A letter from our Chief Investment Officer
14 May 2020
Martyn Surguy , CIO

The worst seems to be over. But we have a long way to go yet.

As we digest the implications of Prime Minister Johnson’s update last weekend, it’s hard not to think that the unusual circumstances we find ourselves in are set to continue for much longer than we originally thought. This poses further challenges to us all. Our hopes for a swift return to normality have been dashed, or at least deferred. Both mentally and organisationally we must reset and prepare for the long haul.

In doing this, the qualities of discipline and patience will be key. Discipline will help us stay within the revised government guidelines, patience will stop us from becoming overly frustrated and losing sight of the end goal. It struck me that these qualities are exactly the ones that successful investors require – particularly when the investment landscape changes as fundamentally as it has in recent months.

Discipline can manifest itself in many ways. We must trust our investment beliefs. We must resist the siren calls of our emotions and not act in haste when calm reflection is required. We must never lose sight of the long-term objectives for every portfolio we manage.

Patience is not only a virtue but the cornerstone for investment success. Ours is not a game of ‘home runs’ and instant gratification, but of long-term planning and careful thought. Changing course frequently or zig zagging through market uncertainty doesn’t work. It’s vital to rely on proven principles that are likely to work well over time.

Our investment principles have helped us navigate the challenges that have come our way this year. Focus on the long term, trust the structure provided by our strategic frameworks, look for opportunities along the way, don’t react to market noise.

Each of our portfolios are set up with a strategic roadmap designed to take our investors safely to their destination. Most obviously, it’s vital that everyone owns a sensible spread of assets. And we want to draw on as many sources of return as we can to diversify every portfolio.

Alternatives are crucial to our portfolios, though can be hard for investors to understand. They enable us to employ a wider range of investment tools and techniques. Typically, we use them to diversify and, in recent times, to provide an effective substitute to sovereign bond markets which offer low yield and return prospects. Our alternatives have performed superbly this year, and outstripped bonds by far.

Some of our secular themes have also helped this year. For example, we bought US healthcare in the middle of last year. We didn’t see a pandemic coming, but thought that as the world’s people become older and richer they will spend more and more on healthcare. Moreover, the sector was cheap due to political concerns in the United States. At the time of writing the sector is one of few areas that’s up for the year. It remains attractive and is very much a core holding for us.

We invest globally, which means not only looking to international stock and bond markets but also holding foreign currency as standard in our portfolios. This can be an important buffer when markets are stressed as sterling tends to be highly volatile at such times, due to the UK’s weak balance of payments. This is exactly what happened in 2020, but in March sterling fell to levels that didn’t make sense to us so we added to our positions.

Credit markets, too, have presented us with interesting opportunities as the crisis has unfolded. In March, spreads between corporate and government bonds shot up to levels last seen in the financial crisis of 2008 as investors worried about whether companies would be able to repay their debts. Credit markets were dislocated.

But 2020 is not 2008 – governments and central banks have stepped in to alleviate solvency concerns and the big banks are far more resilient. We added significantly to credit, cutting sovereign bond holdings to almost zero in most portfolios. Our conviction is high, so we bought decisively.

Perhaps the best example of discipline in portfolio management is the imperative to rebalance portfolios back to their long-term target weights periodically. This ensures that portfolios don’t drift too far from their moorings, which is especially important when asset classes have been moving very differently. In March stocks plummeted while bonds gained. Uncertainty was high, newsflow appalling and sentiment dreadful, but we maintained our discipline and rebalanced. We sold expensive bonds and bought equities that had plunged, enabling portfolios to participate more fully in April’s recovery.

The financial markets will present us with many more challenges over the summer months as they digest the magnitude of the economic setback and corporate headwinds. We must ensure that our portfolios can cope with this but are also looking forward to better times around the corner. Having the patience to rely on tried and tested portfolio structures, together with the discipline to fine-tune the framework as market conditions change, should enable us to do exactly that.

Please stay safe, stay well and let us know if there is anything at all you need from us.

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