The second quarter of 2021 was a welcomed change from prior quarters, as market volatility receded significantly from what was experienced since the onset of the pandemic. In fact, the VIX (which is a measure of market volatility) is down 82% from its high of March 2020. A couple of factors contributed to a relatively "gentle" market for investors over the quarter; A gradual improvement in global economic activity, and declining bond yields. Each of these events allowed stock markets to deliver surprisingly strong performances over the three-month period.
In our first quarter commentary, we mentioned that rising bond yields can have a significantly negative impact on growth type equities, which occurred in the first quarter and led to weak relative performance for the Kinsted Global Equity Pool. However, given the decline in yields in Q2, those same growth equities managed to rally from their lows, ending the quarter on a high note.
The surprising thing about the decline in bond yields was that they occurred while inflation readings were coming in above expectations. One would assume that rising inflation would lead to higher bond yields (to keep real yields constant), but the exact opposite occurred – bond yields declined! As the chart shows, more than half of the increase in the US CPI in April and May was due to higher vehicle prices, along with a rebound in pandemic-affected service prices such as airfares and hotels.
Outside of those areas, the level of the CPI remains below its pre-pandemic trend. As a result, the market viewed the above-average readings as a short-term event and now expects inflation to gradually decline over the balance of the year, which is good for stocks and bonds.
While client's may not have seen much activity from an asset allocation standpoint, most of the Kinsted Pools did experience some activity.
The Kinsted Strategic Income Pool added two new positions and decreased the size of another position. We received a capital call for the North Haven Capital Partner fund (Morgan Stanley's private investment group). This private debt fund focuses on less efficient markets while seeking to generate higher returns than high yield bonds, with less volatility.
While the fund targets net returns in the 10%-12% range, the inception returns up until December 2020 resulted in a 31.8% increase. We certainly do not expect that to continue going forward, but those returns reflect the quality and process of Morgan Stanley's private investment group.
Another new addition to the Kinsted Strategic Income Pool was the Theorem Main Fund, a private fund that uses data science and machine learning to invest in marketplace lending loans. Unique to the US, it is a relatively distinctive asset class. The fund is incredibly well-diversified, comprised of over 100,000 individual loans. The annualized rate of return from May of 2014 to the end of May 2021 is 11.6%, with only one negative month. While negatively correlated to traditional fixed income, we believe it will add tremendous diversification benefits to the Pool. We believe this will decrease the day-to-day volatility of the Pool, while enhancing its annual yield.
Within the Kinsted Real Asset Pool, capital calls were received for the John Hancock Timberland and Agriculture Fund and the Stafford Infrastructure Secondaries Fund.
With these capital calls, the Pool is gradually getting closer to its targeted agriculture and infrastructure allocation.
Regarding Infrastructure, a couple of holdings we now have exposure to include:
Also received was a notice from Brookfield for a capital call in the second half of this year. This will significantly ramp up the Pool's infrastructure exposure to include high-quality, cash-yielding assets. The Brookfield Fund currently has exposure to world-class infrastructure assets such as the Abu Dhabi pipeline assets. BSIP targets a cash yield of ~5%-6% per annum and an all-in return of approximately 8%.
The Kinsted Strategic Growth Pool had an exceptional quarter. We were given the opportunity to invest in a private equity fund at a significant discount to its fair value. Of particular note was our holding in SpaceX, which saw its valuation increase over 60% from its last valuation in September 2020 due to a secondary raise in January of 2021.