Portfolio Review – Q1 2020 – Issue 01
This is the first in a series of One Four Nine Portfolio Management (OFNPM) portfolio reviews 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
To say it has been a quarter like no other is a massive understatement.
The near global lockdown due to Covid-19 has had an unprecedented impact on global economic output, the measurement of which is still in its infancy. We have seen some early indicators from around the globe, but the effects are still unknown. In the US there has been, in the last two weeks of March, just over 10 million new jobless claims. To put this in context the largest weekly new claimant count had previously been “just” 600,000.
Business activity in the service sector has fallen off a cliff with PMI indicators plunging worldwide, especially in Europe. Most economic soothsayers are now suggesting a fall in GDP for 2020 of between 10% and 20%. During the GFC US GDP fell in nominal terms just 3.7%. Central banks worldwide have stepped up quickly by cutting rates to near zero and vastly increased their quantitative easing programmes. But the problem here is not a problem of liquidity but a problem of demand and so governments have announced massive fiscal easing policies to fill a demand driven hole in domestic output.
In normal times this would be massively simulative and coupled with incredibly loose monetary policy would induce untold devaluation of currencies and significant inflation. However, the fiscal “stimulus” is simply filling this hole in the finances caused by this near cessation of economic activity and catastrophic job losses. We are running to stand still.
The next few months will tell us what the effect on GDP has been and how it has affected corporate earnings, the underpinning of equity markets and valuations. At the moment no one knows what the price of anything is.
And so, the markets have reacted in the only way they know how when the future becomes so uncertain so quickly, which has been to sell down aggressively.
This is across all asset classes, equities, bonds, commodities, and property. Nowhere has been safe and correlations have all
moved to one. In this scenario diversification has not been helpful. Only government bonds have provided some measure of safety. Some equities have provided protection of sorts – utilities and consumer staples, but most, especially banks and natural resources, have been found lacking yet again. Those businesses with weak balance sheets, that are cyclical in nature and with large levels of leverage have been punished. Businesses with strong cash flows, good balance sheets, providing the necessities of life and strong market dominance have fared better, but have not been immune.
The FTSE All Share returned -25% in Q1, while the S&P 500 returned -20%, Europe -25%, Japan -19% and Emerging markets -19%. Corporate bonds also suffered with sterling investment grade falling 5% and sterling high yield falling 14%. Listed UK commercial property fell 27%, while even gold, that go to “safe haven”, fell 1% over the last two months of the quarter, although in context this is protection. Gilts provided a glimmer of investment hope rising 6.8% as the yield on the ten-year gilt fell to just under 0.35%. Sterling also fared badly with the currency devaluing 6% against the Dollar, 5% against the Euro and 7% against the Yen.
This however was good for those investors with assets outside the UK as it offered a small amount of cushioning from equity market falls.
One Four Nine Portfolio Management
At One Four Nine we run concentrated portfolios which attempt to protect capital first and foremost and then provide returns in excess of inflation over the long term. In conditions such as this it is hard to achieve this in the short term and our portfolios have suffered significant falls. They have however fallen less than the markets and less than competitors, although we take no comfort from this.
All but one of our eight equity funds outperformed the market. Of our UK equity funds Lindsell Train fell 16%, Evenlode 19% and Liontrust 21%, in comparison to the UK market which fell 25%. Our global funds also held up with Fundsmith falling 8%, Lindsell Train 11% and Evenlode 15%, while the MSCI world in sterling terms fell 16%. Our active equity funds on average fell 15.5%, while their passive peers fell 19.3%, a 3.8% outperformance. They also did so with significantly lower volatility than the market, realising just 75% of equity market volatility. An outcome of higher return and lower risk amidst the carnage.
Our non-equity holdings also provided protection. Our corporate bond holdings fell on average just 2.5%, while the broader investment grade market fell 5%. Our one alternative fund, Trojan, fell just 1.7% with a heavy weight to the dollar and gold, and a high cash weighting helping it significantly. Our property funds outperformed the UK commercial property market with LondonMetric falling 15% and UK Commercial Property Investment Trust falling 25%, while the market fell 27%.
The table below shows the performance of our Active and Passive range of portfolios alongside the ARC PCI estimates for the quarter. ARC PCI is a measure of the return from UK private client portfolios in a certain risk bucket which we have mapped to our portfolios based on their estimated risk relative to world equity markets. Our active portfolio range have outperformed, by some margin, our passive portfolio range and they have, apart from the Defensive and Cautious portfolios (which are in the same ARC PCI risk bucket) outperformed the ARC index. It should be noted that the ARC returns are estimates and they will be revised when actual portfolio data is provided to ARC by its contributors.
|OFNPM Portfolio||Active Portfolio||Passive Portfolio||ARC PCI Index|
|FTSE All Share||-25.13%|
|MSCI World GBP||-15.65%|
All we can really do now is wait and see if government measures around the economy, our health and wellbeing get us through these most trying times. With volatility so high, 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.
Find out how One Four Nine Portfolio Management invest here.
Dr Bevan Blair,
Chief Investment Officer,
One Four Nine Portfolio Management
London, Tuesday 08 April 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 31 March 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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