The Warburton Global Fund delivers a monthly return of +10.6% and an annualised return since inception of +71.0%

KEY TAKEAWAYS:

Series 1 units of the Warburton Global Fund gained 10.6% in January 2018. The value of $1 invested since inception is $2.67.

January was a mixed month for the global financial markets. Equity indexes registered large gains around the world. Government bonds were down noticeably. The US yield curve steepened, as US Treasuries lost value at both shorter and longer maturities. Commodity prices continued to move higher. Precious and industrial metals gained solidly in price. Oil prices rallied strongly. Prices of “battery” metals rose rapidly, with nickel up 7%, cobalt up 6% and vanadium up 34%. The AUD appreciated substantially versus the USD.

The Warburton Global Fund generated another strong month of performance. Both our quantitative portfolios had an outstanding month. Our continued strategy of investing across a widely diversified spectrum of uncorrelated return streams has been extremely consistent and has resulted in a run of 10 consecutive months of positive returns. In the discretionary portfolio, the fund generated great gains from a short position in US 2-year Treasury bond futures. As inflation expectations continued to rise, yields on the US 2-year Treasury bonds ripped 25 basis points higher over the month, as the market went from pricing in two Fed rate hikes, to three Fed rate hikes in 2018.

In January, the CAPE (Cyclically Adjusted P/E) ratio of the US equity market rose to 33.8. This is more than double the average CAPE Ratio and is higher than at any other period in history, except for the late 1990s tech boom. US equity valuations are high but when asking the question as to whether a bear market is imminent, the answer is less than intuitive. Historically, we have seen bear markets after extremely high valuations (1929, 1998 and 2000) and extremely low valuations (1932, 1948, 1976, and 1980). Valuations, in isolation, are not the be-all and end-all for timing a bear market.

What we do know is that the current extreme valuations are being driven by the central bank policy of maintaining negative real interest rates in what is now the 9th year of a global economic expansion. With inflation increasing in all the developed countries that are maintaining easy monetary policies, the evidence of reflation will likely bring an end to such policies. As we concluded in our previous monthly report, we believe that we are at an inflection point in global monetary policy. Such a regime change will affect the pricing of all major global asset classes.

Aligned with our views on monetary policy and higher inflation, we have been focussing on the best ways to gain exposure to commodities, which generally outperform during this period of the economic cycle. The move towards cleaner and more sustainable electric technology has become a major global macroeconomic theme. It has been driven by Chinese-led global policies to combat pollution and also the first-mover initiatives of world-changing entrepreneurs. To date, most of the attention has been on Elon Musk. Via his company Tesla, Musk has provided the catalyst for most major car companies to pursue plans to produce lithium battery powered vehicles. This has driven demand for the commodities of lithium, cobalt and nickel.

Whilst the focus has been on Musk, another charismatic billionaire, Robert Friedland, has recently undertaken a first-mover initiative in rolling-out large-scale vanadium redox-flow batteries in China. Whilst lithium batteries are relatively small, self-contained devices suitable for electric vehicles, vanadium redox-flow batteries store their energy in tanks, making them much easier to build at scale for industrial usage. As a source of clean, sustainable electricity grid-power for both China and the world, Friedland believes that vanadium redox-flow batteries will revolutionize modern electricity grids in the way that lithium batteries are enabling the global transition to electric vehicles. We intend to accumulate an exposure to vanadium in February.