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Our six portfolios outperformed their respective benchmarks on 36 out of 36 occasions.

  • Monday, June 1, 2020

Edition 33 – New Portfolio Selections

In March, we witnessed an equity market fall of over 30% that matches the falls of the 2008 Great Financial Crisis and the 1917 Spanish Flu crisis. Given the magnitude of lost value, markets have been swift to recover between 20% and 30%, but still remain between 20% and 40% off their pre-crisis highs of February. We think that markets are now offering fair value given the pending recession, sovereign debt levels, trade tensions with China, unemployment and the slow release from lockdown. We think we have already had the quick wins in stock market gains in the three weeks after 23rd March. Now, we are in for a slow and bumpy recovery through to 2022 when we should return to normal.

It would be common after stock market falls, to position a portfolio with higher levels of equity to benefit from a recovery in value. We have, however, retained the relatively cautious asset allocation that has been our hallmark for the past 2 years. This positioning held our portfolios in good measure through the bottom of the market in the third week of March. Our portfolios lost money but not as much as the national averages.

The figures below illustrate the gross performance of our portfolios against their respective benchmarks in the one month up to Friday 27th March.

Cautious Portfolio -8.72% Benchmark -8.84%
Conservative Alpha -9.85% Benchmark -12.48%
Balanced Beta -13.02% Benchmark -12.48%
Balanced Alpha -11.55% Benchmark -14.08%
Speculative Beta -14.29% Benchmark -14.08%
Speculative Alpha -12.75% Benchmark -14.08%

From the above figures we can see that our active Alpha portfolios offered better downside protection than the index tracking passive Beta portfolios which by their nature just follow markets.

Since late March, the recovery in value within the portfolios has been reassuring and evidence of the strong selection in the underlying funds. The figures below illustrate the gross performance of our portfolios against their respective benchmarks in the one month up to Tuesday 12th May.

Cautious Portfolio +2.58% Benchmark + 2.36%
Conservative Alpha +3.58% Benchmark +2.99%
Balanced Beta +3.67% Benchmark +2.99%
Balanced Alpha +5.03% Benchmark +3.96%
Speculative Beta +4.54% Benchmark +3.96%
Speculative Alpha +5.60% Benchmark +3.96%

Again, from these figures it can be seen that the higher the equity content within the portfolio the greater the recent recovery. Our overweight position in US and tech stock aided the returns along with holdings in investment-grade bonds and gold.

Looking further into the analysis of stock market performance it is clear that the USA has rebounded further and faster than other markets. This is due to the Federal Reserve’s actions and because the world’s leading tech companies are American corporations. The US tech giants have prospered through lockdown as internet communication and on-line shopping has grown. We now expect this to be the new normal. We have held an overweight position in the US for several years and hold funds that are invested in companies like Amazon, Microsoft, Apple and Facebook. Even with the greatest number of Covid-19 deaths, the USA is still the world’s most dynamic economy. We will continue to hold T. Rowe Price US Large Cap Growth and Loomis Sayles US Equity Leaders in all portfolios with Schroder US Smaller Companies in our Speculative Alpha portfolio.

We expect trade tensions and anti-China rhetoric to dominate the next few months as we head towards the US presidential elections in November. Because Donald Trump needs a strong economy and a stock market recovery, he may not risk another trade war with China in the near term.

The return on equity values in both the UK and Europe have lagged behind that of the USA. The UK market has benefited from falling sterling values, massive government stimulus and interest rates at near zero. However, markets are concerned about the chances of a failed Brexit negotiation, high government borrowing, high unemployment and a slow release from lockdown. These factors will hold back a swift recovery just as they will in Europe.

The issue of a hard Brexit may resurface again with arguments over a level playing field and access to fishing waters. A hard Brexit is not in any country’s best interests especially as we are all looking at a potentially harsh recession. We hope that politicians will reach an agreement before July’s deadline. The British people took on the coronavirus crisis with great national solidarity but the divide over Brexit may resurface if Brexit again becomes a dominant issue in Q4 2020. We have maintained our holdings in Lindsell Train UK Equity and Liontrust Special Situations in all our active portfolios and Standard Life UK Smaller Companies in our Balanced and Speculative Alpha portfolios.

We are concerned about the imbalance of sovereign debt levels within Europe. The political and economic tensions this is causing are somewhat limiting the eurozone from applying their full economic strength to combat the coronavirus crisis and the recession. The German Constitutional Court ruling may restrict or limit the ECB from buying up further Italian sovereign debt and this will have economic as well as political repercussions. Europe does not have a tech industry like the US, nor the dynamic youth of Asia. It has older industries and high national debts. The recent slowness of its co-ordination and emergence from the crisis only highlight this. For these reasons we again have no direct holdings in European equity or bond markets and have directed this allocation to the USA, Asia and to global specialist sectors.

As far as Asian and emerging markets are concerned, they will benefit from the extremely low price of oil but there will be a mixed recovery from the crisis. Due to this, we have reduced our holdings in JP Morgan Emerging Markets and sold our holdings in Stewart Indian Subcontinent. We have redirected this allocation to the First State Greater China Growth fund as we wish to benefit more from China’s early emergence from lockdown and its growing economic strength.

Fixed interest markets have behaved a little differently than expected as a number of our long-standing holdings in strategic bonds, corporate bonds and high-yield bonds exhibited an element of equity like losses and disappointed us in their downside protection. We have been overweight in US treasuries and UK gilts which cushioned losses and maintained value throughout the market turmoil. As soon as the Federal Reserve started buying up corporate credit across the risk range, there was a significant bond market rebound. Interestingly, the passive bond funds outperformed the active bond funds during this period, which is the exact opposite of what occurred with the equity funds.

Going forward, we have reduced our exposure to high-yield bonds in preference to more secure investment grade bonds which with greater QE support, should offer attractive risk related returns along the yield curve. We have maintained our holdings in UK gilts and US treasuries, but added to our exposure in UK and global investment-grade bonds and to some long-dated credit as we seek to provide greater downside protection and improve negative correlation within the Edition 33 portfolios.

It would be normal to invest in gold in the run up to a recession. Our holdings in the Blackrock Gold and General fund were the best performing over the past six months and particularly in April. We are going to retain our holding but not increase them as gold mining funds are notoriously volatile.

We have maintained our other specialist holdings in First State Global Listed Infrastructure and Polar Capital Technology. The Polar Capital Technology fund was the next best performing fund in the last six months. We have removed our holdings in Blackrock Global Property Securities due to recent poor performance, volatility and the recent addition of a 5% entry charge to new investors. This is a great disincentive to keep the fund and so it has been removed. We think that the property sector and rental payments are going to go through a tough period and therefore, avoiding this sector for a while suits us. We are also avoiding the global insurance market as we expect claims experiences to worsen. We have therefore removed Polar Capital Global Insurance.

We have increased our holdings in index tracking passive funds across all portfolios mainly in the fixed interest sectors. This is a result of the more secure and superior performance from our index tracking bond funds compared to our actively managed strategic and corporate bond funds. This has also resulted in portfolio costs falling.

Overall, the new portfolios have been improved due to the recent market experiences and are more robust going into a recession with greater downside protection. The Speculative Alpha and Speculative Beta portfolios have a greater exposure to equity for investors seeking greater capital returns over time. We think the next year will be one of consolidation and lower hard-earned returns and therefore recommend a cautious outlook going forward. These new Edition 33 portfolios are positioned to achieve this.

We have decided to stop offering a Conservative Income portfolio. This is because clients are asking for a monthly set amount of income instead of a natural dividend. Additionally, over the past several years there has been an out performance of growth stocks over value stocks. With dividends now likely to be cut, investment for income is less attractive than investment for growth which can be taken as income. All investors in the Conservative Income portfolio will automatically be switched to the Conservative Alpha portfolio and their income withdrawals maintained.

As of 12th May 2020, the best performing funds held in our portfolios over the past 6 months have been;

Blackrock Gold and General 36.89%
Polar Capital Global Technology 20.46%
T. Rowe Price US Large Cap Growth 13.52%
Loomis Sayles US Equity Leaders 11.57%
Blackrock North American Index 8.25%

The reason for these outperformances is that the great winners in the Coronavirus crisis were gold and tech companies.

As of 12th May 2020, the poorest performing funds held in our portfolios over the past 6 months have been;

Polar Capital Global Insurance -20.28%
Blackrock Global Property Securities -19.44%
Stewart Indian Sub-Continent -18.95%
Blackrock UK Equity Index -17.32%
Franklin UK Equity Income -16.48%

The returns on the above funds are all related to the heavy sell off in equities due to the coronavirus crisis. This would not have been the case without the pandemic.

As far as the 33rd Edition of our portfolios is concerned, across all six portfolios, seven new funds have entered our selections while ten funds have either been dropped or substituted. We have done this for a number of 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.

We will be launching our new Edition 33 portfolios in June and recommend all our investors take up the opportunity to rebalance into the new selections and allocations.

We are pleased to report that our six portfolios have performed very well compared to the relevant national Investment Association (IA) benchmarks. The relative performance is measured over six time periods: – 6 months, 1 year, 2 years, 3 years, 4 years and 5 years. Collectively our portfolios outperformed their respective benchmarks on 36 out of 36 occasions. This is our best relative performance against the national averages in the 16 years we have been managing portfolios.


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Chris Davies

Chris Davies

Chartered Financial Adviser

Chris is a Chartered Independent Financial Adviser and leads the investment team.