2020 in review - If you can keep your head while all around you are losing theirs
2020 has, without exaggeration, been one of the most remarkable years in economic, social and financial history. We’ve seen a sudden stop to the global economy, followed by rapid recovery. We’ve seen a breathtaking collapse in equity and ‘risk markets,’ followed by a breathtaking rebound.
We’ve seen dramatic adjustments to our social lives and the ways we live. It’s not yet clear which of the changes will be permanent and which will fade into memory.
COVID-19 has speeded up many trends that were already in place – a move to more flexible working, a more effective use of technology and the ongoing demise of the high street. These trends will all likely continue.
The debate around the appropriate response to the pandemic has been fierce, polarising opinion in the same way that Brexit does. Everyone has an opinion and it’s strongly held. Is that a further trend that we will have to cope with in the years ahead, as the political and social discourse becomes more hard-line? Will there be less scope for compromise and conciliation? That would indeed be a worry.
Our challenge as investment managers has been to put many of these social and political thoughts to one side and concentrate on the opportunities and risks facing us through the scenarios that have unfolded during the year. Our fundamental beliefs and core principles have helped us do this.
Now there’s a saying, “If you can keep your head while all around you are losing theirs it’s just possible you haven’t grasped the severity of the situation!” But keeping our heads and ignoring the siren calls of fear and greed has helped us and our clients to survive the trials of 2020.
The framework delivers
Our faith in the strategic asset allocation framework that underpins every portfolio we manage has been justified at a difficult time. Along with the financial trauma of 2008 and the ‘surprising’ outcome of the Brexit referendum, 2020 has been another year in which that framework has demonstrated its value as a solid foundation for our clients.
Yet again, we’ve seen evidence that a diversified asset allocation can deliver when we need it to. Who knew in January what the next 11 months were likely to hold? Owning a sensible spread of assets diversified across major asset classes, regions and currencies makes sense to us for the long term. Frankly, it had not been that helpful in the previous couple of years as only the US equity market and sovereign bonds seemed capable of posting attractive returns.
This changed with a vengeance when financial markets realised how severe a global pandemic could be – and fell precipitously. The sensible spread of holdings, the cushion provided by a judicious selection of alternative investments and a core belief in the merits of healthcare helped our portfolios to hold up well.
Of course, market conditions have evolved as the year has progressed so a determination to be nimble along the way has also been important. Discipline is perhaps the most important quality for any investment manager to have.
As the first quarter drew to a close, equity markets had plummeted and portfolios had moved well away from the long-term moorings provided by our strategic frameworks. Investors were nervous and uncertain. Nobody knew what was going to happen next.
Putting that fear aside, we recognised that portfolios must be moved back to their long-term moorings. They were rebalanced into the areas that had performed the worst (stocks and high yield debt) and away from those that had done the best (high quality debt and alternatives). Sounds easy, but it’s hard to do when the world feels like it is collapsing.
Better news emerged in the spring as central banks came to the rescue by delivering synchronised stimulus packages that were faster and larger than ever before. The global economy would not be allowed to slide into depression and the scene was set for a dramatic recovery in risk assets.
Reassured by the safety net provided by central banks we moved to increase portfolios holdings in higher yielding debt, which seemed to offer outstanding value as investors had rushed for the exits. We also made judicious additions to selected equity markets (Europe and the US).
We are global investors creating global portfolios so it is imperative to look beyond the shores of the UK to identify the real drivers of portfolio returns. The actions of the People’s Bank of China and the Federal Reserve are of more interest to us than the pronouncements of the UK government. The challenge is that it is sometimes difficult to ignore local news, particularly when it’s bleak.
As the summer progressed, our global perspective led us to a more optimistic view than a purely UK one might have provided. The global economy was recovering fast, driven by the successful reopening of Asia whose efforts in controlling the pandemic have been the envy of the rest of the world. The US too was showing encouraging signs, as long as you could ignore the political uncertainty around the forthcoming election.
This assessment sent us in search of likely beneficiaries from a more benign economic, pandemic and political outcome than was expected. We are not in the business of chasing past winners but rather in looking for future ones. Areas more exposed to economic recovery had been left behind in the headlong rush for ‘safe’ technology and related investments.
In late summer we added to a selection of ‘laggards’ that had not participated much in the rebound. Areas such as European equity, Japanese equity and real estate all merited an allocation.
This positioning was uncomfortable for a time as the pandemic situation deteriorated and economic fears grew in the autumn. But what is comfortable is rarely the same as what is profitable, and we were not minded to change course.
And then, suddenly, the landscape changed in November, with the emergence of workable vaccines and a market-friendly outcome to the US election. Our relatively non-consensual positioning in September became the norm almost overnight.
So, what now? The consensus is not always wrong and our intention is to maintain our constructive positioning. 2021 will bring better news on both the pandemic and economic fronts. There will be challenges, not least of which will be the gradual removal of stimulus. We will be nimble and trust the beliefs and process that have served us well in 2020.