Brevan Howard: We Will have to Live With Materially Lower ReturnsVW Staff
Brevan Howard Interim Report And Unaudited Financial Statements has some interesting details. The letter from one of the largest hedge funds in the world, has some interesting comments on the fund’s performance and positioning. Below is an excerpt followed by the full letter in scribd.
The six months to 30 June 2013 started promisingly with Net Asset Value (“NAV”) per share increasing by some 3.80% to the end of April. However, after a very strong twelve month run in equity markets and a thirty year bull market in bonds, Ben Bernanke’s testament to Congress on 22 May 2013 caused investors to reassess their strategies. This resulted in a rapid, albeit as it transpired, temporary set-back for equity markets and triggered significant rises in yields on US Treasuries. Although some of the Brevan Howard managed funds in which Brevan Howard Global Limited (the “Company”) is indirectly invested made significant progress others found the going more difficult. The Manager’s Report sets out the detail and I particularly observe the continuing success of Brevan Howard’s credit strategies during the reporting period.
The NAV of the Company’s US Dollar shares, being the base currency on which your Board focuses, ended the six months with growth of 1.14%. The Sterling class of our shares is the most widely held and actively traded. Hedging at the level of the underlying funds has successfully ensured that the performance of all three classes was broadly similar with the NAV of the Sterling shares growing by 1.49%. During the six months all three classes of the Company’s shares traded at persistent discounts to NAV of around 10%. The average over the period for the Sterling class was approximately 10.6%. Both Board and Manager consider such a level of discount to be less than satisfactory.
The Board has authority to buy-back shares in the market and that authority was renewed by the vote of shareholders at the Annual General Meeting on 10 June 2013. During the six month period the Company repurchased 671,599 shares in the market at an average discount of 11.6% and a cost equivalent of approximately USD 12.1 million across the three share classes. As I wrote in March, buy-backs will continue to be used opportunistically and sparingly. Shares bought back are placed into Treasury for possible re-issue in the future. As and when the number of shares in Treasury in any one class approaches 10%, sufficient shares are cancelled to keep the holding below that figure.
In addition to buy-backs, and again as reported in my Statement in March, the Board exercised its discretion to make a partial return of capital to shareholders. This partial return, which represented 100% of the Company’s 2012 NAV growth, was made at a discount of approximately 3% to NAV and the quantum was approximately USD 40.65 million. Although different in nature to buy-backs, the Board views such partial return as one of a number of shareholder friendly initiatives.
Shareholders will note the disclosure in note 10 that at the period end Alan Howard, founder of Brevan Howard, held a beneficial interest in approximately 2.19 million shares in the Company. Alan significantly increased his shareholding during the six months and the Board was very pleased to see this further demonstration of support for the Company. Also, as disclosed, all directors are shareholders.
Whilst out-paced by rising equity markets in the six months to 30 June 2013 it should be recalled that the strategy of your Company is to aim for steady progress of NAV growth with low volatility whilst minimising the risk of capital loss. This has been achieved by substantial actively managed diversification across different geographies, strategies and funds. From inception to the end of June 2013 the Company’s NAV grew at an annual average rate of 5.36% with annualised volatility of only 3.75% and a Sharpe Ratio of 1.31. NAV has grown in every calendar year since launch in 2008. Nevertheless, many facets of the financial world have changed since launch and it is right that, five years on, the Board should, in tandem with Brevan Howard and advisers, review the Company’s position in relation to shareholders’ expectations. In addition all companies, and yours is no exception, need to keep a beady eye on costs.
In an environment where economic growth in many developed countries looks to continue to be significantly slower than most electorates have grown used to over their lifetimes, it is my view that investors will have to learn to live with materially lower returns than in the past. If correct in that view, many investors and governments will find that their assumptions for asset and economic growth were overly optimistic and the problems resulting from that over-optimism may prove very difficult both at entity level – for example Detroit – and at political level – witness the troubles of several European governments in trying to implement austerity programmes whilst simultaneously avoiding being ejected from office.
Many of the developed world’s economic problems have not yet been resolved. The process of containing, let alone reducing, levels of the debts and other liabilities of many governments – often carried off balance sheet in the manner that banks were so criticised for before the crunch – remains a monumental task in an era of lower growth. Electorates are comprised of human beings and only ascetics would really relish the thought of forced removal of that which many people feel they have become entitled to. Political uncertainties look set to continue.
As the Manager’s Report records, uncertainty will create trading opportunities and the experience of Brevan Howard, combined with tight risk controls, should allow those uncertainties to create opportunity to generate further NAV growth with low volatility for the Company.
As always I welcome shareholders’ comments and can be contacted though the Company’s Administrator, Northern Trust International Fund Administration Services (Guernsey) Limited, at Guernsey_Client_Services@ntrs.com.
Sir Michael Bunbury Chairman21 August 2013
Brevan Howard Global performance review
The Company posted a small positive gain in the first half of the year. Strong gains came from Brevan Howard Global’s investments in Asia and credit strategies however these were largely offset by losses in emerging markets strategies. The other strategies in Brevan Howard Global’s fund combined portfolio were largely flat over the reporting period.
During the months of January to April, the Company began well with net asset value (“NAV”) returns of just under 4% across all share classes as at the end of April, with a number of the underlying funds posting fairly strong gains. However, May and June proved to be a challenging period for most of the underlying funds and the Company’s NAV depreciated approximately 2.5% to end the half year up between 1 to 1.5% across the share classes. During May and June global bond markets came under significant pressure and sold-off substantially taking emerging markets with them, across each of the fixed income, FX and equity asset classes. These large moves across multiple asset classes negatively impacted a few of Brevan Howard Global’s larger risk exposures through underlying funds, in particular a long tilt across emerging market assets, a long tilt in European rates and a long tilt in equities, mainly Japanese.
Brevan Howard allocation review
Over the period January to June, the Investment Committee (“IC”) made minor adjustments to Brevan Howard Global’s target portfolio. The allocations to each of BHEMS, BHST and BHCS were reduced. An initial reduction in BHM’s target allocation in January was reversed over the period reflecting the increased perceived macro opportunity set. In June, the IC approved switching BHEML allocation into the Brevan Howard Emerging Markets Local Fixed Income Leveraged Master Fund Limited, a twice leveraged version of BHEML, that carries out active leveraged trading and investment predominantly in global emerging markets. The IC continues to review the concentration and diversification within BHGO’s portfolio and will look to adjust weights and allocations to underlying funds in order to improve risk-adjusted performance.
Brevan Howard commentary and outlook
2013 started off on a positive note for risk assets as markets responded to generally improving data in developed markets, particularly in the US, as well as greater policy accommodation from Japan.
Over May-June, both of these underpinnings came into question as the US Federal Reserve (the Fed) indicated it might begin tapering its quantitative easing policy later in the year and as the market increasingly questioned whether the policy accommodation in Japan would in fact be able to drive economic recovery there. As is often the case at such inflection points, intra?market correlations increased as market participants moved to exit positions.
That said, over the past few months there appears to have been a noticeable improvement in developed market economies, although emerging markets in general are lagging. In the US, in spite of GDP growth averaging a somewhat disappointing 1.4%
(annual rate), US job gains have averaged 200,000 per month over the past 6 months and the unemployment rate has declined by half a percentage point to 7.4%. Furthermore, forward looking indicators released in July suggest an improvement in the second half of the year. As a result of these improvements, it is likely that the Fed will shortly follow through with the tapering of its asset purchases.
The euro area has also seen a moderate improvement over the past few months, in particular in the survey data. In July, the Composite PMI for the euro area posted its fourth consecutive monthly rise, now standing above the 50-point watermark for the first time since January 2012. The southern European countries, including France, have accounted for most of the improvement, while the northern European countries have only seen modestly better survey data, albeit from a higher level. After six consecutive quarters of declines, real GDP in the euro area will likely expand moderately in the second quarter. Political risk remains however, with the recent resignations of two key ministers in Portugal and the Spanish government becoming increasingly entangled in the Barcenas corruption scandal.
It also appears that central banks are again becoming increasingly active while policy becomes increasingly differentiated. The Fed’s “exit” is likely to be a key factor influencing markets globally for a significant time to come, while in Japan the success and evolution of Prime Minister Abe’s major expansionary policy will also be key.
In Europe and the UK policy makers have recently been pushing their own boundaries with new forms of forward guidance on policy rates.
This pick up in central bank activity combined with an increasingly multi-speed global economy should make for an interesting environment, rich in both risk and opportunity going forward. The Manager remains confident in the Company’s ability to profit from both tactical and more structural macro trading activity in this dynamic trading environment.
Brevan Howard wishes to thank shareholders once again for their continued support.
Brevan Howard Capital Management, LP,
acting by its sole general partner,
Brevan Howard Capital Management Limited
21 August 2013