Differentiated proposition made yet more attractive by a 11% discount: BH Macro

BHMG’s differentiated proposition is made yet more attractive given the 11% discount to NAV…by William Heathcoat Amory

Overview

 
Brevan Howard was founded in 2002 with the flagship Master Fund launching the following year. The fund is now coming up to its 21st anniversary. As a firm, Brevan Howard retains its place amongst the top hedge fund managers of all time. Whilst many commentators bemoan the choice of interesting companies on the London Stock Exchange, UK investors may consider themselves fortunate to have in BH Macro (BHMG) a highly liquid access point to one of the foremost hedge funds. Since IPO in March 2007, BHMG has delivered equity-like NAV total returns of 8.8% (to end December 2023) with significantly lower volatility than equities of 8%.

The Master Fund aims to provide compelling, asymmetric returns for investors, irrespective of market conditions. As we discuss in the Portfolio section, the investment process does not rely on correctly anticipating the future path of equity or bond markets, but instead rests on the team constructing trades that, if they are successful, will generate good returns in proportion to the risk taken. The bulk of the capital within the Master Fund is allocated to c. 10 to 15 senior traders. All investment activity is overseen by a highly resourced risk management team of 36 people, who work closely with the PMs. The risk team monitor the individual portfolio managers’ mandates as well as the overall risk being expressed within the fund.

Brevan Howard attributes the source of its returns to having strong macro traders, the excellence of their in-house economic analysis, and also their risk-management skills. Brevan Howard sees risk management as key to everything it does. Risk management came to the fore during March 2023, which saw the fund negatively impacted by a huge reversal in interest rate expectations. As we discuss in the Performance section, the SVB bankruptcy saw the biggest daily move in two-year interest rates since 1983. The risk management team did an excellent job to eliminate these loss-making directional positions within two days.
 

Analyst’s View

 
At its core, BHMG’s underlying strategy has delivered a consistent pattern of returns. The NAV has no appreciable correlation to equities or bonds and, aside from having delivered strong total returns over the years, BHMG has tended to deliver positive returns when equity markets struggle. In the 20 worst months for the S&P 500 index since 2007, BHMG has delivered positive NAV returns in all but two of them. The average performance in these months has been a positive 3.4%. BHMG therefore potentially acts as a good counterweight to equity risk in portfolios, and could materially add to portfolio diversification. A final attraction for investors, in our view, is the stability of the NAV. This is very much by design, and is a product of the inbuilt diversification within the fund, the way that trades are constructed, and not to mention the risk management process.

BHMG’s shares were trading on a premium of 10%+ this time last year, on the back of a strong 2022 when sterling NAV returns were 21.9%. The current discount of 11% can, in our view, be directly attributed to the disappointing performance of 2023, as well as (so far unfounded) fears that the merger of BHMG’s two largest shareholders will result in an overhang of stock . That said, discounts across the investment-trust sector have also moved wider, and so BHMG shareholders are not alone in sharing this pain. The board has been buying shares back around the 10% level, so long-term investors who value the unique, diversifying properties of BHMG may see the current discount to NAV as an opportunity. In our view, BHMG continues to represent a high-quality proposition, with impressive risk-adjusted returns delivered over nearly 17 years, a large and liquid asset base, as well as having an experienced and independent board to represent shareholders.

Bull

• Highly differentiated investment proposition, with few easily accessible comparable peers
• Diversifier to equities and bonds – strongest performance has, historically, come at periods of market stress
• High quality characteristics, with long and consistent track record, a large and liquid asset base, and experienced independent board

Bear

• Opaque underlying positioning
• Can go through periods of relatively lacklustre returns
• Higher fees than traditional funds and trusts

 
Read the latest research on BH Macro here >
 

 
_{Disclosure – Non-Independent Marketing Communication
 
This is a non-independent marketing communication commissioned by BH Macro. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}