Bi-Monthly Review September 2020

Since the last review, the Covid-19 has continued to wreak havoc on the World, this has led to unpredictability not just in markets but to how each country responds. The virus is still spreading throughout the world and a second wave is hitting Europe. The Americas are suffering from the virus badly, however it seems well controlled over much of Asia. The markets have continued to recover but have fallen back a little during September. We have continued to manage your funds well over the past couple of months.

We have the American election looming and it appears that whatever the result the markets will experience volatility. We also think its difficult to predict the winner at this stage, so we couldn’t make moves which we believe is for the best as we don’t know who will be in the White House by Christmas.

We believed that we could see some of this coming and therefore we increased our defensive positions within your portfolios in both January and March reviews and have remained defensive ever since. The markets have recovered significantly since the spring; however our defensive stance has continued to perform well. We have continued to beat the benchmarks and outperform the markets significantly and have produced some great results year on year.

An example of this is to compare one of our balanced portfolios; risk 5 with the 20-60% share portfolio benchmark over the past 3 years. As you can see in the table below and a graph at the bottom of the email the average market return has been 5% over 3 years where we have returned 21%. Thus, we have beaten the average market return by four times as much.

Portfolio / Index 3 year performance
Platinum Portfolio 5 21%
Mixed Investment 20-60 5%

We will strive to keep these standards, although the level of outperformance we have achieved is not likely to be repeated to same extent in the future.

It is difficult to predict the markets however we believe the virus will have an impact on Global economies for a while yet. The virus will of course disrupt things over the next 6 months or until a vaccine is available. The economic effects will have increased volatility. Our job is really to steer through the headwinds as best we can. Our philosophy is to reduce risk with a good diversification of funds and asset classes. Try to keep a level of hedging resulting in the portfolios being slightly more cautious than they would normally be, whilst trying to maintain this excellent performance during the volatile headwinds.

The world has now dropped into recession with resulting high unemployment and uncertainly continuing to carry on into the next quarter. Due to the second wave around Europe and the forthcoming American election we believe the only thing that is guaranteed is volatility over the next couple of months.

We therefore intend to keep higher than normal cash holdings and some funds which have none or negative correlation to each other. Thus, if the market falls further then we would hope to lose less somewhat compared to our peer group, however if the markets actually recover more quickly then we could lag slightly.

Overall we are more negative than positive regarding markets over the next few months so our portfolio’s will remain more cautious than each risk profile would suggest, because of these unusual times we are living in. We will assume you are happy with this approach unless we hear from you to the contrary.

Asset Class Review

Equities

These markets were hit badly with the recent worries over the Coronavirus but as the world demonstrated that they can at least control it with lockdown and the governments pumped money into the world economies, then the world markets have staged a recovery. We expect further volatility, as we believe there is more bad news ahead of us, however, so is the light at the end of the tunnel. We are slightly more negative than positive in the equity markets at present mainly because the markets have recovered a little too much.

We also believe it will be important to pick the right markets which will have the best ability to bounce back. We think Asia should be better equipped to have strong economic recovery and the huge stimulus in Europe may steady things somewhat. The US does not appear to have controlled the virus very well and the economic news may become worse, especially with the disruption that the US election will bring so we are making slight reductions in this area. The UK remains in the doldrums as we have had the problems with Covid-19 and now we have Brexit so our equity markets haven’t recovered as much but therefore offer some kind of long term value for money. We remain neutral on the UK.

Asia looks to be the main exception to the rule they seem to have control of the virus and thus their economies are demonstrating a more sustainable recovery, Asia could be one green shoot in a complex world equity market.

Bonds / Government Debt

This market has performed particularly well as these types of securities are deemed to be a safe port in a storm’, and as a result the market has risen significantly over the past 6 months. The main reason for the rise in this sector is the reduction in interest rates across the globe and when rates fell the value of Gilts and bonds rose. The bond values have fallen back in the past couple of months, however if the equity markets fall back again then gilts are likely to rise or at least have a stabilising effect on the portfolio . The only problem we see is the bond market is giving historic lows so in times of rising interest rates the bond market may be hit hard, however we don’t expect that any time soon.

Gold Miners

Over the past 2 months the gold Mining fund we hold has Fallen back after showing strong growth for nearly a year now. Despite the fact gold generally performs well in recessions we think gold rose a little too much then has fallen back somewhat so offering a little better value for money than 2 months ago. We anticipate keeping the holdings around July’s level.

Property

With regards to property, this asset class is subject to the potential for fund managers to instantly reduce the price and potentially suspend any money in or out of a fund as a protective move. Because of the virus and BREXIT we don’t wish to risk this fund yet.

Emerging Markets

These markets can be unpredictable, and this area of the world is still insecure right now, so we wish to leave this market alone for the present. We are only prepared to invest into these regions via Asia or Global funds at present and not directly.

Cash

In all our portfolio’s, the level of cash is already relatively high due to the uncertainty in markets. We intend to keep relatively high holdings in this sector which can help stabilise the portfolio in times of unpredictability. This sector of course does not grow so once we can see the markets recovering at future reviews, we will start to sell down some of this sector.

Absolute Funds

Some of these type of funds can ‘hedge’ the volatility of the market by buying long and selling short so reducing the overall risk, protecting against the falls and thus reducing the volatility. This sector is difficult to predict however as each fund manager has a different strategy giving differing splits between long and short holdings. It is therefore important we keep in the sector but in a diversified manor.

Infrastructure

This fund should do well in a recession however some infrastructure projects may be cancelled due to lack of funding and staff shortages as this will not be a normal cyclical recession, but a technical recession caused by the Coronavirus. As such we are selling out of this sector until there is a clear path out of the current crisis and new infrastructure projects can be started again. We certainly like the fund but just don’t see it as the perfect time to be invested in it

Overall

Anyway, despite everything we have performed well again over the last 2 months and our portfolios have held up well despite the awful headwinds we are investing into thus giving respectable underlying returns over 1 and 3 years

  • Portfolio 3 has grown by 4% and 14%
  • Portfolio 4 has grown by 4.5% and 17.5%
  • Portfolio 5 has grown by 6% and 21%
  • Portfolio 6 has grown by 7% and 25%
  • Portfolio 7 has grown by 7% and 26%
  • Portfolio 8 has grown by 8% and 26.5%

Please note due to present levels of volatility these figures may differ significantly day by day. If you have paid in or taken funds out during the year this will also affect your overall performance.

Summary

All our portfolios are showing a profit year on year, and this is a result of outperformance when the market was rising and a lower downside whilst it’s been falling. We will do our best to continue to anticipate this to the best of our ability with no promises, however we will of course keep the situation under review.

Please be aware that all portfolios are lower risk than prescribed due the exceptional levels of market volatility due to the exceptional circumstances caused by the coronavirus.

This will give you a little more protection than you would otherwise have.

Funds to buy

All Portfolio’s

Allianz Gilt Yield.

We are recommending this fund because due to COVID and BREXIT the UK economy will have a double whammy whichever way the BREXIT talks go. In other words the UK is in a worse position than the rest of the world , we therefore think it’s likely the Bank of England will cut rates to boost the economy which therefore should boost the value of Gilts. The fund itself has the top FE 5 crown rating and has been top quartile rated for 1 and 3 years

Funds to buy or increase except Portfolio 8

Lindsell Train Japanese Equity.

This fund is also being increased for strategic reasons Japan has and is also handling the Covid crisis better than the west. Additionally they have the Olympics around the corner which will give them added incentive. Thus, we believe that Japan are better placed then the west and generally Japan has a lower correlation to world markets then the US for example. So this fund may produce us better returns than certainly the UK and perhaps even the USA. So the portfolio will be more diverse as a result of more into Japan thus spreading the risk further. This fund has top quartile performance over both 3 and 5 years. This fund has the Top alpha manager award and the top FE 5 crown rating as well as an OSBR silver award.

Funds to increase

All except Portfolio 8

Aegon Global Equity Market Neutral

this fund has recently been taken over by Aegon from Kames. We are diverting more of this fund into the portfolio’s as the fund is now owned by a large institution and the fund managed to hold out well in the March crash thus we are using this to hedge volatility. The fund has no awards as it sems to do poorly in a bear market however this market may be good for this fund which seems to be able to better than other funds in volatile markets and we expect more volatility in the 4th quarter of this year.

Portfolio 5 only

Argonaut Absolute Return

this fund is being increased to balance out this sector for diversification. It has a different approach to the other two funds in this sector from Aegon and Brooks McDonald and has certainly been negatively correlated to equity and in the current volatile market this helps further with the diversification in this sector.

Portfolio 6 only

Fidelity Asia Pacific Opportunities.

We are increasing this fund only in porfolip 6 to bring it in line with our general portfolio strategy and relatively higher Asian equities whilst the west recovers from COVID and the American election. Furthermore if Joe Biden wins then Asia would expect a more reasonable trade link to the US than under the Trump regime.

Portfolio 3 only

Cash / Fidelity Cash.

We are simply increasing this fund in portfolio 3 only to balance out the risk within the portfolio especially during such volatile times whilst we are within the Covid crisis.

All Portfolio’s

Ballie Gifford China

Again, we are increasing this fund for strategic reasons because the Chinese seem to be able to deal with the virus better than the West, thus we expect their economies to be more buoyant. Also, whilst the west is in the doldrums China has the ability to access more of its own huge domestic market. The fund is 4 crown rated and has been top quartile every year for the past 5 years, delivering a whopping 221% growth over 5 years. Over 5 years this fund has produced 221% returns compared to the market average of 126%

Fund to sell.

All portfolios

M&G Global Infrastructure

We are selling down the fund as it has underperformed the market over the past 12 months. The concept of Infrastructure is good however in recessionary times as governments often spend on infrastructure to create jobs to boost the economy. However we don’t expect this to happen just yet as the governments of the world are still fighting COVID and we expect infrastructure spending to be delayed in its use on the trade cycle until we have at least got a Vaccine. However, we will keep an eye on this market and expect to go back into this fund later in the year or next year. We really just need to see the market move past the Covid spending and into a recovery phase.

Vanguard Investment Grade Bond index. We are selling down this fund which is a mix of investment grade bonds and switching all the holdings into Allianz Gilts. This is due to the fact investment grade bonds rose in value as the yield dropped to all-time lows. With the possibility of negative interest rates in the future, we see the main chance of returns in the fixed interest market to be from the UK Gilt market. Thus, we are selling in favour of UK Gilts so we are selling for asset allocation purposes only.

Funds to reduce

All portfolio’s except 8

Brookes McDonald Defensive Capital.

We have reduced this fund before it’s a very good fund but was hit badly in March so we are simply reluctant to hold too much in this fund in times of volatility and uncertainty. So in case we have poor investment conditions in the next couple of months I would prefer limit some of these holdings. We however expect this fund to do well long term as it has a great long term record. Its produced 44% growth over 5 years and the fund is FE 2 crown rated so we are maintaining a reasonable holding in this fund.

All except portfolios 7 and 8

Vanguard Life strategy 20% Equity.

We are reducing this fund to reduce our exposure somewhat to none Gilt type bonds because we don’t believe they are offering much value for money now after large rises in their value in the spring .We like gilts as we expect the government to reduce interest rates which will boost their value instantly.

Only Portfolio 5

Vanguard US Equity Index.

We are reducing our exposure slightly to the US as this is the market that has had the greatest recovery and with the upcoming US elections and there failure to fully handle the Covid crisis we feel reducing our holdings and taking some of the profit would be prudent at this stage.

Allianz Gilt Yield

Liontrust Sustainable Future Global Growth

FP Argonaut Absolute Return

Kames Global Equity Market Neutral

Baillie Gifford China

Brooks Macdonald Defensive Capital

Jupiter Distribution

Fundsmith Equity Fund

Fidelity Asia Pacific Opportunities

Vanguard US Equity Index

Vanguard FTSE Developed Europe ex-UK Equity Index fund.

Baillie Gifford American B Acc Fund factsheet

Vanguard LifeStrategy 20% Equity

Blackrock Gold & General

M&G Global Listed Infrastructure

Vanguard FTSE UK All Share Index

Vanguard Lifestrategy 40% Equity

Vanguard UK Investment Grade Bond Index

Fidelity Cash

Lindsell Train Japanese Equity

Jupiter India

Baillie Gifford European

JP Morgan US Small Cap Growth

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