Portfolio Review – June 2020

Portfolio Review – June 2020 – Issue 04

This is the latest One Four Nine Portfolio Management (OFNPM) portfolio review providing investors and advisers with an easy to digest overview of what’s happening in the markets globally, alongside comparisons of OFNPM’s portfolio performance each quarter and throughout the year.

Chief Investment Officer’s comments

Equity markets continued their relentless march back to recovery in June.

The MSCI World gained 2.7% in sterling terms with Europe leading the way gaining nearly 5%.  The US gained 2.1% while the UK was up just over 1.5%.  The standout regions were Asia Pacific and Emerging markets, which gained 8.3% and 7.4% respectively.

Increases in asset prices were not just limited to the equity markets.  UK corporate bonds gained 1.5% over the month, while high yield bonds gained 3%.  Gilts overall fell 0.6% over the month.  This was driven at the long end with yields over 10 years rising while yields at the short end continued to fall.  Gold continued its strong run gaining just under 3% in dollar terms.

So, there we have it.  All assets pretty much rising, apart from long government bonds.  This would suggest we are in a “risk-on” environment with the economy recovering nicely after some easing of lockdown restrictions in most of western Europe and the US.

Recovery?

Economic data released during June would suggest that we are seeing a recovery of sorts.

While we are seeing falls in GDP we are experiencing some recovery in manufacturing and consumer sentiment, increases in retail sales and some recovery in the employment situation in the US.  This recovery though has been wholly dependent on the large fiscal measures governments have taken to fill a health mandated, demand driven, hole in the economy.  Unemployment schemes have largely shielded us from any catastrophic drop in consumption that a significant increase in unemployment may have yielded.

Central banks have kept monetary policy loose.  The monetary supply globally, as measured by M3, is now increasing at a rate almost commensurate with the increases we saw at the beginning of the last decade, just after the great financial crash.  As then, this coupled with very loose fiscal policy, has provided markets not just with a floor, but allowed them to recover losses.

Risks remain

There are though, significant risks to this recovery.

The cause of the economic dislocation, COVID-19, is not under control globally.  We have just passed through 10 million cases globally with the last million added in just 6 days.  Countries where it was under control are now showing alarming rates of increase, in particular India, Brazil and South Africa.

The US, where the spread of the virus was slowing in mid-May, is now reporting a significant acceleration of numbers with over 40,000 new cases a day in the last week of June.  We have yet to see a commensurate increase in deaths, but this will come with time.

These increases could lead to further lockdowns and a reduction in the confidence of both the consumer and producer, which will have a knock-on effect in markets, sapping investor resilience.

The markets

And the market is not best placed at the moment to suffer another drain in confidence.

This is because the increases we have seen have not been supported by fundamentals, but hope that valuations will recover.

The table below shows equity returns due to an increase in valuation (sentiment) and returns due to a change in the fundamentals (earnings) for the main equity markets.

In all regions we have seen a fall in corporate earnings, but apart from the UK and Europe, the total return is in excess of this fall in earnings, with significant positive returns from changes in valuation.  Lower corporate earnings do not generally support a higher valuation and a positive return to the investor.

Any negative change in sentiment, which will not be followed by an increase in earnings, will cause further falls in markets.

To mitigate any falls in economic confidence governments will have to extend their fiscal schemes further and for longer.  Any reduction in fiscal support for the consumer, whether automatic or planned, will take away a key support of market valuations.  Governments in effect will have to nationalise the economy by becoming a much larger component of GDP.  Of course, this will be financed by printing money and so there is a risk of increased inflation further down the road, although this is small while demand is low, and unemployment is rising.

Portfolio comparison

During June, your portfolios posted moderate gains.  The Active portfolios slightly underperformed the passive portfolios and the ARC estimates for June.  Most of our funds posted positive returns for June, but our 3 UK equity funds all posted negative returns, despite a positive market.  Market positivity was driven by oil, mining and cyclical stocks in June, while non-cyclical stocks and in particular consumer staples stocks suffered from some profit taking.

Over the year thus far the active portfolios have significantly outperformed the passive and they have both outperformed the ARC estimates for the year.  About half of our funds have made positive returns this year, most notably Fundsmith, Troy Trojan and Lindsell Train Global Equity.  Only our UK focussed funds, whether they be equity or commercial property are now reporting negative returns for the year to date.

These however are still significantly ahead of the market.

Final thoughts

We continue to hold our nerve in these most trying times.

With volatility still well above its long-term average now is not the time to be trying to time the market in or out.  Your long-term strategic asset allocation will do the heavy lifting from that point of view, and our underlying funds are invested in good quality, low leverage, strong companies, which offer the best probability of weathering this storm.  And the evidence so far is that they have done a sterling job.

Find out how One Four Nine Portfolio Management invest here.

Dr Bevan Blair,

Chief Investment Officer,

One Four Nine Portfolio Management

London, Tuesday 14 July 2020.

The value of investments and the income from them may go down as well as up.  You may not get back the amount you invest.  The return may increase or decrease as a result of currency fluctuations.  Past performance, or any yields quoted, should never be considered a reliable indicator of future returns.

All data is at 30 June 2020.  One Four Nine Models are benchmarked against UK CPI and any other benchmark has been displayed for comparative purposes only and is not a benchmark for the Models.  Performance figures are net of underlying fund fees and include One Four Nine Portfolio Management’s Management Fee of 0.24% (including VAT).  All model portfolio performance data is sourced from One Four Nine Portfolio Management.  All other data is from Bloomberg and Morningstar.

This service is intended for use by investment professionals only.  This document does not constitute personal advice.  If you are in doubt as to the suitability of an investment, please contact your adviser.

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