Collectively our six portfolios outperformed their respective benchmarks on 20 out of 33 occasions.
- Thursday, May 20, 2021
EDITION 35 PORTFOLIO SELECTIONS
Our last Portfolio Edition 34 was researched and built in November and December 2020 when the outcome of the expected recession, the furlough programme extension, the vaccine roll out and Brexit were all unknown but important considerations. We positioned our portfolios for the expected equity growth on the back of recovery and in particular we retained our successful US and tech stock holdings. We added the iShares Clean Energy Fund that had performed particularly well in 2020 and was expected to continue to do so on the back of President Biden’s US$2bn infrastructure and clean energy plan. We also maintained our long-dated gilt and credit holdings as an insurance against the recovery or vaccination roll out not going to plan. This was a distinct possibility at the time so we hedged this potential risk with some protection.
When the US 10-year treasury yields rose to 1.75% in late February our overweight exposure to US and tech stock as well as our new clean energy holdings lost money in a significant correction in value. Our long-dated gilts were in particularly impacted by duration risk due to the threat of future inflation eroding real yields and therefore fell in value. Our portfolios were hit by this unexpected correction more adversely than the relevant national averages. We took action to limit any future duration risk on our long-dated credit by recommending a fund switch to short dated and high yielding bond funds but retained our equity holdings as we expect a significant recovery will bring good returns to these holdings. For the period from February our portfolios have underperformed the respective national average benchmark. This underperformance will take a little time to recover but we expect the portfolios to do so, particularly with a rebalance about to take place.
We are alert to the potential impact of rising inflation will have upon central bank’s policy positions. If US inflation races ahead of expectations and causes the Fed to signal an earlier than expected tightening of policy, the subsequent rise in bond yields and fall in bond prices plus the flight to the US$ will hit risk assets and particularly high-priced growth stock. Our expectations are that the Fed will seek to manage bond yields by additional purchasing and keep short term rates virtually zero.
With the now accelerating vaccine roll out in Europe and the opening up of the Eurozone economy, we think that European equity markets will respond with attractive growth. The EU Recovery Fund, whilst not as potent as its US equivalent will also aid the recovery. The leading corporations of Europe are benefiting from a post lockdown world and should therefore enjoy a recovery phase. We have therefore added a direct European equity fund to our holdings in Allianz Continental Europe Fund.
The Asian markets have shown a strong recovery from the lockdowns of last year. Countries like Australia, New Zealand and Singapore have been a leading example of effective lockdown strategy. We have retained our holdings in Asian markets but have reduced our positions in both China and emerging markets. This decision is due to the tightening of monetary policy in China and the expected slowing of growth, the knock-on effect in regional markets plus the differing degrees of vaccination rates and continued national and regional lockdowns still in place in many developing countries. We have retained our holdings in FSSA Greater China Growth but sold our positions in Baillie Gifford China. We retain JPM Emerging Markets but at a reduced allocation.
We made a mistake in purchasing the iShares Clean Energy Fund in January. The timing was poor. This fund had enjoyed remarkably good returns having grown by 99% in the past twelve months. This whole sector has been growing in importance and is set to receive considerable backing from government spending on clean energy. The sector is seen as an attractive longer-term investment. The US 10-year treasury yield spike in late February prompted a sell off in tech stock and any highly leveraged growth stock. This hit the clean energy sector just after we had invested in it and resulted in a -26.18% fall in value in the three months of February, March and April. The iShares Global Clean Energy fund has proved to be exceptionally volatile and would now prefer a different access point to this market. We firmly believe that this sector is worth investing in. It represents along with artificial intelligence, the next industrial revolution. The global transition from oil and carbon fuel to electrical transport, wind, solar and wave power generation will be a major investment theme for government and corporations for several decades. We have decided to cut our losses, as US treasury and bond interest rates are expected to rise so may cause further volatility in this particular fund. We have partly reduced our overall allocation and have invested into sustainable energy through Guinness Sustainable Energy and Baillie Gifford Positive Change Fund. Both funds have strong track records, rated with more consistent and less volatile returns. My apologies to investors for a selection that has undermined returns recently.
We have reduced our holdings in Japan due to the recent poor fund returns mainly because of GB£ and ¥ currency exchange rates. The general outlook for Japanese companies is very good as the world restarts to trade. We are concerned about the very low rates of vaccination roll out in Japan. There vaccination rate per population as of 10th May was 3% while the UK was 74%. This situation is not helped by the fact that Japan has no vaccine manufacturing capacity of its own at present. We have retained but reduced our holdings in JPM Japan.
The US equity market is generally overvalued and many investors consider it expensive. We have held overweight positions in the US for over 15 years and this has served investors well. Due to Joe Bidens stimulus packages giving unprecedented levels of support to American households and businesses we expect the US economy to recover more than any other in 2021. Therefore, we are retaining our overweight exposure but have shifted some of the emphasis in our holdings from growth stocks to value stock in the form of the JPM US Equity Income Fund by reducing our holdings in the Baillie Gifford American Fund, Natixis Loomis Sayles US Equity and T. Rowe Price US Large Cap Growth.
We have returned to the global property securities market after a gap of some 18 months. The iShares Global Property Securities fund offers a developed worldwide real estate exposure. The commercial property markets have been hit hard by lockdown, online retail and home working. All factors that have had an impact upon demand and rentals, while warehousing has been the growth sector. With economies now re-opening the property market has picked up as it has been undervalued for the past year. An additional factor is that the bond market is not offering worthwhile returns so as an alternative to bonds, the property securities market should offer better returns.
Our specialist equity selections aim to give a broader sector diversity above geographic diversity to our portfolios. We have therefore looked at sectors we expect to do well going forward. We have retained and increased our holdings in First Sentier Global Listed Infrastructure due to the expected expansion in the infrastructure sector, the funds’ recent performance and its low volatility. We have reduced but maintained our exposure to the clean energy and sustainable energy markets with new holdings in Guinness Sustainable Energy and Baillie Gifford Positive Change Fund. We have reduced our holdings in Polar Capital Technology Fund as these funds holdings are highly valued and sensitive to treasury yield rate rises. Due to the potential of US inflation and yield rises we have invested into the Jupiter Financial Opportunities Fund, Polar Capital Global Insurance and JPM Natural Resources Fund. All funds we have held before in the portfolios. We expect a late cycle commodity rally on the back of electric cars, battery technology, clean energy and the demand for metals. These positions offer some additional inflation protection if needed. We feel that while equity markets are expected to rise, replacing our gold holdings with copper and other in demand metal makes sense.
We have increased our UK holdings. We have for a few years held underweight positions in the UK as the FTSE 100 underperformed other developed stock markets. The increase in our UK allocation is due to the rising expectations for the UK economy. The FTSE 100 has been long overlooked by international investors and is very much undervalued relative to other stock markets. The UK is expected to be one of the leading growth economies in 2021 and 2022. Our focus in the UK is mainly on the domestic market via the FTSE 250 index through both the Jupiter UK Mid Cap Fund and the Franklin Templeton UK Mid Cap Fund. While the Artemis Income Fund focuses on FTSE 100 dividend producing stock.
Our fixed interest holdings have moved to shorter dated durations. We have retained holding in the Vanguard global bond Index and the Royal London Short Dated Global High Yield Funds but have added some short-dated index linked holdings and short dated investment grade credit. These moves are to reduce the risk on yields of future inflation. These new holdings sit alongside our strategic bond holdings that offer a broad range of managed mandates.
As far as the 35th Edition of our portfolios are concerned, across all six portfolios, eighteen new funds have entered our selections while twelve funds have either been dropped or substituted. We have done this for several reasons. These being performance related, cost related, or that a fund has lost an analysis rating. There are also sectors that we no longer wish to invest in. Investors will be invited to rebalance their portfolios to Edition 35 in the coming weeks and we firmly recommend such a move.
Chris DaviesChartered Financial Adviser
Chris is a Chartered Independent Financial Adviser and leads the investment team.