Q1 Funds Update – January to March 2022
Quarterly markets review:
Russia’s invasion of Ukraine in late February caused a global shock. The grave human implications fed through into markets, with equities declining and bond yields rising. In the Chinese market, equities were negatively affected by renewed Covid-19 outbreaks, leading to new lockdowns in some major cities.
US stocks declined in Q1. Russia’s invasion of Ukraine drew widespread condemnation and elicited a range of strict sanctions from the US and its allies. President Biden targeted what he termed "the main artery of Russia's economy" by banning Russian oil imports. The average U.S. price of gasoline shot up 79 cents over the past two weeks to a record-setting $4.43 per gallon. The new price exceeds by 32 cents the prior all-time high of $4.11 set in the 2008 crisis. The invasion amplified existing concerns over inflation pressures, particularly through food and energy, although US economic data otherwise remained stable. The US unemployment rate dropped from 3.8% in February to 3.6% in March. Wages continue to rise, but have not yet matched the rate of headline inflation.
The annual US inflation rate, as measured by the consumer price index, hit 7.9% in February. The Federal Reserve (Fed) raised interest rates by 0.25%, with calls from within for more aggressive tightening. Further hikes are expected through the rest of 2022. Energy and utility companies were amongst the strongest performers in relative terms over the month, outperforming a falling market with modest gains. Technology, communication services and consumer discretionary were amongst the weakest sectors.
Eurozone shares fell sharply in the quarter. The region has close economic ties with Ukraine and Russia, otherwise known as Europe’s breadbaskets. The reliance on Russian energy commodities lead to a spike in energy prices and caused some fears about security of supply, driving countries from continental Europe to find alternative energy source. Over the quarter, energy was the only sector to register a positive return. The steepest declines came from the consumer discretionary and information technology sectors. Worries over consumer spending led to declines for stocks such as retailers, while the war in Ukraine also exacerbated supply chain disruption, hitting the availability of parts for a wide range of products. In response to rising inflation, the European Central Bank (ECB) outlined plans to end bond purchases by the end of September. Data showed annual eurozone inflation at 7.5% in March, up from 5.9% in February.
Financial markets were volatile over the quarter. There was a short-lived rotation toward safe haven assets as the war began, but investors appeared to focus overall on inflationary pressure that is high and still rising. Government bond yields rose sharply whilst bond prices and yields move in opposite directions. Central banks were surprisingly hawkish and markets priced in a faster pace of monetary normalisation. The extent of yield moves differed across markets. The US Treasury market is in the midst of one of its worst sell-offs on record, but moves were less pronounced in core Europe and the UK.
Merill Total Return Income Fund
Share Class 30/03/2022 31/12/2021
A1 Accumulator (EUR) 0.5406 0.5787
A2 Accumulator (EUR) 0.5003 N/A
Distributor (EUR) 0.4998 0.5362
As at 30 March 2022, the fund had €40.13 million in assets under management.
The adjustments were minor as compared to the prior quarter's asset allocation. Within the asset class split, however, we have completed a number of transactions. We have decreased our duration exposure in the sovereign and investment grade space by generating profits on long-term bonds and switching to short-term bonds or floating-rate notes. Due to the possible negative impact of the Ukraine incursion, we have reduced our European exposure and realized profits on the German equity market and relocated this to the US and Emerging Latin America.
Merill High Income Fund
Share Class 30/03/2022 31/12/2021
Accumulator (EUR) 0.5100 0.5381
I Distributor (EUR) 0.4362 0.4634
C Distributor Inc (EUR) 0.4649 0.4957
GBP Hedged Distributor (GBP) 0.4741 0.5034
As at 30 March 2022, the fund had €62.81 million in assets under management.
We continued to reduce interest rate risk this quarter by switching from investment grade bonds to high yield bonds with short maturities. In addition, a number of bonds were called during the quarter, and as a result, we received the principal and coupon sooner; the latter was invested in high yield with short duration exposure. We've kept a bigger cash allocation because of the Ukraine invasion and high inflation figures, so we can buffer any negative movements and take advantage of market opportunities as they emerge.
Merill Global Equity Income Fund
Share Class 30/03/2022 31/12/2021
Accumulator (EUR) 0.6131 0.6393
Distributor (EUR) 0.5941 0.6199
As at 30 March 2022, the fund had €21.24 million in assets under management.
The cash we had at the end of the year proved useful this quarter, as we were able to tap into certain equity holdings at much more attractive prices and better buffer the downturn caused by inflation and the invasion of Ukraine. We continued to add to specific equities in this quarter, primarily in large pharma, financials, and to a lesser extent information technology. Also, our cash position is still relatively high at this moment, which will be employed when company valuations become more appealing.
Merill Strategic Balanced Fund
Share Class 31/12/2021 30/09/2021
Accumulator (USD) 0.9916 1.0360
As at 30 March 2022, the fund had $28.76 million in assets under management.
We lowered our equity exposure in this quarter by realizing profits on several shares that had a significant gain or a sharp rise in the latter months of 2021. As a defensive measure and as an alternative to cash, the proceeds were invested in US Treasury bills. We consolidated gains on a number of low-yielding bonds and utilized the proceeds to invest in higher-yielding bonds. The latter adjustment was motivated by a desire to reduce interest rate risk.
This document is issued by Jesmond Mizzi Financial Advisors Limited (JMFA) as Managers of Merill SICAV plc. JMFA (IS30176) of 67, Level 3, South street, Valletta, VLT 1105 is licensed to conduct investment services business under the Investments Services Act by the MFSA of Triq l-Imdina, Zone 1, Central Business District, Birkirkara, Malta and is a member firm of the Malta Stock Exchange. Merill SICAV plc is incorporated and licenced as an open ended collective investment scheme, registered in Malta, qualifying as a Maltese UCITS with effect from the 16th October 2015. This document does not intend to give investment advice and the contents therein should not be construed as such. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this document. Past performance is no guide to future performance and the value of investments may fall as well as rise.