Market update 27/03/2020
At the beginning of 2020, our asset allocation was predicated on our view that the global economy was towards the end of what had become an elongated cycle. Whilst our base case was not imminent economic contraction, we were comfortable managing client mandates at a reduced level of risk, although this was not as low as would be expected if economic contraction was on the horizon.
The events of the past month have taken many by surprise, including ourselves. The structure of our portfolios and the reduced risk has meant that our mandates have not been fully exposed to the savage sell off. At our March asset allocation meeting, the effects of Covid19 dominated our discussion. We concluded that it was appropriate to increase risk within client mandates, to a modest extent, to take advantage of recent falls. Managing multi-asset portfolios, in our view, has a number of advantages, not least of which is diversification. Part of our diversification is through the use of ‘alternative’ investments, which vary in constituents from strategies with a hedging philosophy to those that are asset backed with index linked yield.
As a group, these assets have held up well over the period, in fact some have increased in value. Some holdings are in the process of being recycled from these defensive areas into a number of opportunities across alternative income, specialist fixed income, asset backed real assets and UK equities. Whilst we have no clarity on “the bottom”, we believe it prudent to take advantage of attractive pricing for inflation linked assets that, in the long term, should provide strong returns. We note that the degree of risk increase differs between mandates; as expected, lower risk mandates are utilising different investments than those with a higher risk tolerance.
In terms of where the global economy finds itself; we are in recession. It has been described as a recession that we can see happening in front of us. Usually, economies determine whether they are in recession after the event through lagging data. In this instance, one only has to walk down a high street to see the effects. Our base case remains that, whilst there is an unprecedented shock to the economic system, it will be relatively short-lived, going by the China and South Korea experience. How central banks and governments have reacted so far, will be key.
There is ‘joined up thinking’ between central banks and governments. From a UK perspective, the government has come out with a package designed to help struggling businesses and is also talking with the unions. The Bank of England is also throwing in everything it can; interest rates did not get this low during the Great Financial Crisis (GFC). We are often asked about comparisons between this sell off and the GFC. There are a number of important differences; firstly, liquidity within markets remains and secondly, and most importantly, the financial system is not broken.
Clients may have noticed that open-ended UK commercial property funds have gated due to their valuers being unable to place a confident value on their underlying properties. We took the decision around four years ago to access this asset class through closed ended vehicles. Therefore, client exposure to gated funds is exceptionally limited. As an aside we are assessing opportunities within commercial real estate, which again will be through closed end funds.
We are in contact with our underlying fund managers and external strategists. In an environment such as this, an active approach, particularly within equities and fixed interest, shows its advantages by, at the very least, avoiding sectors that are under substantial pressure. We have seen a large amount of selling in markets from passive investors via ETFs, which has caused an indiscriminate sell off. Active managers should be able to cherry pick the best from the worst and position themselves well for the rebound.
Whilst our recent moves to increase risk, albeit on a modest basis, may raise some eyebrows, we are taking advantage of fast-moving markets. Many of the underlying companies that we have invested in on your behalf have strong balance sheets and sound business models. We understand justified client concerns and we seek to reassure you that your assets are being continually assessed, as active management remains core to what we do.
As always if you have any questions please get in touch with your usual CAM contact.
James Calder
Research Director
The value of your investments can fall and you may not get back the amount invested. Past performance is not a guide to future performance. Please see our website for more detailed information and risk warnings. You should not invest in or deal in any financial product unless you understand its nature and we recommend you seek advice. Compliance code: CH2450