News

I have cut and pasted the following from an update received from one of the larger AIM Fund Managers in the UK, Octopus.  For those investing in AIM stocks you will know these are more volatile than most investments.

3:08pm 20 Mar 2020 – Written by Richard Power, Head of Smaller Companies

Below is a further update on how coronavirus is impacting the Octopus AIM Inheritance Tax Service.

Our investment processes while working remotely

Our investment processes while working remotely

We thought we would update you on our investment processes following this change in working environment. The important thing is that it’s business as usual for us and the management of the portfolios continues, albeit more remotely.  In place of the face to face meetings that we usually have with management teams of portfolio companies, we are speaking to them regularly via conference calls with a set up that allows for our usual team-wide involvement. We continue to have access to all of the analysts on the companies in our portfolios and, of course, the research they are producing.

We have been managing AIM portfolios for 15 years. The team have managed this product through the 2008 financial crisis, giving us confidence in the approach we are taking today. 

We have diverse portfolios of 25 to 30 established and profitable companies. However, share prices of all companies quoted on the stock market are being impacted and have fallen steeply. This is a typical reaction to a shock in the market. The eye of the storm is yet to pass, but it will, and as the number of new coronavirus cases slows, we expect sentiment to shift very rapidly leading to share price recovery, just as we have seen so far in China. 

Our investment approach during this period

We became increasingly concerned about the impact of the virus in mid-February. Our concern at that time was limited to China and the impact to the supply chain for UK companies. Share prices have fallen very steeply in response to the uncertainty, but we expect to see more rational pricing of companies in the future, connected to the level of business interruption.

We take a long-term view and still expect many companies in the portfolio to be able to double revenues over the next five years. It is a discretionary portfolio service so we will be making the decision on when to invest. The portfolios we manage will remain fully invested, in order to qualify for Business Property Relief. Rest assured, we are taking significant care prior to committing client cash into the market.

We are responding by buying ‘half a holding’ in companies we consider to be oversold, and are taking a longer term view – not always easy to do in the face of extreme short term uncertainty. We think it is important to be participating, as the correction is likely to happen quite quickly once investors can see through the worst of the crisis.

Recent performance of the portfolios

The portfolios have fared slightly better than the wider small and mid-cap indices because they have no exposure to some of the worst affected sectors such as Travel, Banks and Oil & Gas. They also have very limited exposure to the Retail and Leisure sectors. 

When selecting companies for these portfolios, we look for certain characteristics that we think compliment the investment objective of the product. As a result, we tend to be overweight in sectors such as Business Services and Technology, which benefit from high levels of recurring revenue.

The more management teams that we speak to, the more confident we become in the long term opportunity for the companies in the portfolio. 

It could still be a very bumpy ride but Octopus’ view is in line with market consensus.  Good quality stocks are still good quality.  Active stock picking adds value.  We just need to be patient and ride out the extreme volatility.

Steve Speed

23/03/2020

To our Prudential customers, as you may be aware, on Tuesday (17/03) Prudential announced and applied a downward Unit Price Adjustment (UPA) on some of their PruFund range of funds. We have just been listening to Prudential’s Treasury and Investment Office’s (T&IO) technical feedback and outlook regarding this recent action and I have summarised below some of the key outputs from this update:

• Prudential have stated that some areas of the investment market have been ‘indiscriminately affected’ and they see buying opportunities in the market
• Unusually high volatility – Prudential stated that we are not far from ‘the darkest hour, before dawn’. Effectively, this means that they believe that the high levels of market volatility we are currently seeing, are likely to continue for perhaps another couple of months before returning to more normal markets
• There is nothing else quite like PruFund – please see below past performance of PruFund Growth vs Multi-Asset benchmarks over the last 5 years:

Past Performance over last 5 Years

Source: FE Analytics

We have also seen this data tested against some of the PruFund peers too and it was evident that there was nothing else quite like PruFunds.

• PruFund recap: One of PruFund’s key characteristics is the ‘smoothing’ mechanism to their investment returns and this is reflected in changes in the value of the fund’s underlying unit holdings
  • One point to remember is that the PruFund is designed to lag a rapidly rising market and the same is true in a decreasing market. Please also bear in mind that the PruFund range of funds cannot defy gravity and in turbulent times (like we are experiencing now) they will also reduce fund values

 Summary

Prudential’s T&IO views are that high levels of volatility are expected for the next few months before we see more normal levels of investment volatility returning. Now is a buying opportunity ahead of the future market recovery. It is important to keep calm and carry on (stay invested).

Should you have any queries please, please do not hesitate to contact us.

Carl Mitchell – IFA/Paraplanner

19/03/2020

Please see the input received today (19/03/2020) by email below from Prudential’s Distribution Team with a market update from their Treasury & Investment Office:

T&IO Market Updates

March 2020 Investment Summary

Having been hit by the double whammy of reduced demand due to the virus, travel/production restrictions and the spat between Russia and Saudi Arabia; where Russia refused to yield to the kingdoms’ request to cut output, even the speed of last weeks’ moves were jaw dropping by any standard. Crude oil collapsed 30% intraday on Monday, losing almost 50% year to date. The fallout for energy companies, especially US shale producers led to two temporary circuit breakers kicking in for the US stock market, where it dropped 7% with indiscriminate selling both on Monday and Thursday. US 10 year yields fell to a record 31 basis points on safe haven flows whilst the Vix spiked north of 60, which is the highest reading since the global financial crisis. Market participants and authorities are now coming to the realisation that the virus and reactions to it could cause a rapid slowdown to growth globally. Authorities are reacting by providing co-ordinated responses; central banks by providing liquidity where they can, the BoE cut 50 basis points last week and increased lending facilities to small companies.

The Chancellor unveiled a £30bn spending plan, abolishing business rates/extending sick pay for small companies and giving the NHS unlimited resources to deal with the crisis. The markets still deem the action inadequate in dealing with a crisis of this nature and await/hope for further policy responses. The ECB also underwhelmed markets by leaving rates unchanged, but including measures targeted to provide cheaper funding to banks and companies, although how much more this can stimulate company investment from an already low borrowing rate is under question.

The fear in markets is two-fold, one that the potential containment measures executed by authorities damage economic activity and cause profits to get significantly marked down, second the knock on consequences in credit markets, where credit spreads have blown out to levels not seen since 2012, potentially causing funding stresses for companies that need to rollover maturing debt. The former can’t be solved by central bank action, as the real economy will need time to heal and hopefully a rebound in activity through pent up demand can make up some of the lost output. The latter is something that could potentially be stemmed by providing lending facilities similar to the previous crisis and programmes such as these should be relatively easy to restart.

In terms of data releases last week, Q4 2019 finalised Japanese quarterly GDP came in at -1.8% which was in line with expectations and German/Italian industrial production number surprised to the upside at 3.0%/3.7% month on month respectively for January. UK quarter on quarter GDP disappointed at 0.0% for January, however markets are fixated with numbers that will come out for February onwards, as this will show the impact from the virus slowdown. Some countries such as Germany were already weak coming into this, others like the US were relatively strong and the intensity of the virus grip on the population will determine measures deployed to overcome it. Hence the starting point of the economy and containment measures introduced will keenly be watched by the market.

Outlook

In terms of the virus outlook, with cases only beginning to register in some European countries and the USA, it does seem to us that the illness itself and the reactions to it might become stronger over the coming days. The key question is whether the knock on impact on global growth has already been priced into markets (or not). Equity markets are now back to similar levels to Q4 2018. At that time there was a fear that central banks would continue to tighten interest rates in the face of softening growth. Valuations do look very attractive compared to the market levels before the sell off began. However, we will watch what happens to the virus and the reaction to it from here, and we reserve judgement about whether the market should be higher or lower in the short term.

As per the note last week, GDP growth for the world economy has been lowered by many agencies, with the Organisation for Economic Co-operation and Development (OECD) lowering growth by 0.5% with further forecasted cuts likely. While the portfolio management team went into this market sell off with low levels of absolute risk, we are effectively now neutral for fund ranges where we deploy tactical asset allocation (excluding PruFund). Where we have corporate bonds in the SAA (Strategic Asset Allocation) we remain underweight versus cash. We take this approach with a view to put capital to work when the opportunity presents itself, through dislocations in valuations or when data starts to exhibit positive signs. We are of the view that the shock will largely be temporary in nature and growth will likely get worse before getting better.

Prudential’s Treasury & Investment Office (T & IO) manage over £175 billion in assets.  They are the team responsible for the PruFund range of funds amongst others.  The T & IO have access to over 800 investment professionals around the world.

Prudential’s T & IO have 10 actuaries and investment strategists responsible for the complex in-house modelling that underpins all strategic asset allocation.

This is a very well resourced multi asset investment team.  T & IO financial data as at 30/06/2019.

Steve Speed

19/03/2020

Please see Lothar’s input below re Tatton’s thoughts on managing invested assets in this heightened volatility: 

Why aren’t you doing something? 

During times of such unprecedented uncertainty, some of our investors will be asking themselves what active investment management means under the circumstances and what we, as your appointed investment manager, may be doing to manage the impact capital markets are having on portfolio values. So, just as we all want to know what the Government is doing, we would like to answer your questions as to what we are doing. By the way, our operations and investment team remain fully functional with most of the team now working from home. To put our management into context, in times of heightened if not unprecedented levels of uncertainty everybody has a significant urge to ‘do something’ – it is human nature to want to fix something if it goes ‘wrong’. 
 
The toilet paper and now general panic buying, against best advice from the government and the supply chain managers, are testimony to this very human notion. 
 
Investment managers and portfolio managers in particular face the same pressure when markets and asset classes embark on a wild yo-yo-like pattern of daily movements. However,  even if it runs against the human desire to intervene, ‘doing nothing’  is widely accepted as the best approach to a) preserve the volatility reducing characteristics of diversified portfolios vs. direct stock holdings and b) to have portfolios in a position to act at the point when the wild market swings calm and the biggest buying opportunities arise. 
 
This does not mean that Tatton’s investment team has been sitting idle. Nothing could be further from the truth. Every day we review the relative weightings across portfolios and reflect against the market developments whether the portfolios’ individual component parts have drifted to a positioning – driven by differing asset class returns – that we deem adequate and appropriate. 
 
While we continue to monitor the portfolio as a whole, we are constantly reviewing those individual component parts. Ensuring that the underlying funds which make up our portfolios perform as we would expect through the prevailing market environment. We would expect the active managers to be taking advantage of the recent volatility in markets, but we want to ensure they remain committed to the philosophies we selected them for in the first place. 

At the moment, our investment committee made the decision that not rebalancing portfolio weights back to previous target weights is the most suitable investment strategy to deal with the current capital market environment – until current uncertainty levels reduce. 
 
This approach means that equity exposure across all (bar Global Equity) portfolios has drifted to an underweight position versus the risk profile target weight. Given the heightened levels of uncertainty and resulting volatility this seems reasonable to both lower the relative impact of volatility, but also to keep portfolios invested at levels which mean that when the market sentiment turns, they will fully participate to their previous allocation levels. 
 
With a reduction of stock market valuations of over 30% since their February highs, there are arguably buying opportunities appearing in the equity markets. However, we need to understand and accept that uncertainty over the extent and timing of an economic rebound remains exceedingly high and we are only four weeks into this downturn. It is quite likely that we will – even if just temporarily – see lower lows over the coming weeks. 
 
Trying to ‘time- the-market’ and trade on short term swings is the reserve of the very highest risk seekers amongst investors. Those with a capacity for risk to lose significant amounts of their capital or miss any short-sharp recoveries that long-term investors will capture when they misjudge the sudden turns of disorderly markets and guess wrong. As long term investors, we will not be drawn into ‘gambling’ with client savings entrusted to our investment management as we firmly believe that ‘time in the markets’ will once again prevail, just as it has done during all previous ‘apocalyptic’ looking global crises. 

Best wishes 
 
Lothar Mentel 
CEO Tatton Investment Management Limited 
CIO Tatton Asset Management 

This is how Tatton manage their Managed Portfolio Services, in reality it is similar to other Fund Managers.  Once again the key message and way to minimise risk is to remain invested, you can’t time the markets. 

Steve Speed 

18/03/2020 

Over the last few weeks volatility has increased quite significantly with the backdrop of the coronavirus pandemic.  Even less volatile investments are now starting to see fund value reductions.

In the circumstances I thought it would be a good idea to outline some basic thoughts about investments:

• Rule number 1 is you need to remain invested. It is virtually impossible to time markets, so you just remain invested
• If you are in growth mode and not drawing income, we just wait for the markets to recover. This will happen given time
• Drawing income from your pension or investment funds is more complicated. My advice in this case is as follows:

1. If possible, stop drawing income from your investments and draw on your cash deposits – emergency funds. This is what the emergency funds are for
2. Should you not have any cash assets to draw on reduce your income from your investments or pension funds to the minimum you can manage on. You are trying to protect your invested funds for the long term
3. When markets recover switch your pension or investment income back on
4. Replenish your cash deposits (your emergency funds) with capital from your Stocks & Shares or Investment ISAs after the market has fully recovered

This is the ‘three pot’ approach we talk about and advise our clients on all the time.  It might be a while before markets recover, please just be patient and stick with the strategy outlined above.

The key point about this approach is that we are trying to sustain and protect your capital for the long term.  It’s a simple and effective plan.

If you have any questions on your own personal situation, please don’t hesitate to contact me.  In the current environment I’m spending more time in the office.

I know it’s a well-used phrase at the moment, but it really is a time to ‘Keep calm and carry on’.

Steve Speed

17/03/2020

Prudential have now had to take action on their ‘smoothed’ fund range, please see the following cut and pasted from Prudential’s update: 

PruFund Unit Price Adjustments 

We’ve applied downwards Unit Price Adjustments(UPAs) to the PruFund funds shown below. Please note, the UPAs also apply to the protected version of the funds, where applicable: 

Prudential ISA / Trustee Investment Plan / Flexible Retirement Plan  

• PruFund Growth Pension/ISA Fund: -11.99% 

• Risk Managed PruFund 4: -10.00% Pension/ISA Fund 

• Risk Managed PruFund 5: -11.05% Pension/ISA Fund* 

*Only available on Prudential ISA 

Retirement Account Series D  

• PruFund Growth Fund Series D: -11.99% 

• Risk Managed 4 Pensions Series D Fund : -10.00%   

Retirement Account Series E   

• PruFund Growth Fund Series E: -11.70% 

• Risk Managed 4 Pensions Series E Fund: -11.91%  

• Risk Managed 5 Pensions Series E Fund: -13.13%  

 UPAs have not been applied to any of the other PruFund range of funds. 

 Why have these funds had a downwards UPA movement? 

The difference between the smoothed and unsmoothed prices is checked on a daily basis against Daily Smoothing Limits. A price adjustment is made based on the Daily Smoothing Limits if the unsmoothed price differs from the smoothed price by: 

8% or more, based on the actual unsmoothed price and a 5-day rolling average of the unsmoothed price for our PruFund Cautious, PruFund Risk Managed 1 or PruFund Risk Managed 2 funds. The smoothed price will be adjusted immediately to reduce this difference to 2.0%. 

 Or 

10% or more, based on the actual unsmoothed price and a 5-day rolling average of the unsmoothed price for our PruFund Growth, PruFund Growth & Income, PruFund Risk Managed 3,  PruFund Risk Managed 4 or PruFund Risk Managed 5 funds. The smoothed price will be adjusted immediately to reduce this difference to 2.5%. 

The Daily Smoothing Limit and the Gap After Adjustment will vary for each fund.  

If you are in growth mode please just remain invested, this is short term volatility and you are invested for the medium to long term.  For those of you drawing an income it may be prudent to stop or lower your income now until the market recovers. 

Please get in touch if you have any questions.  Given the current situation I’m becoming more office and home based and able to take calls. 

Steve Speed  17/03/2020 16.40 

We hit a period of extreme volatility last week but we need to remain calm and invested.  Please see the input below from one of the investment houses that we use, Brewin Dolphin: 

Market update  

Managed Portolio Service (MPS)    

Over the past few weeks, markets have given us a stark reminder of how quickly they can turn. As the impact of the coronavirus in China became apparent and it became clear that the harsh containment measures would not keep the disease within the country’s borders, so the financial markets started trying to price a risk with many unknown factors. As a result, volatility spiked up and markets fell startlingly quickly. Yesterday we saw the biggest one-day move in UK equity markets since 1987.  

Furthermore, Saudi Arabia has declared a price war in the oil market and its timing could not have been more unhelpful. An oil price which was already lower due to concerns about the virus, took a further leg down and fed concerns about the viability of firms that are closely linked to the price of oil. The usual investments that negatively correlate to oil (because it is a major input cost), such as airlines, were having a difficult time for obvious reasons.  

Up until Monday, bonds upheld their role as a risk-off asset and have cushioned lower risk portfolios from the worst of the sell-off. Absolute return funds have also held up reasonably well so far.  

As long-term investors with Brewin Dolphin will know, we are very wary of reacting to market movements or headlines without having a handle on the wider context. It is all-too easy to panic early and lose the benefit of long-term exposure to the markets. It is easy to forget that, not so long ago, newspapers were concerned by the possibility of war in the middle east after the US targeted a senior Iranian general, but fortunately that did not transpire.  

On a personal level it is easy to understand people’s concerns about the virus, but what markets are more concerned about are the effects of the containment and the delaying efforts on the underlying economy.  

Brewin Dolphin has sought opinion from over half a dozen virologists, epidemiologists and public health experts to ascertain the implications. There are a wide range of opinions among the experts but there is a consensus that the focus will need to be on delaying the spread. Our asset allocation committee, which normally meets monthly, has already met twice in February to evaluate the situation. Our base case remains that this represents a sharp, but short-lived hit to global GDP although we recognise that there is a danger the situation could then trigger something more systemic.  

We are fortunate enough to have some extremely experienced and level-headed investment managers on Brewin Dolphin’s MPS Investment Committee. They recently agreed that it was time to sell down two funds that have proved disappointing in recent months. An absolute return fund has been replaced by Muzinich Global Tactical Credit and BNY Mellon Short Dated High Yield. These are two interesting strategies run by exceptionally skilled managers who are cautiously positioned giving themselves opportunities to take advantage. We also removed a European manager whose value strategy we felt could be replaced more cheaply by a blend of active and passive exposure.  

The market movements in February meant that MPS rebalanced a significant amount away from gilts very close to historic highs and bought into equities at lower valuations.  

In the sell-off we are once again seeing quality growth outperform on a relative basis. Lindsell Train has therefore done well in the MI Select Managers UK Equity fund, whilst Investec UK Income has performed the same role in the MI Select Managers UK Equity Income fund.  

Outlook  

The UK equity market produces a healthy dividend currently worth around 5% of current value. Even with the rather tepid growth, if you accept the premise that there will be a return to normality once the impact of the coronavirus fades, then it looks like markets are discounting significant cuts to dividends. In the UK, the convention is to maintain dividends unless your longterm ability to meet them has fundamentally changed, therefore such cuts seems unlikely.  

Underpinning UK dividend yields is a large amount of oil and gas profitability. As time passes oil supply should naturally decline and the market will come back into balance in due course with every chance of current dividends being maintained.  

There can be no question that the coronavirus is very serious, and the headlines in the UK and the US are liable to get worse before they get better, however it is also the case that we believe it will prove to be a temporary phenomenon and as such should only have a modest lasting impact on financial markets. 

As you can see the article suggests that once we are through the coronavirus pandemic the markets should be in a reasonable place with minimal long term impact from coronavirus.  I think it’s important that our blog readers continue to see a variety of views from across a range of different Fund Managers. 

You will see the consistent messages from different sources.  

Steve Speed  16/03/2020 

Article courtesy of Brewin Dolphin on 13/03/2020 

Further Input from one of our investment houses that we use below, Tatton:

Disorderly divestments create confusing market dynamics

Last week could be characterised as an “orderly” repricing of equity markets to the consequences of COVID-19 disruptions. This week has seen second-order market dynamics, driving valuations down to levels which do not seem particularly rational anymore.

Are we back to a systemic crisis, the return of a global financial system teetering on the brink of collapse as it did back in 2008/2009? The answer is a firm and resounding ‘No!’.

This time the source of the stock market downdraft is not the financial system itself, but an external shock to global economic activity. Given such shocks happen far more frequently than banking crises and the resilience of the financial system is stronger following the financial crisis of 10 years ago, we see far less stress across the financial system overall.

Nevertheless, stock and bond markets are displaying levels of apparent disorientation as they bounce between brutal sell-offs and staggering recoveries, suggesting that distressed sellers are dominating the markets. The double whammy of the oil price collapse adding to the growth downgrades from COVID-19 counter-measures has clearly worsened the situation, but not to the extent that it can explain some of the market action we are currently experiencing.

Instead, it is likely that a number of large investors who entered this rapid sell-off with geared/ leveraged investment positions (to catch the growth rebound that was predicted at the start of 2020), are now scrambling to reduce their positions because their leveraged market exposure has put most of their capital at risk (needless to say that Tatton portfolios do not hold geared investment exposures). To quote Warren Buffet: “Only when the tide goes out, do you discover who has been swimming naked.”

This may provide some explanation why markets are driven down to valuation levels that appear to price in a sustained fall in company earnings – as would result from a lasting recession – even though it is by no means clear that this is the most likely outcome. In other words, we cannot currently gain much insight from market action, except that no-one has more insight than anybody else.

What is very encouraging is the willingness for concerted action between governments (fiscal support) and central banks (monetary intervention). It is easier to agree to protect society as a whole from virus disruptions than bailing out the ‘fat-cats’ of the banking sector as was required 11 years ago. On that note we commend the new chancellor, government and Bank of England on taking the lead amongst the western nations in announcing bold action plans to prevent long lasting economic damage from what increasingly looks like an inevitable but temporary public health crisis.

We read from the UK’s actions, but also some of the extraordinary steps taken by the Italian government to contain the economic fallout at household level, that we may well experience, not only a virus inflicted pause to public live and economic activity, but also a pause to the financial rules and obligations that private households and small businesses normally have to live by. This will feel very uncomfortable for most of us and is likely to confuse markets again, but such action is absolutely what may at some point be required to address this formidable challenge.

In all of this we will not lose sight at Tatton of the fact that such extraordinary times also lead to some extraordinary opportunities in investments, as too much focus on the very short term leads to buying opportunities for those with a longer term perspective. Historical precedent tells us that this virus crisis will pass and lead to a strong recovery, because the recessionary conditions are related to a passing condition, rather than a sustained deterioration in the general direction of travel the global economy was on before the virus crisis struck.

My message remains the same – stay invested, keep calm and carry on. If you have spare cash now is a great time to invest.

Steve Seed

12/03/2020

Article courtesy of Tatton Investment Management

12/03/2020