It has now been 18 months since we took on the Sentinel Navigator mandate in March 2022 and subsequently, just over one year since the launch of the SVS Aubrey Citadel Fund.
Our assets generally provide attractive yields, so our job is to limit the downside in difficult times, gain decent exposure to the upside in good times, all the while collecting income while we wait.
The previous 18 months have without a doubt, been a time to be defensive. Keeping in line with global events, our approach has equally kept us in the more defensive group, in line with our more defensive absolute-return fund peers, rather than taking a hit like less defensive multi-asset peers.
Citadel, however, is not an absolute return fund and so, when the turn comes, we hope to bounce more in line with the multi-asset funds. Well…that’s the plan anyway.
The chart below shows Sentinel Navigator’s performance since March 2022 as the earliest point of the Defensive Income Strategy. The SVS Aubrey Citadel Fund has performed in line with the Navigator mandate since its inception in September 2022.
At the moment it’s a pretty grim world. After a long period of growth resilience in the US, I believe we will begin to see the impact of higher and higher bond rates on economic growth, company earnings, and multiples. So, I don’t have much exposure to US equity assets, which still have not adjusted and look expensive as their profits are vulnerable to a slowing economy.
I think we are at or very close to the Fed Funds rate peak. However, an almost limitless supply of US treasury bonds will likely keep bond yields high until the pain inflicted outweighs the effect of over-supply, and bits start dropping off the economic engine.
Global conflict is becoming more established on multiple fronts, which I have been saying for a while now results from the end of “Pax Americana” and so is not a temporary phenomenon. This should at least be positive for Citadel’s defence stocks.
Over the last few months, the Fund has begun limited recycling into defensive assets with upside optionality, such as infrastructure funds. These should provide positive returns from the current, deeply discounted levels and some inflation protection going forwards. Given the unstable, high risk, low growth environment, with rolling stagflationary and recessionary overtones, further complicated by a misfiring China, it is fair to say that Goldilocks may prove hard to find. My aim remains to identify themes and companies that are well priced and can benefit, while maintaining a defensive tactical approach.
Citadel is coping in difficult markets, waiting but not dependent on, a turn to deliver positive returns, hedged for continuing wider difficulties and providing a low-cost exposure to liquid global assets, low US equity exposure and a focus on deep value assets with shorter-term catalysts. Hopefully so meeting our aim of providing a diversified and diversifying defensive portfolio with optional upside and high levels of income to ride out the ongoing storm.
Postscript: Asset allocation changes over the last quarter are illustrated in the chart below with the outside ring showing current weights:
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