10th June 2020
Following on from my article last month, Coronavirus: seven possible long-term changes, I wanted to set out our current investment thinking and how we have responded to the changed investment environment. To begin with, it is worth rewinding a few months to consider our thinking before the coronavirus crisis. Going into 2020, we were reasonably constructive in our outlook for most markets whilst recognising that both the economic and market cycle had been unusually long. We felt that UK equities were due a period of catch-up, relative to other equity markets, following the decisive Conservative victory in the General Election, having lagged over the last few years. We were also generally cautious on government bonds given the, in many cases, record low yields available.
Fast forward and we now know, of course, that UK equities suffered another bout of underperformance in Q1, partly due to sector mix, while government bonds performed positively, with yields in the UK and US falling to new record lows, as investors sought out safe havens following the implementation of national lockdowns. With this background in mind, we reviewed our investment strategy and the funds that we have built our portfolios around. Following this process, we made several portfolio changes that can be broadly split into two areas. Firstly, those influenced primarily by macroeconomic considerations. As described in last month’s article we are relatively cautious about the economic outlook globally in both the short and long-term. However, we recognise the sheer scale of the fiscal and monetary stimuli that policy makers have implemented. We believe there is a risk that short-term deflationary pressures are eventually replaced by reflation. It is for this reason that we have bought a position in the Capital Gearing Absolute Return Fund which has a spread of assets to reflect exactly this mix of risks including a significant holding in index-linked bonds, to hedge against future inflation.
Secondly, we have used the coronavirus crisis to methodically review all our current fund managers. We normally do this on an ongoing basis, throughout the year, but it struck us that the bear market of Q1 provided an additional test bed for a portfolio manager’s skill set. While accepting that certain asset classes and investment styles were hit harder than others in the downturn, we believe that some managers have demonstrated greater resilience and repeatability in their investment processes than others. As a result, we have taken the opportunity to switch into two funds, one in UK equities (Franklin Templeton UK Equity Income Fund) and one in global equities (Fidelity Global Dividend Fund). Both funds were already on our Watch list, having successfully passed through our due diligence process. Both also appear to have investment approaches that can stand up to a tougher market environment rather than relying purely on the usual tailwinds associated with a bull market.