Investment Management -

Market Musings

In this issue we look back at some of the decisions our Investment Committee made throughout 2020 around strategy and implementation. 

Starting the first quarter of 2020

As we entered 2020, markets were positive coming off the back of a very strong 2019. Inflation was low, markets were buoyant and the concerns over any overheating or recession had been kicked into the long grass. 

Although things were looking positive, there are always market bears around the corner. With this in mind…

  • We decided to rotate out of UK commercial property into alternative funds - which had a defensive focus. 
  • Cut our hedges on foreign currencies which we had held since the UK general election in 2019. 
  • Increased our allocation to UK equities which we saw as undervalued.
  • Lastly debated traditional defensive assets and ended up increasing our cash. 

In hindsight we got three of the four investment decisions right, with the addition of UK equities being the laggard in portfolios. 

That was in early January, and at that time we were aware of Covid-19, but it seemed a long way from our doorstep. In Asia - as we well knew - they've had bird flu, SARS and a number of other flu-based epidemics which, as a region, they had been very well able to contain and combat. At first glance, it seemed that there would be no difference with Covid-19.  

As we moved into the latter weeks of February and certainly early March it became very much more apparent that this was turning into a global issue. At the time I don't think any money managers were anticipating a global lockdown that would still be in place twelve months later.

We were spending a lot of time comparing the market movements which were occurring around us against previous market crises; we were looking at 2008, the dot-com correction of 2000 and even at the 1920s. Most of our clients were concerned about something similar to 2008, one of the most destructive in terms of capital value certainly in the last 50 years. Last year certainly wasn't like 2008 though; we didn't have the same level of bad debts which had been built up. This was an income crisis - or lack thereof - rather than a debt crisis. We made sure, where we could, to communicate this view with clients.

Throughout March our Investment Committee was meeting daily, if not multiple times a day, running through our different scenario analyses and how we thought we should position portfolios. The most challenging part of portfolio management in a crisis is judging when the bottom is, because prior to the bottom you need to have high cash, then at the bottom you need to take on a higher degree of risk to participate in the recovery. Having decided our strategy regarding when to add risk, we then approached a range of investment banks and asked them to structure an investment vehicle specifically for us. We wanted long term protection and short-term leverage to take advantage of any rebound. We invested on 19th March. The bottom was 23rd March.

Q2 and the Spring

In Q2 and the Spring we were seeing a dramatic V-shaped recovery. Despite markets, the investment committee were very aware that we were seeing a wall of unemployment that was going to hit, and we didn't think that people would get their jobs back immediately. This was morphing from a health crisis into an unemployment crisis. For context, between 23rd March (the market bottom) - and 23rd April, the S&P was up 25%. This, in our view, was too much, too quick, too soon. 

After this rally we were in ‘bull market’ territory, and so we decided to take risk off the table. We sold down equities across the board from the UK, to Europe and Asia, rotating into less volatile corporate bonds and money market funds. 

We defended the first quarter of the year, but we lagged in the second quarter of the year, due to our cautious approach. This is indicative of our conservative nature; however, this doesn’t mean we’re not prepared to take on a higher level of risk and we do when we think it's appropriate. Part of the stability that we try to offer means we can also be a little more cautious during times of volatility. 

As I mentioned, one of the areas which was really taking off was the S&P 500, and Tech. Albeit the S&P 500 recovery was on the whole being driven by a handful of stocks. We looked to rotate some of our exposure from the S&P which is dominated by Apple, Microsoft, Amazon, Alphabet (Google) and Facebook.

By switching into a new fund, we moved the allocation away from the big five and into other fast-growing companies such as Square and Shopify, whilst maintaining our high growth characteristics. This was one of the better trades of the year as these smaller Tech companies started to outperform their older larger siblings.

Into Autumn…

In the Autumn as the leaves on the trees turned brown, we were seeing economic green shoots. Globally, a lot of economic data was in growth territory rather than recession. We like focusing much more on the tangible economics, adding back into Asian and Emerging Market equities as this region had been successful in combating the pandemic.

The risk that we added here had a positive impact on performance.

The last quarter of the year 

The last quarter of the year was as defining as the first quarter. We had the Joe Biden victory in the US presidential elections adding a sense of predictability and the UK government announcing the approval of the first vaccine, from Pfizer. We were actually sitting in our Investment Committee when the announcement was made. Following this news, we rotated into the disrupted and old-world economies. Moving into industrial assets, European banks and - in general – more ‘beaten-up’ companies across the world.

Moving from global equites – which had performed well since mid-March into the equities that had suffered large losses due to the pandemic allowed us to ride the recovery wave and was a big boost to performance last year. 

Year End

Looking at the year in its totality, our flagship UK-based and Global portfolios were able to outperform five out of the six benchmarks. To give a flavour, our UK medium risk portfolio delivered around 4.2%-, our global portfolio of medium risk delivered 8.9% and our medium unconstrained portfolio generated 9.2% - so ironically, it's as if nothing happened. We “round-tripped’, starting January 2020 positive and we ended December, from a market perspective, still positive (all returns quoted are prior to Arbuthnot’s management fees).

Looking Ahead

Looking ahead, we are all cognisant of unemployment rates in the US and that the consumer might be a little more wary about how they spend their money in the future. However, we do believe that with a vaccine-led recovery, markets will recover, and economies will return to some semblance of normality. With that in mind we see Asia, Emerging Markets and the UK being areas where there is still value to be had. We will have a continued focus on looking at more alternative elements of the portfolio such as infrastructure or more specific property investments because the bond market is relatively expensive. Additional focus will be given to looking at building defence into the portfolios in new and innovative ways.


Further reading

Investing for the long-term

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Author -

Ed Johnstone

Ed Johnstone

Associate Director, Investment Manager
+44 (0)20 7012 2522

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