Performance by Asset Class Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by asset class as at 31 August 2018
| 2018 |
Rates |
FX |
Commodity |
Credit |
Equity |
Total |
| August 2018 |
0.92 |
0.21 |
-0.01 |
0.01 |
-0.23 |
0.90 |
| Q1 2018 |
0.93 |
-0.20 |
0.01 |
-0.06 |
-0.07 |
0.58 |
| Q2 2018 |
8.54 |
0.46 |
-0.02 |
0.02 |
-0.02 |
8.94 |
| QTD 2018 |
1.54 |
0.65 |
-0.06 |
-0.10 |
-0.22 |
1.82 |
| YTD 2018 |
11.24 |
0.90 |
-0.07 |
-0.13 |
-0.31 |
11.57 |
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Methodology and Definition of Contribution to Performance: Attribution by asset class is produced at the instrument level, with adjustments made based on risk estimates. The above asset classes are categorised as follows: “Rates”: interest rates markets
“FX”: FX forwards and options
“Commodity”: commodity futures and options
“Credit”: corporate and asset-backed indices, bonds and CDS “Equity”: equity markets including indices and other derivatives Performance by Strategy Group Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by strategy group as at 31 August 2018
| 2018 |
Macro |
Systematic |
Rates |
FX |
Equity |
Credit |
EMG |
Commodity |
Total |
| August 2018 |
-1.04 |
0.14 |
1.10 |
0.44 |
-0.00 |
0.01 |
0.25 |
-0.00 |
0.90 |
| Q1 2018 |
0.87 |
0.02 |
-0.46 |
-0.09 |
-0.00 |
-0.03 |
0.28 |
-0.00 |
0.58 |
| Q2 2018 |
4.29 |
0.05 |
2.91 |
0.34 |
-0.00 |
-0.06 |
1.33 |
-0.00 |
8.94 |
| QTD 2018 |
-1.02 |
0.06 |
1.81 |
0.48 |
-0.00 |
0.01 |
0.48 |
-0.00 |
1.82 |
| YTD 2018 |
4.13 |
0.13 |
4.29 |
0.72 |
-0.00 |
-0.07 |
2.09 |
-0.00 |
11.57 |
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Methodology and Definition of Contribution to Performance: Strategy Group attribution is approximate and has been derived by allocating each trader book in the Fund to a single category. In cases where a trader book has activity in more than one category, the most relevant category has been selected. The above strategies are categorised as follows: “Macro”: multi-asset global markets, mainly directional (for the Fund, the majority of risk in this category is in rates) “Systematic”: rules-based futures trading “Rates”: developed interest rates markets “FX”: global FX forwards and options “Equity”: global equity markets including indices and other derivatives “Credit”: corporate and asset-backed indices, bonds and CDS “EMG”: global emerging markets “Commodity”: liquid commodity futures and options The Manager anticipates that with effect from 1 October the Fund will continue to access the trading expertise of Fash Golchin (“FG”) via an initial allocation of approximately $300 million to a new fund, Brevan Howard FG Macro Master Fund Limited (the “FG Macro Fund”). The FG Macro Fund will also provide external investors with the opportunity to invest in a fund that is directly managed by FG, whilst giving FG the potential to manage additional external assets without the need to manage two pools of capital. Immediately following the Fund’s investment in the FG Macro Fund, it is anticipated that the Fund’s holdings in other Brevan Howard-managed funds will be approximately 75% of the Fund’s assets. The information in this section has been provided to BHM by BHCM US Economic momentum was well maintained in August. Employment rose briskly, the unemployment rate remained at 3.9%, and wages jumped by more than expected. Real GDP growth in Q3 was tracking somewhere above 3% at an annual rate, after having surged 4.2% in Q2. Consumption and investment are pacing solid growth, with wide swings in trade and inventories partly reflecting timing shifts related to the imposition of tariffs. The latest data on manufacturing point to vibrant activity. Although there are many anecdotes about how tariffs are disrupting supply chains and raising prices, there is almost no evidence of such disruptions at the macro level. Meanwhile, housing and automotive, two traditionally interest-rate sensitive sectors, are in the doldrums. Headline and core personal consumption expenditure (“PCE”) inflation over the last year were near 2% in July. After having moved up around the start of the year, inflation has settled into a channel close to the Federal Reserve’s (“Fed”) 2% target. Given the strength of the economy, the Fed is expected to deliver further gradual rates hikes in September and December. Beyond that, the roadmap is less clear. In his Jackson Hole speech, Chairman Powell emphasised the degree of uncertainty about some of the key markers for policy makers, like the neutral interest rate. Instead of following an approach guided by abstract economic theory, Chairman Powell appears to be more comfortable taking an empirical approach rooted in ‘risk management’. He will likely feel his way forward based on how the economy performs, given all the cross-currents. Elsewhere in Washington, trade policy took two different tracks, marked by constructive negotiations with Mexico and Canada that suggest a new agreement on the North American Free Trade Agreement (“NAFTA”) is likely, and the ratcheting up of tariffs on China. UK After having shrugged off the predominantly weather induced slow-down at the start of the year, economic activity has returned to its earlier moderate pace. However, the uncertainty around Brexit as well as the moderation of activity in Europe may pose some challenges. According to the Office of National Statistics, the economy grew 0.6% 3m/3m in July, still supported by robust growth within the services sector (contributing 0.45ppts). There was also a rebound in construction activity, which contributed around 0.2ppts, after having detracted 0.2ppts previously. Meanwhile, industrial output has continued to act as a modest drag with manufacturing little changed over the past three months. Currently, GDP is expected to grow at 0.5% q/q in Q3, up slightly from the 0.4% seen in Q2. Looking ahead, business sentiment within manufacturing has moderated further, reflecting both a slow-down in activity in Europe, as well as increased uncertainty around the prospects of a no-deal Brexit. Surveys for manufacturing export orders have experienced the largest single month decline since 2011, and point to a contraction in manufacturing export orders. Business sentiment for the services industry (which accounts for 80% of the economy) continues to move sideways. Should business sentiment continue to hold, GDP is expected to continue to grow at an average pace of around 0.4% q/q, enough to absorb the little remaining slack in the economy. Meanwhile, the unemployment rate continues to hit new multi-decade lows, reaching 4.0% in June, the lowest rate since 1975. Robust employment should support consumption; for example retail sales have grown 3.7% y/y in July, up from the lows of 1% last year. However, the softness in the housing market may still act as a drag; although house price growth remains positive at the national level, activity indicators remain modest. Moreover, tighter conditions around consumer lending may also act as a headwind to consumption. Overall, the tightness in the labour market should continue to put upward pressure on wage growth. Excluding bonuses, wage growth is averaging a pace of 2.9% 3m/12m, remaining near post-crisis highs. Wage pressure should in turn cause inflation to pick up; headline inflation rose 0.1ppts to 2.5% y/y in July, whilst core inflation was unchanged at 1.9%. The combination of moderate activity, a tight labour market, and gradually building wage pressure has impacted the Bank of England’s projection of inflation, which remains above 2% for most of the projection horizon. It was in this light that the Monetary Policy Committee (“MPC”) voted unanimously to raise the official bank rate 0.25ppts to 0.75% in August. Following this, the MPC voted to keep the policy rate unchanged at the September meeting. On the one hand, the minutes had highlighted the further improvements made in the labour market. However, it also highlighted the increased concern among businesses around the prospects of a ‘no-deal’ Brexit, as well as the moderation in external growth. The key message from the MPC’s statement was left broadly unchanged: “were the economy to continue to develop broadly in line with [the Bank’s] Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.” Of course, the state of the Brexit negotiations remains a key risk to the economic outlook. According to the latest White Paper, the UK aims to achieve a post-Brexit “association agreement” with the EU, including a “free-trade area” for goods and a looser arrangement for financial services. With regards to timing, both the UK and the EU are still hoping to have a deal in October. However, this is looking increasingly unlikely as there are more and more headlines suggesting the possibility of an emergency EU summit meeting in November. EMU EMU economic indicators suggest a rate of expansion which remained sluggish in Q3, and a pace not dissimilar from the one recorded in the first half of the year. In particular, in July industrial production, excluding construction, fell by a larger than expected 0.8% m/m, to a level which is 0.8 points lower than in Q2, and points to a contraction of manufacturing output in the current quarter. The contraction is partly due to a meaningful drop of the production of automobiles, a sector affected by changes in regulation, more pronounced in Germany, Italy and Spain. In August evidence from business surveys showed some tentative indications of bottoming out, with the EMU Composite Purchasing Managers' Index (“PMI”) rising by 0.1 point, but only to a level lower than the Q2 average, which is consistent with the subdued rhythm of GDP expansion. The headline Harmonised Index of Consumer Prices (“HICP”) fell from 2.14% y/y to 2.04% y/y. Core inflation also fell from 1.07% y/y to 0.96% y/y, a 5 month low, and to a level quite troubling from the European Central Bank’s (“ECB”) perspective, currently showing no sign of convergence towards its definition of price stability. Despite relatively dismal macroeconomic developments, both on the growth and the price side, the ECB revised its projections for GDP and core inflation only slightly downward, and the Governing Council seemed to remain confident that underlying activity and inflation trends were moving along a self-sustained process towards the ECB threshold. This optimistic reading of the economy appears to have been motivated by the ECB’s intention to proceed with the pre-announced reduction of the pace of monthly net purchases of bonds, from €30bn to €15bn from October to December, and the conditional end from January 2019 onward. The bar to stop this process appears quite high. Next year the fine tuning of monetary policy will likely depend solely on the decision concerning interest rates and their forward guidance. Japan The recent Bank of Japan (“BoJ”) meeting was a non-event, with policy and guidance unchanged. The BoJ is still evaluating the fallout from widening the bands in which it will allow the 10 year rate to trade, from ±10bps to ±20bps. The 10 year rate moved up a bit and is now running a few bps above the previous range at around 0.12%. After depreciating somewhat against the dollar over the spring, the yen appears to have stabilized in the 111-112 range. Dialogue also revolved around a couple of topics outside of underlying trends in demand, and beyond direct control of the bank. Tariff uncertainty appears to be a concern to the BoJ, Japanese businesses and consumers. There are some hints that President Trump may direct some pressure towards Japan in order to bring them to bilateral talks. A multilateral agreement is unlikely; the best case scenario for Japan is likely some combination of talks and US bandwidth taken up elsewhere. Japan is also affected by tensions between the US and China. On the one hand, there are reports that Japanese companies are shifting some production home to avoid US tariffs. On the other hand, supply-chain disruptions likely will lead to some minor hiccups for producers. The typhoon that struck Osaka and the earthquake in northern Japan are likely to affect some high-frequency data and hamper the tourism industry but have no tangible long-lasting impact. Recent activity data have been mixed, but overall do not change the view of a decent pace of demand. Q2 real GDP was revised up, to show a 3% gain at an annual rate. Solid contributions came from household consumption and business capital fixed capital formation. Arithmetically, the second quarter would have been stronger had imports not climbed as much. That is not necessarily a sign of weakness though; strong domestic demand typically leads to some additional imports. The Economy Watchers survey improved 2.1 points in August. At 48.7, it is at a reasonable level, though down from the end of last year. Industrial production slipped 0.2% in July. It has bounced around recently without any real direction. Inflation data has improved a bit of late, not sufficiently to allow the BoJ to declare victory, but it is improving. National western core prices edged up 0.1% in July, which reverses the previous month’s decline. More importantly, Tokyo core-core prices rose 0.2% in August after rising 0.1% in both June and July. The Company Secretary
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