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COVID-19 and ‘unusual’ Business as usual

As the country was reacting to the Global COVID-19 Pandemic and protective measures were being rolled out we had one staff member ‘self-isolating’ in line with Government guidelines.  Like the rest of the UK and world, we at People and Business had to make some quick and decisive Business Interruption Plans in late March 2020. 

After an emergency Board Meeting, we looked at all scenarios operationally, financially stress testing the business before taking the decision to facilitate remote working for staff members not self-isolating. As we have a fantastic digital infrastructure, skilled and knowledgeable IT consultants, we were able to move quickly to get our staff the right tools to operate from home and maintain phone lines seamlessly. 

Working from home

The next important phase was ensuring our staff were happy and comfortable working in their own home office environment.  Our confidence in the team was quickly evidenced to be well placed.  As they rose to the challenge and excelled once again in their flexibility to deliver.  We are blessed with exceptional staff members, who not only successfully adapted to new working conditions but creatively drove through new working processes.

We have twice daily phone or video calls with all staff members working from home.  This has enabled us all to continue working as a team and assisting in maintaining our mental health and collective belonging in what has been testing times.  With lockdown being enforced, we envisaged that personal difficulties may occur, so offered a private and confidential, personal wellbeing counselling service. We engaged a professional, experienced Mental Health Counsellor, to help look after us all if required.

Customer Focus

Steve continues to lead from the front with his strong work ethic and customer centric focus.   As an organisation, we instil the same value across the team.  This is echoed by how we have kept our customers informed in the COVID-19 crisis.  We are proactively in regular contact with our customers.  The cloud-based phone lines have been maintained and regular blogs have been posted to our website as the markets, industry, our organisation and the world reacts.   

As an organisation we have met the challenges head on and from a business perspective, we remain robust and resilient. The proactive measures we have put in place ensure we are in a strong position to continue delivering the service our customers expect and deserve.  As we have evidenced, we are able to continue working and thriving whilst having key staff working from home.  We will continue working to keep each other safe, our organisation safe and the UK safe by taking the most responsible working approach appropriate to the business circumstances.

What the future holds

While we are still a long way from business as usual, there have been a few changes happening and indeed the UK COVID-19 alert level has just been downgraded from four to three, so we will continue to monitor the situation, but safe in the knowledge we are successfully working in ‘unusual’ Business as usual practices.   

Some of our experience gained over this crisis may help us evolve and improve our service to clients.  As a team we constantly look to innovate with our client centric focus.

Moving forward, with new skills and working practices, we will sustain and adapt as the world continues to evolve.  We can leave our customers safe in the knowledge that our business is on firm footings and aiming to continue its organic growth as we look after the financial needs of our customers.

Jason Norton

Operations Manager

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A.J. Bell – Understanding portfolio attribution on a multi-manager active portfolio

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

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Brewin Dolphin Update: Markets in a Minute 16/06/2020

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

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Royal London Market Update

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

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Jupiter Investment Update: Will geopolitics lead to untangled supply chains?

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

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Covid-19 Related Scams

As we all adapt to the current situation, I wanted to write to you again with some information about new Covid-19 related scams.

While the majority of us are doing all we can to stay safe and stem the Coronavirus outbreak, some are unfortunately using this as an opportunity to exploit the outbreak and initiate new types of scams.

Your health is clearly the most important thing during this crisis, but the safety and security of your money is also crucial in these uncertain times. And with many people isolated from family and loved ones, it’s more important than ever that we’re all aware of these scams and how to spot them.

New Covid-19 related scams

Some of the new scams include:

  • ‘Good cause’ scams, where scammers will ask you to invest in good causes such as face masks and hand sanitiser production, often promising lucrative returns
  • Cold calls, emails, texts or WhatsApp messages telling you that your bank is in trouble due to coronavirus and you need to transfer your money to an alternative bank account
  • Scammers asking for upfront fees when applying for loans or credit cards that you’ll never receive, in an attempt to exploit people experiencing short-term financial concerns

Here are some of the signs of a scam, that you should look out for at all times:

  • A call, email or text message asking for personal details or for you to transfer money
  • A clone firm – this is where a scammer may cold call or email you claiming to represent an authorised firm to appear genuine. They may want to falsely advise you on the sale of a pension or investment product
  • Anyone asking you for your passwords
  • Anyone asking you to move money into another account, or ask you to pay fees directly into another bank account

How to protect yourself from fraudsters:

There are ways you can protect yourself from these scams:

  • Don’t click links or open emails from senders you don’t already know
  • Don’t give personal details out to anyone you don’t know
  • Be vigilant when taking unsolicited calls or checking unexpected emails
  • Avoid being rushed or pressured into making decisions

The Financial Conduct Authority has more information on scams. You’ll find this on their Covid-19 scams website.

Our priority is to help keep you safe during these challenging times

Whilst we encourage you to follow this guidance as closely as possible, I’m here to help you if you’re unsure about anything. If you receive any calls or emails in relation to savings, pensions or investments, that you’re not sure about, please don’t give out any of your personal information and contact me straight away.

We’ll continue to do everything we can to support you and are committed to keeping you updated as things develop. In the meantime, I hope you, your family and your friends remain healthy, safe and secure

Steve Speed

15/06/2020

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Brooks Macdonald Market Update 12th June 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

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AJ Bell Update: The impact of Covid-19 on the property market

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

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SEI Strategic Portfolios: May 2020 Monthly Commentary

Please see below the May edition of SEI’s monthly market commentary received today (11/06/2020):

Global equity markets continued to rally in May, based on expectations that the economic impact of the global pandemic will be limited to a few quarters.

Executive Summary

  • Global financial markets continued their sharp rallies in May, albeit short of their remarkable April rebounds. The “risk-on” sentiment came amid a push by local governments to slowly reverse lockdowns of non-essential economic activity; the promising news of progress made in the race to develop COVID-19 vaccines; and the sustained extraordinary support of central banks.
  • Equities around much of the world experienced a choppy first half of May that ultimately gave way to a strong second half for the month. However, mainland Chinese and Hong Kong shares were outliers; both came under pressure as the month progressed, with the latter finishing the period with a steep loss. European and US shares generated solid monthly performance, while UK shares delivered more subdued gains.
  • Government-bond rates followed divergent paths from country to country. They mostly declined for UK gilts, yet increased for those with the longest maturities, while they increased across all maturities for eurozone government-bonds. As for US Treasurys, short- and long-term rates increased as intermediate-term rates declined for the month.
  • Considering the stability-focused Strategic Portfolios, relative returns were boosted by overweights to economically sensitive debt, including corporate bonds, selected emerging markets, as well as peripheral Eurozone debt. Consistent with its design, the Global Managed Volatility Equities fund lagged in a rising equity market but was able to provide meaningful risk reduction.
  • For the growth-focused Strategic Portfolios, some of the challenges faced by value managers in recent quarters continued to ease somewhat in May, with several periods of stronger returns potentially indicating a bigger rotation. Our core investment case for SEI’s overweight to this area remains the same: extreme relative valuations between the most expensive and cheapest parts of the market. SEI further believes that the post-crisis environment may provide further support for this positioning, given the huge stimulus being provided.

Market Overview

  • In the UK, the Chancellor of the Exchequer Rishi Sunak announced his intention to extend the government’s mortgage-payment holiday beyond June as its initial three-month timeframe approached. As of mid-May, UK banks had granted these repayment holiday terms to 1.7 million homeowners.
  • The Bank of England’s (BoE) Monetary Policy Committee held course following its 7 May meeting, keeping the Bank Rate at 0.1% and reiterating a commitment to purchase £200 billion in gilts and investment-grade corporate debt. The central bank’s May policy statement cited data that pointed to a significant drop in household consumption and plummeting expectations for sales and business investment during the second quarter.
  • Sharp contractions in manufacturing and services conditions appeared to slow across the UK, eurozone and US during May, but remained far from returning to growth. The UK economy shrank by 5.8% during March, representing the largest monthly decline in more than 20 years of UK gross domestic product (GDP) measurements2. Economic activity contracted by 2% over the first quarter of 2020. The UK claimant count (which measures the number of people claiming unemployment benefits) jumped to 5.8% in April from 3.5% in March. Retail sales in the UK fell in April by 18.1% from the prior month and by 22.6% from a year earlier.
  • In mid-May, the European Commission put forward a proposal for nearly €2 trillion across the EU, with €750 million devoted to recovery efforts and another €1.1 trillion to budgets over the next seven years. The European Central Bank (ECB) did not meet to address monetary policy in May. Germany’s constitutional court ruled during May that the ECB must produce justification for the legality of its bond-buying programme, in order to determine whether the Bundesbank could continue to participate.
  • The eurozone contracted by -3.8% during the first quarter and -3.2% over the one-year period. Construction output dropped -14.2% in March after slipping just -0.5% in February. Loans to nonfinancial corporations climbed by 6.6% in April, following an increase of 5.4% in March, continuing a corporate-credit bounce from February’s ebb.
  • Towards the end of May, the House of Representatives passed an additional $3 trillion in COVID-19 relief funds, but the legislation is held up in the Senate with unclear prospects for approval. Legislation passed the US Congress in early June that would extend the period during which companies can spend loan proceeds and remain eligible for loan forgiveness.
  • The increasingly tense US-China relationship was further stressed in May by a US push for more transparency in the ownership of US-listed Chinese companies and the US government’s barring of certain Chinese holdings from its retirement plans. China, for its part, imposed an 80% tariff on all barley imported from Australia over the next five years in an apparent response to the Australian government’s call for an independent inquiry into the origins of COVID-19.
  • The US Federal Open Market Committee held no meeting in May. As part of its crisis-period response, the Fed began buying corporate bond exchange-traded funds on 12 May to support secondarymarket liquidity. Fed Chair Jerome Powell announced near the end of May that the central bank’s Main Street Lending Program would be operational within days.
  • US consumer spending fell by 13.6% during April, registering the sharpest one-month decline since the data series began in 19593. New jobless claims for US unemployment benefits declined from more than 3 million per week in early May to about 2 million later in the month. Nearly 15 million US credit card bills went unpaid during April, and more than 8% of US mortgages were in forbearance as of mid-May. US GDP declined by an annualised 5% during the first quarter of 2020, the largest quarterly decline since the final three months of 2008.

Selected Asset Class Commentary

  • Global Fixed Income: During the month, the building block benefited from an overweight to peripheral Eurozone countries, overweights to Mexican and Colombian local rates, and off benchmark exposures to corporate credit and US Treasury inflation-protected securities (TIPS). Alliance Bernstein’s overweight to peripheral Europe contributed. Off-benchmark exposure to credit, mortgage credit risk transfers and US TIPS also helped. Wellington struggled on an underweight to the euro and overweight to the yen. A duration overweight in the US further detracted.
  • Global Managed Volatility Equities: The building block achieved meaningful risk reduction in May, but struggled on the back of pronounced style headwinds to low-volatility names and unfavourable overweights to consumer staples, utilities and health care. An underweight to mega-cap stocks was beneficial. Wells Fargo Asset Management fared better against style headwinds during the month, benefiting from greater diversity exposure and its momentum bias. LSV Asset Management’s value bias suffered most. Its exposure to cheaper low-volatility names was amplified by stock-specific disappointments in US biotechnology and insurance.
  • Global Equities: Overall market leadership remained unchanged in May; however a strong rotation in the middle of the month was also in evidence, was not quite enough to change the overall monthly results, but sufficient to challenge investors’ complacency in expensive growth stocks. With low volatility being the biggest laggard over the month, LSV’s results detracted the most at the Fund level. US value manager Poplar struggled with both style headwinds and sector positioning, as well as poor stock specifics in the technology sector. Towle, also a US value manager, was a significant contributor, benefiting from its bias towards smaller and higher risk stocks. Maj Invest, a global value manager, also outperformed due to similar positioning. Momentum managers, both Lazard and Intech, continued benefiting from the established trend favouring profitability and growth and contributed accordingly.

Manager Changes

  • Macquarie Investment Management (Macquarie) was removed from the Emerging Markets Equity building block in May. Macquarie’s strategy does not align with SEI’s alpha-source framework. Alpha refers to returns in excess of a given investment’s benchmark. Active investment managers seek to exploit various factors or sources of alpha in order to add value.

Outlook

  • The sudden and widespread stop in economic activity has never before been experienced on such a scale. The ultimate impact on GDP is truly anybody’s guess. The first quarter of 2020 saw an annualised decline of 5% in the US. The second quarter will likely be one for the record books; as of late May, Wall Street economists forecasted a quarter-to-quarter annualised decline exceeding 30%.
  • National governments have been quick to respond. All central banks are in crisis-fighting mode, having learned valuable lessons during the 2008-to-2009 great financial crisis, re-establishing unconventional bond-buying programmes and creating some new facilities to expand the types of accepted collateral in order to extend cash to companies in need of liquid assets.
  • The Fed and other leading central banks have moved with an alacrity and forcefulness that we find commendable. But central banks cannot single-handedly support this economic shutdown. In our view, fiscal policy—in the form of direct income support, tax deferrals, loan guarantees, and outright bailouts of industries badly damaged by the halt of economic activity—must be the prime tool used to address this crisis.
  • The fiscal response is occurring with a speed and decisiveness seldom seen in history. The US Congress passed a series of COVID-19 relief bills that easily topped 10% of GDP. Other developed countries have pursued a similar strategy of massive income support and liquidity injections. Italy, the European epicentre of the virus, will be particularly hard-pressed to do all that is necessary to stabilise its economy; its government debt-to-GDP ratio is already well above that of other major European countries.
  • In our view, a financial crisis can be averted in Europe if the ECB backs up the debt. This is now-or never time for the EU and eurozone. The stronger countries must come to the aid of the weaker, or else face an intensified popular backlash that could threaten the unity of the economic zone.
  • The onslaught of developments presented by the spread of COVID-19 has forced financial markets to recalibrate prices sharply as expectations about different industries and the overall economy shift quickly. Investors should gain some reassurance, however, from the fact that an earnings recession caused by virus-containment measures is generally only expected to last a couple quarters or so. If market prices are based on a long-term, multi-year expectation, then this fallout should represent a relatively small part of the market’s forward-looking focus.
  • Only time will tell whether markets have sufficiently discounted the pain that lies ahead. Investors should be cognisant of the fact that earnings estimates will likely come down hard over the next two quarters. These waterfall declines in earnings could still drag equities down with them. It all depends on how willing investors are to look beyond the valley. Markets should prove resilient if there is a common belief that fiscal and monetary responses to the crisis thus far will successfully prop up the global economy.
  • Right now, as always, we are focused on trying to deliver as diversified a portfolio as possible to all of our investors, regardless of their risk tolerances. We’re considering the known risks inherent to the capital markets as well as the uncertainty that comes with any long-term investing plan, such as the black swan we’ve encountered in 2020.
  • At SEI, we build and maintain long-term-oriented portfolios by being attuned to evolving relationships between asset classes. SEI views its strategies as robust and built to handle the kinds of challenges presented in today’s environment. At a portfolio level, we encourage investors to stay diversified and avoid short-term trading in these volatile markets.

SEI is a global provider of investment processing, investment management, and investment operations solutions. We believe the best way to keep up to date with the general market consensus in this rapidly changing market is to seek out and take on board the opinions of a diverse and expansive range of high-quality fund managers.

This has always been our approach to views on the market even pre-pandemic. Although the views across the board have generally recurring themes, it is important to see a wide range of views to hear consistent messages and see ‘the bigger picture’. 

Paul Green

11/06/2020

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Brewin Dolphin Update: Markets in a Minute 09/06/2020

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