Blogs

Please see below an article received today and published by A.J. Bell last Friday (12/06/2020) detailing the importance of fund research and diversification during adverse market conditions.

At first glance, fund-by-fund level attribution of any multi-asset active portfolio may appear confusing, with a mirage of both reds (negative relative returns) and greens (positive relative returns). The AJ Bell Active MPS attribution is no exception, and a number of the underperformers have significantly struggled on a relative sense. However, we actually take great comfort in this picture, as too many negative returns – or, indeed, too many positive returns – could indicate a mismanagement of risk and a lack of diversification. Holistically speaking, the AJ Bell Active MPS performance has been pleasing, both since the product’s launch and through the crisis experienced in March 2020, with an encouraging track record when compared with likeminded active peers.

The unspoken truth about single-strategy active fund performance is that most fund managers take on inherent biases through their investment style exposure. This can, on its own, largely explain much of the performance attribution analysis and is the very reason that performance profiles can be very volatile against an index. A fund manager’s performance can be very strong for many years, during which they get heralded as ‘stars’, only to give back some or all of the relative return (against a mainstream index) in the subsequent years, as the market environment changes and their style goes out-of-fashion – often in a dramatic sense, too. They then get labelled as ‘duds’, or other more disparaging terms. For this very reason, the fund research element of the process at AJ Bell is driven by qualitative analysis. Our quantitative screening process is not, therefore, the dominant factor, but more a useful tool to sense-check our understanding of what a fund could achieve in different market environments. It’s only when you understand this about a manager that you know whether they’ve had a favourable tailwind or been pedalling into a headwind.

In building portfolios, we first and foremost want to invest with conviction and back the fund managers we truly believe can deliver to their stated objectives through multiple market cycles, and in a repeatable manner. This should help the portfolios at AJ Bell to deliver better risk-adjusted, long-term returns. At the same time, the whole portfolio should always maintain diversification by both fund manager and investment style.

Typically, the crystal ball tends not to be very reliable and so, when considering asset allocation, rather than forecast macro events and capital market reactions or market peaks and troughs, our preference is to judge what value creation or destruction remains in an asset class. With diversification in mind when constructing portfolios at AJ Bell, we look to award capital to a number of fund managers with different inherent biases. This leads to blending fund managers, which may not necessarily neutralise all risk factors, but certainly mitigates unwanted risks. Otherwise, there is a very real risk that you will end up with one big momentum portfolio that looks great initially, but then runs out of steam when the wind changes direction.

Therefore, it should not be surprising to learn that the Active MPS portfolios tend to be fairly neutral on investment-style risk against our benchmark by owning offsetting positions. These offsetting positions do not necessarily have to be in the same regions, as we consider the portfolio in total. The portfolios have held a couple of funds which have strongly underperformed on a relative sense and, much like any index fund, the portfolio as a whole is exposed to a whole host of factors at any one time. For instance, whilst the first quarter return of 2020 for the Fidelity Index World fund was circa -15%, the large- and mid-cap value stocks within that portfolio equate to around one third of the exposure and yet nearly two thirds of the fund’s performance detraction. A similar pattern can be seen in the active portfolios, whereby one or two funds have heavily detracted from returns but are offset by other funds held.

The value investment style has come under immense pressure over the past three years, as it has significantly underperformed its growth counterpart, a phenomenon that continued throughout the crisis occurring in March 2020. As a result, any fund which is biased towards value is more likely to have experienced severe underperformance against its mainstream respective index, depending on the extent of its skew. This is one of the key reasons behind the extensive effort directed towards fund research, with thorough research being undertaken prior to initiating any position. This is imperative so that a fund manager’s investment process and philosophy is fully understood – while we also delve under the bonnet and spend time understanding individual stock positions, sectors and themes. This enables us as investors to clearly and concisely understand what to expect from any fund behaviour (excluding poor stock selection, of course).

Across the active MPS range, the funds that should resonate with you while considering the content of this article are Man GLG Japan CoreAlpha, Lazard Emerging Markets and D&C Worldwide US Stock; all have had poor relative performances since our launch over two years ago. While we continually challenge our initial investment thesis, when we stand back and check the facts (aside from a spell of poor performance since our initial investment at the launch of the portfolios), these funds continue to behave in a manner that is expected given the market conditions. These funds therefore remain very relevant within the portfolio to play the part for which we awarded capital to them in the first place – and so they live to fight another day!

Value as an investment style remains extraordinarily cheap these days, and we hold confidence in these funds. When the time comes that markets rotate away from growth and start rewarding value stocks, these value funds could be in the right place to benefit handsomely. However, we are the first to admit that we don’t know when that point will be and, as a result, we never bet the ranch on any one view. As such, you should always expect to see a diverse range of holdings in our portfolios, that in isolation may perhaps look questionable, but remember: it’s how the holdings work together that’s important, not necessarily what they do on their own. That is the benefit of portfolio diversification.

Please continue to check our Blog content for the latest economic and market updates from leading investment houses and professionals.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

18/06/2020

Brewin Dolphin emailed their weekly market update on Tuesday evening (16/06/2020) as below:

Another good quick update from Brewin Dolphin. These ‘Markets in a Minute’ updates they post weekly give you a good insight without getting overly in depth or technical, just the key points from the week.

Andrew Lloyd

17/06/2020

Please see below two articles uploaded by Royal London yesterday (15/06/2020). These articles provide an update on the latest market view and economic view according to Royal London.

As you can see from the above, markets remain volatile and it is important to remain invested in order to achieve your long-term goals.

Please continue to check our Blog content for the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

16/06/2020

Please see the below update posted last week by 2 of Jupiter’s Japanese Equity fund managers.

Dan Carter and Mitesh Patel discuss the increasing frictions between China and other developed nations, as Japan seeks to limit foreign influence on companies and the US rhetoric toughens. What are the implications for globalisation and supply chains, which are already showing fragility as a result of Covid-19?

In October last year we focused upon Japan’s Foreign Exchange and Free Trade Act (FEFTA), after planned revisions to this seemingly arcane piece of regulation sparked fears of a chilling of the increasingly febrile activist scene, setting back Japan’s progress to better management and a better functioning market. In late April 2020, however, the Japanese Ministry of Finance (MoF) clarified the revision to the Act and explained that almost all investors would be excluded from the most restrictive requirements such as seeking pre-authorisation for stock buying.

In its announcement, the MoF considerably assuaged concerns that the revision was a conspiracy to restrain meddlesome foreign activists, but in doing so confirmed the official narrative: that this legislation is designed to regulate state-directed investment into Japanese companies operating in strategic sectors. Whilst many investors are wiping their brows that the conspiracy theories have been (almost) put to bed, it seems to us that the implication of the official narrative is likely to be a power greater to investors in the mid to longer term.

An uncomfortable reality

The revised FEFTA flashes the spotlight on an uncomfortable reality. As it grows in size and influence, China’s aim of being global number one becomes ever more concerning for the US and its allies such as Japan. The friction caused as these national strategic ambitions grind against one another has already begun to affect the investment landscape – through curbs on FDI such as FEFTA – and will continue to do so into the longer term. But how?

One theme could be the de-globalisation of manufacturing, also known as re-shoring. In its Covid-19 recovery package the Japanese government announced that ¥244bn (c.$2.2bn) would be earmarked for companies wishing to bring production back to Japan from China. The pandemic has highlighted the fragility of global supply chains but also provided cover for a shot to be fired in this new cold war. We have previously written about the trade interdependence between China and Japan.

If cross border supply chains do begin to become untangled then clearly Japan will need to make more of its own machinery, textiles and chemicals. As investors we have sought to avoid manufacturers of basic materials and that will not change, but there may be producers of more value-added intermediate products which warrant attention. If reshoring does gather pace, Japan’s continually dwindling labour force suggests that factory automation companies, engines of efficiency such as Daifuku (which is held in the strategy), will be relied upon increasingly heavily. It is not all good news though; a repatriation of Japanese production would also mean a concentration of currency exposure once again. For too long Japanese manufacturers’ profits were tied closely (inversely) to the yen, globalisation at least allowed these bindings to be loosened and a reversal would be unwelcome.

Technology as a battleground

Perhaps the primary battleground is likely to be technology. The Huawei affair has highlighted the extent to which Chinese technology has become relied upon internationally. Similarly, China continues to need overseas companies, such as the semiconductor production equipment makers, to facilitate the build-out of its own strategically important tech industries. If Chinese ambitions continue to jar with those of the US, as well as Japan and Europe, the result could be increased technological self-sufficiency. As investors we need to carefully weigh up the opportunities and threats of this eventuality – a technological arms race will only make the possession of real technology leadership, enjoyed by companies like Lasertec and Tokyo Electron, more valuable, but a deeper fissure between geopolitical blocs could restrict addressable markets.

As investors we are hypervigilant of the temptation to overreach – we are not setting up any heroic anti-consensus positions with the above geo-strategic pondering. Rather the competing ambitions of the world’s major players create a reality in which our investee companies must operate – just as economic, social and environmental realities do – and it would be remiss of us ignore this. For so long the world order has been set, roles assumed, and relationships taken for granted. As this order shifts it will be important for investors, ourselves included, to factor these new realities into our decision making.

Jupiter is a well-established fund manager with an increasing presence in Europe and Asia. The views from fund managers provide a good insight into the current market issues.

Andrew Lloyd

15/06/2020

Please see the below market update from Brooks Macdonald received today.

BM Daily Briefing: Worst day for equity markets since March

What has happened?

Yesterday the equity markets had their worst day since March as the Federal Reserve’s (Fed) grim economic projections combined with fears over a second wave. The US index fell by almost 6% with a lot of the sell-off occurring after European markets had gone home, European indices are more range bound today with the US futures moving off their lows.              

Second wave fears ignite

The source of these second wave fears is the United States with California, Texas, Florida and Arizona all highlighted. All of these states have seen growing cases in the last fortnight and stoke fears that the rapid reopening in the United States is catalysing a resurgence of the infection. The total cases per million in theses states is similar to the levels we have seen in Italy and France which were hit hard by the pandemic so markets are wary not only of the growth rates but absolute numbers as well. Arizona has the highest case growth rate amongst US states with an average of 4.6% over the last 7 days. The resurgence raises two questions for the global economy, how fast is too fast to reopen an economy and what would these numbers look like if they did not occur in some of the warmest states in the US. The markets had little appetite to ponder either topic in detail and sold off rapidly and progressively as Thursday continued.

Will we see the US return to lockdown?

US Treasury Secretary Steven Mnuchin garnered a lot of headlines with his statement that “We can’t shut down the economy again. I think we’ve learned that if you shut down the economy, you’re going to create more damage.” Globally the economic impact of lockdowns has become a more important factor in decision making but this is yet to be tested with a true second wave. There is talk in Houston of reopening an emergency stadium hospital to accommodate hospital overflow. It may prove difficult for state governors to stick to the Federal reopening script if hospital capacity is under immense strain.

What does Brooks Macdonald think?

Our two big risks have been that of a second wave and US/China escalation. The data from the US certainly raises the risks of a second wave and makes progress towards a vaccine even more important. As this risk escalates expect markets to pay even closer attention to the successes in the Moderna and Oxford trials.

A good brief commentary from Brooks Macdonald on yesterdays market drops. As echoed through our recent posts, we do expect this volatility to continue. Keep checking back for regular up to date blog posts throughout this time.

Andrew Lloyd

12/06/2020

Please see the below article posted by AJ Bell on 11/06/2020.

What the pandemic meant for moving house and what could be in store

The coronavirus crisis has had an unprecedented impact on the UK property market, as viewings and sales ground to a halt and the market stalled during lockdown.

Activity is now starting to resume, but at a slow pace and with a number of big changes that househunters and sellers will have to adapt to. So what does that means if you’re trying to buy a property or sell your pad?

What Happened During Lockdown?

The property market effectively stopped during lockdown. No-one was allowed to carry out viewings of properties as it would have breached lockdown rules. Some estate agents came up with video tours of houses, but who was likely to make the biggest purchase of their life just based on a video?

What’s more, removal companies were not meant to operate, so actually moving house was tricky – although there were some exceptions if you were moving into an empty property.

What’s more, during this time mortgage companies started pulling their products. It meant that only those who had the highest loan-to-value, so the largest deposits, were able to get new mortgages.

Mortgage companies said they were overwhelmed with work and facing staff shortages so needed to reduce new customer numbers, meaning they restricted their new loans to just the highest-quality ones – so those people borrowing relatively less compared to the value of the property.

What About Now?

Viewings can happen in properties now, so long as they stick to strict guidance. Estate agents are advised to offer virtual viewings as a first step, which is either a video tour where the estate agent is live in the house, or a pre-recorded video of a walk-through of the property.

The Government advises that in-person viewings should only be carried out by buyers who are already strongly considering putting an offer in.

In-person viewings will have to follow social distancing guidelines and it’s advised that the homeowners leave the property while the viewing happens. Afterwards the house should be cleaned.

Two big changes are that open houses aren’t allowed and estate agents are not allowed to drive potential buyers to viewings – which could present some problems if you’re searching outside your home area and don’t have your own transport.

If you were ready to move before the crisis struck you can now also move, as removal companies have resumed their work. The advice is to do as much of the packing yourself as possible, and when moving day arrives make sure the movers can wash their hands and open internal doors for them so they don’t have to.

If anyone in the household has coronavirus symptoms or is self-isolating then the move should be delayed.

The mortgage market has also improved, with providers offering more products now. This means if you have a smaller deposit you’ll likely have more options now than you would have done a month or so ago.

What About House Prices?

You’d need a crystal ball to be able to tell what’s going to happen to house prices. The Government has an official measure of house prices, which tracks the direction their moving in.

However, it has suspended the measure as it says there isn’t enough reliable data to generate the figures – this is because so few house moves happened in March and April and the market hasn’t fully resumed yet, so the data would be based on a small sample size.

Nationwide, which has data of its customers (so only includes mortgaged purchases and no cash-buyers), says house prices fell 1.7% in May when compared to April – representing the largest fall in its data in 11 years. However, the sample size of this is likely to be even smaller than usual, so it’s difficult to know if it’s a reliable measure.

Stamp Duty Refund Deadline Extended

People who have paid higher stamp duty after buying a new property before selling their existing one will now have longer to sell their original home in order to claim a stamp duty refund.

Homeowners who buy their next property before offloading their current home pay additional stamp duty, as though they are buying a second property.

This means they’ll pay a three percentage point surcharge on the purchase, which can easily run into the tens of thousands of pounds. Ordinarily if they sell their original property within three years they can reclaim the additional stamp duty from HMRC.

However, the Government has now extended this three-year period if your home sale has been affected by the Covid-19 crisis.

It means anyone who bought their home from 1 January 2017 onwards will have longer than three years to sell it and get the refund, assuming they can prove the coronavirus crisis was the reason for the delay in the sale. Find out more information here. 

The logic behind house prices falls is that fewer people might move as their income is more precarious and fears about the wider economy mean people are less likely to pay top whack for a property.

In contrast, the property search portal RightMove (RMV) said it had its busiest ever day towards the end of May, with 6m visits to the site – up 18% on the same time the previous year. The site also said there was an increase in calls and emails to estate agents – showing that at least some of the demand isn’t just bored people on lockdown browsing property listings.

There’s some expectation that with people having spent more time in their homes they’ve realised they need to upsize or get a bigger garden, for example, or they want to live in a new area. There may also be some pent-up demand from the market having halted for seven weeks in lockdown.

The Pandemic ground the housing market to an unprecedented halt causing issues for the industry and people looking to buy or sell their property! As the article explains, activity is starting to resume now, albeit socially distant activity. 

If you are looking to move, make sure you keep up to date with developments in the housing market and continue to follow government guidelines.

Andrew Lloyd

12/06/2020

Brewin Dolphin emailed a market update on Tuesday evening (09/06/2020) as below:

As a Discretionary Fund Manager Brewin Dolphin offer a range of Managed Portfolio Services in the UK.  We really believe the best way to get a handle on the fast-changing markets at this time, is by taking on a variety of commentary and consensus views from a good variety of different high-quality fund managers.

This has always been our approach even pre-Pandemic. Whilst the themes are all generally similar, its useful to get a wide range of views.

Andrew Lloyd

10/06/2020