In June the fund returned 4%, led by South Korea, Brazil and Greece. The second quarter dividend was GBP0.27555 making a 12m trailing yield of 5.7% which is a yield spread of 210bp over UK inflation.
As we close an eventful first half, the scores on the doors show some very interesting juxtapositions. The worst first half for the US dollar (-11%) since 1973, the best for gold (+26%) since 1979 and the best for ACWI ex-US equities (+16%) since 1993. The tariff tantrum of April now looks like a sneeze with the fund rallying 12.9% from the lows and closing the first half at a new all-time high.
Whilst the ebb and flow of tariff issues will now continue until August, the modus operandi of ‘escalate to de-escalate’ will have a fading impact on markets. A few years ago, we started highlighting a trend in the emerging world we phrased as ‘Rebalancing’ – trade and market focus moving away from being myopically focused on China towards a more heterogenous asset class. It appears this trend has now clearly gone global, and investors are increasingly looking to diversify their exposure away from the US.
With cautious positioning in the first half, little pressure coming from imported goods in the US and a more benign inflation than the orthodoxy feared, it seems probable that rates are likely to start coming down. The weaker US dollar, passage of the ‘One Big Beautiful Bill Act’ and in the continued absence of a Treasury bond revolt (also mitigated by the stablecoin bill) sets a positive tone for equities through the rest of the summer. Although EM markets have had good momentum, valuations are not stretched.
One such market has been South Korea which was mentioned in last month’s commentary following the election of President Lee on the 3rd June. We now have a planetary alignment we’ve been waiting to see for decades. A new president whose party holds a comfortable majority, and together with parts of the opposition are all on-side for significant legislative reforms designed to transform the market from a value trap, to a long-term compounder.
His election campaign featured ‘Kospi 5000’ which at the time represented a doubling of the index, by addressing weak shareholder rights and low dividend payouts. The market has taken him at his word and in two months has rallied 20%, having wasted no time in pushing forward on this agenda. There’s now even a ‘Kospi 5000’ committee, which unlike most committees, is actually doing something.
These are interesting times with some significant tectonic changes gathering pace across Asia, South Africa and Argentina. We have been re-allocating within the portfolio accordingly, which has also been prompted by price performance reducing the running yield of the portfolio. In addition, a few of the higher yielding positions paying quarterly have been recycled into positions paying semi-annually, which should be reflected in higher third quarter dividends.
The other major event of June was that we celebrated the 3rd anniversary of the fund. Since inception the fund has generated an annualised return of … and 12m trailing real yield spreads of between 200-450bp over UK inflation. We very rarely discuss relative performance but compared to MSCI Emerging Markets the fund has outperformed by 31%, with around two thirds of the volatility (10.7%). However, probably more surprising is that at the end of the second quarter, it was only 3% behind the S&P.
