT's unaudited NAV has increased by 13.70%, the FTSE All-Share (TR in £) by 11.49% and the HFRI Fund of Funds Strategic Index by 12.40% (in £), and 5.79% (in US$).

At BACIT's financial year end, 31 March 2013, 85% of the fund was invested and by the end of the second quarter this number had risen to 93%, across 27 underlying funds and 19 managers. BACIT has also made a commitment of €18.7m to Permira V, which may be drawn down at any time. During the second quarter of 2013 BACIT added to the weightings of a number of existing funds, raising exposure to UK equities, the US recovery and the sub-Saharan African consumer, and increasing the potential to hedge BACIT's Japanese equity exposure. BACIT also made a small investment in a new fund, the SW Mitchell Emerging Europe Fund.

In broad terms, BACIT is now fully invested. At 30 June 2013 the fund held 7% of NAV in cash to cover the cost of the dividend and charitable donations for the financial period ending 31 March 2013 and the investments of up to 1% of NAV each year in the Institute of Cancer Research's early stage drug candidates.

At 30 June 2013 the list of investments was as follows:

	% of NAV
Majedie Asset UK Equity	7.7%
CG Portfolio Fund plc Dollar Fund	6.4%
Maga Smaller Companies Fund	6.2%
Sinfonietta Fund	5.5%
Tower Fund	4.9%
BlackRock UK Special Situations Fund	4.8%
The SFP Value Realization Fund	4.8%
Cumulus Energy Fund	4.5%
Polar Capital Japan Alpha Fund	4.1%
AIMS Diversified Fund	4.0%
Chenavari EU Regulatory Capital Strategy	3.8%
SW Mitchell European Fund	3.7%
Polygon Mining Fund	3.3%
Infracapital Partners II	3.2%
Polygon European Equity Opportunity Fund	3.2%
WyeTree RRETRO	3.1%
Polygon Convertible Opportunity Fund	3.1%
WyeTree Yield Distribution Fund	2.9%
Thyra Global Technology Fund	2.6%
Russian Prosperity Fund	2.1%
Chenavari EU Real Estate Strategy	2.0%
BlackRock Natural Resources Growth & Income Fund	1.6%
Henderson Agricultural Fund	1.5%
Prosperity Russia Domestic Fund	1.4%
Optimal Australia Fund	1.4%
SW Mitchell Emerging European Fund	0.8%
Baker Steel Genus Dynamic Gold	0.7%
TOTAL	93.0%

The portfolio's long bias to risk assets which was so favourable during the first six months of BACIT's existence produced mixed results during the volatile markets of May and June. This volatility was triggered by the Chairman of the Federal Reserve's indication that the end of Quantitative Easing was in sight, signalling a future tapering of asset purchases. With yields on government debt as low as they had been for fifty years, we elected not to invest BACIT's initial portfolio into liquid credit, with the exception of inflation-linked bonds. We expected that any Treasury sell-off would be accompanied by a rise in inflationary expectations, which would support these bonds. For now, the market's expectation of rising inflation has been pushed out towards the end of 2014, and we retain the position as portfolio insurance for this eventuality. As we have demonstrated, timing these moves is not a precise science.

At 30 June 2013 the breakdown of the portfolio by fund type was as follows:

	% of NAV
Equity	25.6%
Equity Hedge	25.2%
Commodity	15.5%
Credit	8.6%
Fixed Income	6.4%
Global Macro	5.5%
Infrastructure	3.2%
Relative Value	3.1%
Cash	7.0%

Almost all of the long only and long-short equity funds outperformed their respective benchmarks or the All-Share Index, and notwithstanding the ructions in that market, both of BACIT's Japanese equity investments made positive contributions during the quarter.

Against a commodity index which fell by 7% during the quarter BACIT's commodity funds, most of which invest both long and short, were additive to performance. European power and soft commodities were particularly constructive.

Outside the inflation-linked Treasury holdings, our fixed income investments are in public and private structured credit. We have focused on investments which will benefit from recovery in the US economy, in European property prices, and the earnings of small and mid-sized European companies. We expected the value of these to be substantially insulated from any expansion in the yields and credit spreads of more liquid instruments, and this thesis was borne out, particularly by the European investments.

We added to BACIT's investment in the Pacific Rim-focussed macro fund at the end of April, as the revaluation of Japanese equities over the preceding six months had made them a far more significant part of the BACIT portfolio, and in the knowledge that the manager of this macro fund is as comfortable making money from a negative view of the Japanese recovery as from a positive one. This proved to be BACIT's single most profitable investment during the quarter.

The value of BACIT's infrastructure investment with M&G Infracapital II grew during the quarter, and our relative value manager also made money.

Economic Backdrop

In terms of the economic backdrop to the portfolio, the US has continued to demonstrate the FIFO principle (first in, first out of the recession), and after a soft start to the second quarter of 2013, purchasing manager indices and consumer confidence measures are now at post crisis highs, home prices continue to tick up, corporate credit standards remain as loose as they have been in 20 years, and optimism amongst smaller companies and their demand for credit remains strong.

Denomination of Share Class into which BACIT is invested	% of NAV
US $ (unhedged)	54.1%
UK £	39.3%
€ (hedged back into £)	6.6%

We continue to leave the investments BACIT has made into US$ denominated share classes unhedged, but we note that across the Atlantic the UK's data has been stronger than expected since June, and that indicators from Germany and France (very much in that order) are also showing recovering optimism and confidence. The one black spot in the measures that we have seen is savings ratios which have once again collapsed in both the US and UK in 2013, but overall the statistics paint a picture which is supportive of economic recovery and, thus, the upside potential for these equity markets' earnings.

At 30 June 2013 the geographic focus of the funds into which BACIT invests was split as follows:

	% of Invested Capital
Europe ex-UK	27.8%
Global	22.9%
Asia-Pacific	16.9%
UK	13.5%
US	10.0%
Emerging Markets	9.0%

Since the Quarter End

The current quarter has started confidently for most of BACIT's managers, and though the portfolio's overall performance is not at present being helped by a stronger Sterling, this is a phenomenon which we expect to be temporary, given the accelerating US recovery, the probable start of the tapering of asset purchases by the US Federal Reserve in September, and the limited options open to the still highly indebted UK.

We are in the process of signing up a number of funds which would offer the portfolio exposure to opportunities BACIT is currently not able to access, and discussions continue apace with the Institute of Cancer Research for BACIT to make its first investment into the ICR's drug candidates. We look forward to updating you once there is further news to report, but until then we leave the last word as one of thanks to BACIT's managers, for delivering another quarter of outperformance and absolute returns."

BACIT Management, 15 August 2013

 

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