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26 April 2013
BACIT Limited (“BACIT”)
Portfolio Update
During the first quarter of 2013, BACIT’s net asset value (“NAV”) increased by 9.52%. The FTSE All-Share
(£) rose by 9.29% during that time, and the HFRI Fund of Funds Strategic Index by 10.99% (in £) and
3.83% (in US$). Since launch, BACIT’s NAV has increased by 12.69%, the FTSE All-Share by 11.78% and
the HFRI Fund of Funds Strategic Index 12.30% (£), and 5.77% (US$).
BACIT started the quarter with 77.8% of NAV invested, and ended it with 95.4% committed, of which
85.0% had been invested, across 27 underlying funds and 20 managers. During the quarter, we invested
in Chenavari European Real Estate Debt Strategy, to take advantage of the opportunities created by the
withdrawal of traditional banks from this area, in the face of higher capital requirements, we made the
Fund’s first private equity investment with the initial drawdown by M&G Infracapital II, and we
committed to Permira V.
Since the quarter end, Permira has announced the first close of Permira V, and we expect the first capital
call to follow in the coming weeks. We have also added to two existing holdings for 1 May, and are in the
process of concluding paperwork with a manager who is not currently on the roster. We expect BACIT
will be fully invested during the current quarter.
At 31 March 2013 the list of investments was as follows:
% of NAV
Capital Gearing Portfolio Dollar Fund
Maga Smaller Companies Fund
Majedie Asset UK Equity
BlackRock UK Special Situations Fund
SFP Value Realization Fund
AIMS Diversified Fund
Chenavari Bank Regulatory Capital Strategy
SW Mitchell European Fund
Polar Capital Japan Large Cap Fund
Polygon Mining Fund
Cumulus Energy Fund
Infracapital Partners II
Polygon European Equity Opportunity Fund
Tower Fund
Polygon Convertible Opportunity Fund
Sinfonietta Fund
WyeTree Yield Distribution Fund
Thyra Global Technology Fund
Russian Prosperity Fund
Chenavari European Real Estate Debt Strategy
BlackRock Natural Resources Growth & Income Fund
Prosperity Russia Domestic Fund
Henderson Agricultural Fund
Optimal Australia Absolute Fund
Baker Steel Genus Dynamic Gold
The onward march of risk assets and Sterling’s devaluation against the US Dollar and most other major
currencies dominated the investing landscape of the last quarter. Both dynamics have been beneficial to
BACIT. We have invested around half of the NAV into long-biased funds across the fixed income, credit,
listed equity and unlisted infrastructure spectra, and a similar proportion of the portfolio is invested into
funds which are dollar denominated, and since launch we have elected not to hedge that exposure back
into Sterling.
% of NAV
UK £
US $ (unhedged)
€ (hedged back into £)
At the launch of BACIT, we expected this US$ exposure to dampen volatility, but as we reported in January
the dollar’s inverse correlation to risk assets broke down at the start of the year, as the trajectory of the
US recovery and those of Europe and Asia diverged. Notwithstanding softer data since the middle of
March, the US recovery remains much stronger than those of the other large economies, buoyed by a
housing market that continues to mend – and possibly even show pockets of bubble behaviour – and
enjoys the benefits of lower energy prices on the back of the shale revolution. There have been
substantial productivity gains (the US is now second only to South Korea in the OECD in unit labour
costs), and the budget deficit has halved to 5% since 2008. The UK recovery, instead, remains in the
balance, the next election will come into view before the year is out creating further uncertainty, and the
OECD’s view is that Sterling’s fair value has moved down from $1.47 to nearer $1.40.
Given the Chinese leadership’s stated wish to rebalance that economy and the implications for commodity
economies and currencies, and the unresolved problems of the Eurozone – Mr. Draghi’s sleights of hand
and oceans of liquidity may have tamed the European bond markets for now, but they have not paid off a
single € of debt – the attractions of the US Dollar have increased relative to currencies beyond the UK’s.
We accept that this currency exposure will almost certainly increase the volatility of BACIT’s returns – it
added more than 3% to performance in the first quarter – but we believe that this is a price worth paying
in view of our wish to preserve investors’ purchasing power, and given the risks of timing a hedge, when
we expect the ultimate level will be below today’s. Whilst we have endeavoured to construct a portfolio
whose returns exceed the volatility of those returns, avoiding permanent loss of capital is our main goal.
There might come a point when we seek to hedge out the fund’s US Dollar exposure, and we will inform
the market if we do so.
We continue to hedge out Euro exchange rate risk as liquidity has cured nothing and change on the
ground is sporadic, rather than systemic. Some localised chinks have appeared in the 35-hour week
creating opportunities for stock pickers, but the bottom line is that Europe has too many debtors and not
enough countries willing to finance them.
% of Invested Capital
Europe ex-UK
Just a small minority of our managers are required to be fully invested and are long-only, and thus we
rather welcome the Spring sell-off that has become a feature of the second quarter since 2010, and
returns asset prices to, or to below their 200d moving averages from which many had floated free. A
period of consolidation is welcome, and a number of our managers reported cutting their exposures in
March, after the strong run of the first quarter, pending better entry points. In spite of the downturn in
leading indicators (purchasing managers surveys, consumer confidence (except Japan), economic
surprise indices, etc.) which started in March, we suspect that any softness in risk asset prices will find a
floor more rapidly than in the seasonal sell-offs of recent years, buoyed by the tide of central bank
liquidity, and the prospect of dovish replacements (Carney, Yellen?) to the incumbent Central Bankers.
Valuation measures rose almost across the board during the quarter, but there are still opportunities for
stock and bond pickers to identify real value, preferably backed by a real cash-flow.
Encouraged by the change in tone of the QE rhetoric emanating from Japan over the late summer and
autumn, BACIT made two investments into Japanese equities in October, one hedged into Sterling, the
other into US Dollars. The prospect of a weaker Yen releasing exporters from the tightening head-lock of
recent years was encouraging. These holdings had grown to over 8% of the portfolio by the end of the
quarter, and their progress has continued since then. We are grateful to have access to the range of
investing expertise in Japan that we do, from large cap stocks to takeover candidates at the other end of
the scale. Our managers suggest that a successful hostile takeover is what would substantially reset prices
from here, though the scale of the Japanese private sector which is woefully underweight domestic
equities, (US$56Tn invested in liquid assets versus the combined value of the Nikkei and the Topix of
US$5tn), means that turn may be rapid when it comes.
BACIT’s African and Russian investments account for less than 10% of the portfolio, but represent, we
believe, important diversification from the opportunities available in the debt-burdened if liquid
developed markets, with their latent risks of the Scylla and Charybdis of inflation and taxes eroding their
ultimate real value. Both hold the attraction for us of being something of blind spots for investors given
long histories of misappropriation and Lobster Pots, which mean that hefty discounts have been applied
to their stock markets’ growth rates, even though consumer numbers and spending are growing from a
broadly debt-free base. While the prospect of GDP growth is merely necessary rather than sufficient for
equity prices to rise, there are a number of changes taking place in both markets which lead us to believe
that investors will rerate these markets, and particularly the consumer-facing stocks where we have
focussed, over time.
The increased size, liquidity and sophistication of the South African market mean that shorting stock, and
protecting valid investment ideas from wider market or global concerns, is now a possibility. This makes
this market investible for us in a way that it would not otherwise be. Likewise, the determination of the
Russian authorities to institutionalise the Russian capital markets and to protect investors from a collapse
such as 2008, is now becoming visible in the raft of legislative changes taking effect. These include a
requirement for GAAP accounting for large companies, a move to T+2 trading, clearing for bonds, and
25% dividend pay-out ratio for SOEs, all by the end of 2013. Additionally, local pension funds which have
to date been prevented from investing in equities, are expected to have their mandates relaxed. Finally,
and most importantly, BACIT can invest in these markets because managers of long local experience have
given us access to them.
% of NAV
Equity Hedge
Fixed Income
Relative Value
Global Macro
In summary, the US Dollar and the net long exposure to risk assets have both contributed to performance
in the first quarter of 2013, but we should like to emphasise the point that we mentioned in reference to
our African investments: around a third of NAV has been invested into funds whose positive performance
does not require the increase in value of the asset class into which they invest.
The managers of this group of funds can elect to be long or short the assets they buy, and a number of
them express their opinions through instruments with loss limits, such as options. These options may
expire worthless if the manager is wrong, but the manager may make multiples of their original
investment if their thesis is proved correct. At the risk of repetition, we are keen to make our investors
money, but also to choose those managers with a history of capital preservation, through disciplined risk
management and a talent for constructing asymmetric trades. These skills are particularly useful for
investing in volatile asset classes such as commodities and currencies, and despite headwinds from their
benchmarks, this group of managers has enjoyed another strong quarter, and contributed substantially to
Finally, a few words on what we are planning to do with the beginnings of the endowment-like stream of
income you have created by investing in BACIT. We are working closely with the ICR to make BACIT’s first
investment into their drug discovery prospects. We don’t know when this investment programme will
start, and for the moment we are carrying forward the 5 months’ worth of contributions (~0.42% of NAV)
to the March 2013 year end. We will of course inform the market at the point the first investment is made
on this front. Once BACIT’s audit is finalised, a similar amount will be available to the charities on the
BACIT roster. Half will go automatically to the ICR, and the destination of the balance will be for holders
of shares at 31 March 2013 to determine. Any unallocated monies will be split equally between the
We are enormously thankful to our existing managers for getting BACIT off to such a promising start.
There is limited scope for the use of leverage in this portfolio, and even so the long-biased managers beat
their benchmarks pretty much across the board, and the relative value managers contributed similarly
impressively. We are also grateful to those managers who are now considering becoming part of BACIT:
we will continue to endeavour to invest with the blue chip names of today and tomorrow, and expect to
be fully invested by the end of this calendar quarter. BACIT’s success is entirely dependent on the
philanthropy of the talented managers with whom we invest, and we are indebted to them all.
BACIT Management Team, 26 April 2013
BACIT Limited (“BACIT”) is a closed-ended investment company, registered and incorporated in Guernsey (registration number 55514).
BACIT was admitted to trading on the London Stock Exchange’s main market for listed securities on 26 October 2012. Shares in BACIT
trade under the ticker BACT.L.
BACIT’s investment objective is to deliver superior returns from investments in leading long-only and alternative investment funds
across multiple asset classes. BACIT only invests where the relevant investment manager provides investment capacity on a ‘‘gross
return’’ basis, meaning that BACIT and its subsidiaries (the “Group”) do not bear the impact of management or performance fees on its
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