Q3 Investment Commentary
8 DECEMBER 2020
We hope this missive finds you and your family well. CV19 continues to dominate the headlines, with the Brexit negotiations and the November US Presidential election occasionally taking centre stage. When we wrote to you last in July, we explained the recent moves made within your portfolio; taking advantage of market opportunities but, as important, rebalancing portfolios to take account of the new environment. These moves have continued over the recent reporting period.
‘Core Fixed Interest’ has replaced, for the most part, investments within the absolute return sector of your portfolio. Whilst absolute return performance on a relative value basis has been respectable, it did not provide the level of diversification we had hoped for during the market reversal of March 2020. Summer 2020 was a busy period for the research team, with whitepapers on several subjects delivered to the wider investment team. Amongst our collective conclusions was that the return potential for absolute return strategies had substantially reduced. This segment of the portfolio will become the ‘anchor’ for our multi-asset offerings. In normal conditions, returns from these assets will look paltry compared with equities, but will provide sleep at night exposure. The remainder of the portfolio is responsible for the ‘heavy lifting’. Core Fixed Interest will do little more than keep up with cash until the environment becomes testing and then provide attractive diversification, when it is most needed.
It looked as if UK society was returning to a semblance of normality towards the end of summer, only for stricter lockdown rules to re-emerge more recently. The damage to UK Plc can clearly be seen in those sectors directly affected by it, leisure & tourism, and the knock-on effects to others. There is a growing acceptance that CV19 is here to stay for the medium term and a return to normality is some way off. Markets have continued to show remarkable resilience, but we believe more volatility is on the horizon. Part of this will result from CV19 news flow but the US Presidential election, which is looking less Presidential each week, will also drive short term market sentiment. At the time of writing, US President Donald J Trump had been diagnosed as CV19 positive, leading to a break in his canvassing.
As we have stated before, it is our view that Brexit negotiations will go to the wire, with grandstanding continuing on both sides. Our base case is that a deal will be done; it is in no one’s interests for it not to happen. Even if we do leave on a World Trade Organisation basis, it is likely a deal will be concluded shortly after. Sterling will move on this news flow and, whilst the UK stock market is cheap on a relative value basis compared with most other developed markets, its biased structure towards old economy sectors leaves us indifferent at best.
With two of our macroeconomic worries, there is at least a line in the sand as to when they should be assuaged. A contested US Presidential result would be a nightmare for markets and, of course, for the US democracy.
Our valuation analysis indicates that some markets, particularly the US, look expensive with ‘bunching’ common place (quality growth/technology leading the charge). Whilst we are prepared to play along for the short term, the outlook longer term is less certain. Where we are much more certain is regarding the opportunities arising within alternative income. We are mindful of clients’ needs for income and look to placate this requirement. Yields in general from most asset classes have fallen and, if not, there is a reason (real default risk). Global interest rates have cratered and will not move for years; therefore, the yield hunter will be disappointed with absolute levels and/or risk taken. The one bright spot is alternative income. We have been early adopters of investments in this space and have watched the sector grow in recent years. Opportunities here have sprouted more recently, as the Initial Public Offering market opens again. At the point of writing there are three new ideas on the launch pad and existing ideas are coming back for further capital raising. These ideas range from a homelessness solution, to a music royalties trust via an energy efficiency play.Asset backed index linked investments that can potentially yield more than 5%, once fully invested, are attractive and therefore portfolios will see the weight to these assets increase over the coming months. Even for the non-income investor, the potential for a Net Asset Value total return in the mid to high single digits is striking.