Brevan Howard Global’s monthly shareholder report published April 2014.
Brevan Howard Global: Monthly Commentary
The NAV per share of Brevan Howard Global’s (BHG) USD shares depreciated by 0.45% and the NAV per share of GBP and EUR share classes depreciated by 0.30% and 0.51% respectively in April. The outperformance of the GBP and USD share classes can be attributed to share buy-backs.
There were positive returns from credit and commodities strategies, which did not offset the losses experienced in the other Underlying Funds.
The Investment Committee did not make any target allocation changes or portfolio adjustments in April.
Monthly Performance of Underlying Funds
Brevan Howard Master Fund Limited (“BHMF”)
The NAV per share of BHMF Class Y USD Shares depreciated by 1.07% (net of fees) in April.
During April, BHMF suffered some losses in USD interest rate trading, in equity macro trading and in FX trading. These losses were partially offset by small gains in EUR interest rate trading and credit trading.
Brevan Howard Asia Master Fund Limited (“BHA”)
The NAV per share of BHA Class X USD Shares depreciated by 0.66% (net of fees) in April.
During the month, BHA incurred losses across all strategies with the exception of gains in Chinese FX trading.
Brevan Howard Emerging Markets Strategies Master Fund Limited (“BHEMS”)
In February 2014, the board of directors of BHEMS determined to return investors’ capital. 98% of capital has been returned, with the balance due to be returned to investors (including BHGO) in Q2 2014.
Brevan Howard Credit Catalysts Master Fund Limited (“BHCC”)
The NAV per Share of BHCC Class Y USD Shares appreciated by 1.54% (net of fees) in April.
Contributions from ABS/MBS and corporate strategies were both positive on the month. Mortgage- and asset-backed positions contributed approximately 75% of monthly performance, driven by several catalysts, as well as generally positive performance in the asset-backed market.
Brevan Howard Commodities Strategies Master Fund Limited (“BHCS”)
The NAV per Share of BHCS Class X USD Shares appreciated by 0.34% (net of fees) in April.
In April, BHCS generated positive returns. Gains in base and precious metals and natural gas strategies outweighed losses in oil and, to a lesser extent, agriculture.
Brevan Howard Systematic Trading Master Fund Limited (“BHST”)
The NAV per Share of BHST Class B USD Shares depreciated by 0.69% (net of fees) in April.
During the month, BHST made gains in bond futures, metals and agricultural commodity futures trading. However these were offset by losses in all other strategies.
Brevan Howard Emerging Markets Local Fixed Income Leveraged Master Fund Limited (“BEL”)
The NAV per Share of BEL Class Y USD Shares depreciated by 0.15% (net of fees) in April.
During April, the net exposure to emerging market currencies continued to be significantly long. The net exposure to emerging market interest rates remained modestly long. The foreign exchange positions incurred losses. The interest rate positions made small gains.
Brevan Howard Credit Value Master Fund Limited (“BHCV”)
The NAV per Share of BHCV Class Y USD Shares appreciated by 0.75% (net of fees) in April.
The majority of April returns came from mortgage- and asset-backed positions. Commercial mortgage-backed positions, European-based investments and US RMBS (in particular second lien positions) all performed well over the month. Corporate holdings’ contributions to returns were muted, though positive.
Brevan Howard: Market Commentary
Employment rose at a brisk pace in April, making up for the weak numbers seen during the unusually harsh winter. At the same time, the unemployment rate dropped four tenths of a percentage point to 6.3%, the kind of monthly decline seen in only a handful of instances in the last 50 years. It seems likely the unemployment rate will fall below the psychologically important 6% rate by the end of the year. To be sure, some of the lustre of the April drop was tarnished by the fact that the participation rate fell by the same amount and average hourly earnings were flat.
Growth stalled in the first quarter and eventually might be revised into negative territory. However, the early indicators about the current quarter are positive, as the economy bounces back from the mostly temporary weather-related disruptions. Motor vehicle sales have been strong even though retail sales have been choppy. Indicators of business spending have picked up. Finally, inventories appear to be better aligned with final demand, a development that sets the stage for healthy gains in production going forward.
Inflation remains soft. Both headline and core price inflation are a little above 1%. There are tentative signs of a bottom at these low rates of inflation but no indication of any strong upward momentum.
With the mixed signals from the data – a solid labour market against weak wage and price inflation – the Federal Reserve seems content to stick with its game plan to end QE this fall and raise rates sometime in the second half of next year.
According to Eurostat’s flash estimate, euro area HICP inflation recovered to 0.7% y/y in April from 0.5% y/y in March, less than initially expected. The rise in headline inflation in April was mainly driven by an Easter-induced rebound in core inflation and an acceleration of energy prices. Food prices continued to decelerate. Core inflation moved up to 1.0% y/y in April from 0.7% y/y in March. The rebound in services inflation was mainly driven by the late timing of the Easter holidays this year, while prices of non-energy industrial goods continued to decelerate in March. In April while the EMU Composite PMI climbed to its highest level since May 2011, March industrial production figures surprised to the downside showing a meaningful monthly fall and a loss of momentum towards the second quarter. The positive news is that the recovery in the periphery countries’ labour markets continues. In April, the unemployment count fell in Spain almost by twice as much as expected by the consensus and showed a further decline in Portugal and Greece. The ECB Governing Council left interest rates unchanged at the May meeting but, as a response to the weak inflation data, signalled an upcoming easing of monetary policy in June. The Governing Council Members have also stepped up their rhetoric on the strong euro, calling the strengthening of the exchange rate in the context of low inflation a cause for serious concern. While the exchange rate is not a policy target for the ECB, it remains a very important indicator of price stability and for growth.
The UK activity data remains resilient, and shows no sign of slowing from the pace seen in recent quarters. Activity indicators over the past month actually ticked up again after some months of being stable. Consumer confidence has risen back to pre-crisis levels, retail sales growth has continued to be robust, as have car sales. House prices continue to rise at around a 10% annualised pace, and gains have become more broad-based geographically. Unemployment claims data point to ongoing improvement in the labour market, consistent with above-trend growth and a reduction in economic slack. The composition of growth has become better balanced, which reduces the risk that it will fall back sharply. The initial growth pick-up relied heavily on housing and consumption. Moreover, that consumption acceleration was largely financed with a reduction in savings, as real incomes remained broadly stagnant. But more recent data show better balanced growth in two respects.
First, investment is making an increasing contribution to growth, and with investment intentions at cyclical highs, this strength looks set to continue at least in the near term. Second, with inflation falling further below target but some increase in wage inflation due to a stronger labour market, real household incomes are set to rise. These real income developments are likely to put consumption growth on a sounder footing for 2014. External rebalancing remains painfully slow, as this relies on eurozone demand improving by more than currently seems likely. Consumer price inflation remains benign and continues to surprise the Bank of England (“BoE”) mildly on the downside. We expect inflation to remain below target for the remainder of the year. Wage inflation, on the other hand, show further signs of improving from its recent lows. As the year progresses, we expect wage inflation to normalise further. The BoE has switched from unemployment-based forward guidance to more qualitative guidance now that the unemployment rate has fallen below 7%.
The Bank of Japan (“BoJ”) board members marked down their forecast for 2014 GDP growth but left its expectations for inflation unchanged on balance with a somewhat narrower spread. The BoJ sees inflation progressing in line with expectations and evinces no anxieties over the recent trend in prices. That outlook, however, does not appear to be supported by the latest data. Western core inflation for the country as a whole is not trending up. The latest seasonally adjusted index level (March) is the same as it was last November. Tokyo prices in April were pushed up by the consumption tax increase, but after adjusting for new taxes, the inflation data did not impress. There are no obvious factors to push non-food and energy inflation up further towards the BoJ’s 2% goal.
After coming off its high reached at the end of 2013, the dollar-yen rate is little changed on balance over the last three months. Consumer surveys of inflation expectations have not given up any ground won in the last year, but their upward march has stopped. The recent wage bargains are helpful but seem more likely to consolidate and ratify the previous pick-up in inflation rather than push it up further. The BoJ believes that the output gap is getting closer to levels indicating tightness, though the Cabinet Office’s official figures still show some slack. Regardless, the level of the gap and the speed at which slack is being taken up would not normally be expected to support a sharp acceleration in prices. The latest activity and survey data are contaminated by the effects of the consumption tax hike at the start of April and cannot clearly reflect the underlying state of the economy. Measures such as industrial production and retail sales increased through March and were likely pushed up by households and business buying in excess to take advantage of pre-tax-hike prices. Survey data, such as the Shoko-Chukin survey of small businesses and the consumer confidence survey, show a sharp drop as respondents anticipate a fallout from the tax increase.
China’s growth in the first quarter of 2014 was weak, with GDP showing a 5.7% q/q (annualised) increase. In April, available indications show signs that the domestic side of the economy is bottoming out. However, the recovery from the lows of the previous quarter looks for the time being quite shallow. Both the HSBC and the official manufacturing PMI improved, but only by a small margin from the below 50 threshold lows recorded in March. Releases of industrial production, retail sales and fixed assets investments all undershot expectations, which were already quite modest. Consistently, loans dynamics were below expectations too, showing that monetary policy is slowly reducing its support to the economy. Trade figures, instead, showed an improvement for both exports and imports, with the trade surplus rebounding from USD 7bn to USD 18bn. Inflation dynamics continued to moderate. In April, CPI slowed from 2.4% y/y to 1.8%, significantly below the market consensus. Half of the decline was due to a high base effect, while the other half was due to an unexpected decline in vegetable prices; core inflation remained in line with its historical averages. The PPI continued to deflate at a fast -2% y/y clip.
Brevan Howard: Risk Factors
Acquiring shares in BHG may expose an investor to a significant risk of losing all of the amount invested. Any person who is in any doubt about investing in BHG (and therefore the Underlying Funds) should consult an authorised person specialising in advising on such investments. Any person subscribing for shares in BHG must be able to bear the risks involved. These include, among others detailed in BHG’s Prospectus, the following:
- The Underlying Funds are speculative and involve substantial risk.
- The Underlying Funds will be leveraged and will engage in speculative investment practices that may increase the risk of investment loss. The Underlying Funds may invest in illiquid securities.
- Past results of each Underlying Fund’s investment manager(s) are not necessarily indicative of future performance of that Underlying Fund, and that Underlying Fund’s performance may be volatile.
- An investor could lose all or a substantial amount of his or her investment.
- An investment manager may have total investment and trading authority over an Underlying Fund and each Underlying Fund is dependent upon the services of its investment manager(s).
- Investments in the Underlying Funds are subject to restrictions on withdrawal or redemption and should be considered illiquid. There is no secondary market for investors’ interests in the Underlying Funds and none is expected to develop.
- There are restrictions on transferring interests in the Underlying Funds.
- The investment managers’ incentive compensation, fees and expenses may offset an Underlying Fund’s trading and investment profits.
- Each Underlying Fund is not required to provide periodic pricing or valuation information to investors with respect to individual investments.
- The Underlying Funds are not subject to the same regulatory requirements as mutual funds.
- A portion of the trades executed for the Underlying Funds may take place on foreign markets.
- The Underlying Funds are subject to conflicts of interest.
- Each Underlying Fund is dependent on the services of certain key personnel, and, were certain or all of them to become unavailable, an Underlying Fund may prematurely terminate.
- Each Underlying Fund’s managers will receive performance-based compensation. Such compensation may give such managers an incentive to make riskier investments than they otherwise would.
- An Underlying Fund may make investments in securities of issuers in emerging markets. Investment in emerging markets involve particular risks, such as less strict market regulation, increased likelihood of severe inflation, unstable currencies, war, expropriation of property, limitations on foreign investments, increased market volatility, less favourable or unstable tax provisions, illiquid markets and social and political upheaval.
The above summary risk factors do not purport to be a complete description of the relevant risks of an investment in shares in Brevan Howard Global and therefore reference should be had to Brevan Howard Global’s Prospectus and related offering documentation for a complete description of these and other relevant risks.