VT Chelsea Managed Fund Range — The case for the defence (stocks), June 2024

Launched on 5 June 2017 by Chelsea Financial Services, the four VT Chelsea Managed Funds are now celebrating their seventh anniversary. Each of the four portfolios has a different client profile (Cautious, Balanced, Aggressive and Income) and they invest in different markets and assets via funds and investment trusts.

Darius McDermott, one of the investment advisers to the VT Chelsea Managed Fund range, gives his view on markets and fund positioning.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and, if you are unsure of anything please contact an expert adviser.

They say the best things in life are worth waiting for - but in reality it is never that easy! The first half of 2024 has been trying for investors from a macroeconomic perspective, despite most markets producing a positive return.

The global economy has been dominated by two major themes – monetary policy and growing geopolitical unrest. The former holds major sway on markets as we await a clear path on potential interest rate cuts.

This challenge is furthered by central banks not being completely reliable, as evidenced by the US Federal Reserve U-turn in December 2023 (when it announced it was looking at scaling back its policy tightening/rate-hiking approach). We expected rate cuts in the first quarter of this year, we are now at the back end of the second quarter, with no more clarity on when this will start.

Like it or not – inflation has been stickier the other side of the Atlantic. At the start of the year the US Federal Reserve was pricing in seven rate cuts in 2024 – I expect we may see one or two at best now. Closer to home inflation has fallen in line with expectations, with Europe expected to cut interest rates soon, while the UK is likely to hold out a little longer because of the General Election on July 4. But I’d stress this is as of writing, rate cuts are expected but not guaranteed.

Meanwhile geopolitical tensions continue to rise. Russia’s invasion of the Ukraine shows no signs of coming to an end, while recent tensions between Israel and Iran saw the oil spike before settling down. Shipping costs have also escalated due to the attacks in the Red Sea – forcing some of the world’s largest shipping companies to suspend Red Sea routes and redirect their vessels. Going the long-way round clearly has time and cost implications – making oil something of a hedge against growing uncertainty.

Defence, energy and bond proxies offer balance to VT funds

One of the changes we’ve made to counteract the geopolitical uncertainty has been the purchase of the Future of Defence ETF in our portfolios – this offers investors exposure to the companies generating revenue from NATO and NATO+ ally defence and cyber defence spending. Global military spending is rising. In 2022, $2.2 trillion was spent on defence — the highest level ever recorded*. That number is likely to rise should Donald Trump return to the White House in November (which he is currently favourite to do). Trump is expected to mandate other NATO countries to spend at least 2% of GDP on defence, a further boon to what could be a strong theme over the next 2-3 years.

We’ve also looked to tap into the strong commodities rally in 2024 by adding the BlackRock World Mining Trust. Demand for the likes of copper has reached record highs (it has risen over 20% since mid-February 2024**). The energy transition to a lower carbon world cannot happen without an increased use of metals – the likes of electric vehicles are dependent on this (all electrification needs mining). We also need to consider the importance of metals for the likes of artificial intelligence (AI). AI can’t commoditise commodities and if you want more AI you need more data centres (computing power) and that requires more commodities.

Many of our changes in reaction to potential rate cuts took place a little earlier in 2024. There has been a lot of discussion about the opportunity within fixed income. The potential rate cuts would have opened the door for capital appreciation – but we wait for cuts to take place.

What impact does this have for corporate bonds? Well the performance of corporate bonds has two main influences: the government bond yield and the credit spread. The more credit risk in a bond, the more important the macroeconomic environment, while the value of investment grade corporate bonds, which have less credit risk, will be more influenced by the government bond yield.
For the past 12 months, credit spreads have been reasonably stable. They have continued to tick marginally lower in 2024 as it has become increasingly clear that the major economies will experience a soft landing (avoid a deep recession).

Specialist investment trusts remain an attraction as does UK PLC

While the tightening of credit spreads has not resulted in us reducing our bond exposure, we have looked to specialist investment trusts as an alternative bond proxy. Examples include GCP, a debt investment trust which lends and Assura, a specialist property company that buys GP surgeries. Not only do they offer an alternative route to bonds, but we can access these investment trusts at attractive discounts. This is something we continue to do across the portfolios - there are a lot of specialist trusts out there at distressed levels. We are familiar with them, have owned them in the past and find them attractive at these prices.

As for equities, the main changes to our fund range have seen us top-up our value strategies in the portfolios as well bolstering our UK exposure, particularly in unloved smaller companies. Interest is starting to grow, highlighted by the increased mergers & acquisitions we are seeing from private equity businesses. The UK has had a small recovery but is still incredibly cheap when compared with the US. We’ve added Artemis UK Select and to an existing position in WS Montanaro UK Income, which focuses on small and medium-sized businesses.

I’d say we are nicely balanced, as we are not positioned for disaster but are taking advantage of attractive income levels on offer while we play the waiting game. We are not swinging the bat massively when we are thinking of making changes, but we do believe there is definitely the potential for a positive re-rating in some of our investment trusts if the market gets the sniff of a cut in interest rates. By contrast, our rising exposure to energy and defence stocks helps manage any downside risk.

I’d like to finish by thanking all of our clients for their continued support across the VT Managed Range.

Performance since launch

As the funds mark their seventh anniversary, performance has been rewarding.

Since launch, the VT Chelsea Managed Monthly Income fund is the second best-performing fund in a peer group of 189, having returned 47.96%*** compared with 19.61%*** for the average fund in the IA Mixed Investment 20-60% Shares sector.

The VT Chelsea Managed Cautious Growth fund, which is compared with the same sector, has returned 31.46% and is the 13th best performing fund***.

Strong performance has also been shown by the VT Chelsea Managed Balanced Growth fund, which sits in the IA Mixed Investments 40-85% Shares sector. This fund has returned 47.78%*** compared with a sector average of 33.62%*** and is 27th out of 222 funds.

The VT Chelsea Managed Aggressive Growth fund, which is now in the IA Flexible sector, has also had strong performance. The fund has returned 62.62% compared to the sector average of 37.79%.
This places the fund 11th out of 105 funds.***

You can find out more about the VT Chelsea Managed funds here.

*Source: hanetf, 3 June 2024
**Source: Credendo, 27 May 2024
***Source: FE Analytics, total returns in pounds sterling, 5 June 2017 to 3 June 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.

Valu-Trac Investment Management Limited is the authorised corporate director (ACD) and investment manager of the VT Chelsea Managed Funds. Valu-Trac is authorised and regulated by the Financial Conduct Authority (FCA). Valu-Trac’s FCA registration is 145168. Chelsea Portfolio Management Services Limited is the investment adviser for the VT Chelsea Managed Funds.