We have written blogs on the process we follow when managing and reviewing the portfolios. In this blog I wanted to provide more in-depth detail on the portfolios, and why we are so excited about them. I will also touch briefly on our Positive Impact Portfolio, and why we believe it is an important part of our range.
Starting the journey
Every year we meet up to 100 fund managers; this is about research. We are looking to understand what people are thinking, and where opportunities lie. Within this process we often uncover gems. Every fund and investment within a portfolio must justify its place because there are always other opportunities.
Our current process started two years ago when we worked on the diversified part of the portfolio, which we changed last year (2019). The next stage was about considering the global economy and where we saw the best opportunities over the next five to ten years.
In terms of geographical spread, it was clear to us that China will be the next global powerhouse and now it is about when they overtake the US, rather than if. Therefore, it made sense to have exposure to China. The second area is the US; compared to Europe, the US is more innovative and clearly offers greater opportunities for growth.
When we look at specific sectors, technology and biotechnology will be winners over the next 5-10 years.
One other thought we had was that the idea of ‘value’ does not really exist (value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.) Over time it was becoming clear that the disruption within certain industries meant that ‘value’ normally represented a business positioned to the old world, often heavily laden with debt. Some of these businesses would unlikely survive today; consider the likes of Thomas Cook and Debenhams.
If we built a portfolio with just China, US, Technology and Biotechnology the mix would not work (and our asset allocation is out of alignment), because of the increased short-term volatility and risk. This led to us developing and producing what will now be the portfolios in July.
What just happened?
The blend of holdings proposed for 1 July has some “protective” qualities. What we mean here is that if markets drop in value, the portfolios should not fall as fast as the market, and then when the markets rise again, the mix of funds we have chosen should capture the upside.
For China, we identified opportunities both within the China ‘A’ Large Cap Market (one of the most liquid markets in the world), and Smaller Companies. We also introduced changes to Asia and Europe, as well as adding a Technology Fund.
Interestingly, when markets dropped recently, we continued to monitor the new funds to see what would happen, and we have spoken to almost all the new managers. Two things came out of these discussions, firstly all funds performed better than the market, and have been able to capture the upside recovery. The second point is that where we have heard from managers sounding battered and bruised, these managers have made extraordinarily little if any changes to the portfolios which makes us more confident in the decisions we have made.
If we take Morgan Stanley Global Brands Fund:
|1 January – 16 March 2020||1 January – 30 April 2020|
|Morgan Stanley Global Brands Fund||-11.81%||1.25%|
|FTSE World TR||-21.95%||-8.62%|
When we spoke to the team they explained that the focus on quality had insulated the fund from the broader market falls, and although the sharp correction had opened up opportunities these were often companies they would not buy. They were not actively looking to add to the existing holdings and any new purchases would follow their normal process of researching quality, long-standing businesses. Its top holdings include Microsoft, Philip Morris, Reckitt Benckiser, Visa and SAP.
We also spoke to the management at Matthews Asia and China Smaller, ASI China, ASI Europe, Miton Europe and Morgan Stanley Asia and the messages were similar.
There is a risk with performance from some of these investments if there is a rally in ‘value’. In periods where markets fall heavily, there are often sectors that become hugely unloved for a time and their share prices crater. A ‘dash for the trashed’ (unloved shares) is where previously unloved shares become lovable again and they are bought back at lower prices. These stocks tend to perform well in a rally. We have discussed this with the teams however, and many of these funds are positioned towards the new economy and companies with lower levels of debt.
The point being that over the next 5-10 years these companies would likely be winners. Recent events have enhanced certain companies, whilst weaker ones have withered further. In this case, any ‘dash for the trashed’ (i.e. funds buying these unloved companies) they believe will be short lived, but it does remain a short-term risk.
How did the funds in our portfolio perform?
We identified areas of weakness within the portfolios, and these will be removed in July. During this period, for example, the manager of the Schroder European Alpha Income Fund left, and a replacement was appointed. We spoke with the new investment team, but we no longer believe this fund is suitable for the portfolios.
Atlantic House Defined Returns Fund is a portfolio made up of a series of Structured Products. I wanted to focus on this fund specifically (which remains in the portfolios).
Performance figures year to date:
|1 January – 18 March 2020||1 January – 30 April 2020|
|Atlantic House Defined Returns Fund||-35.87%||-11.60%|
The first time we spoke with the team they believed that based on different factors the recovery in the fund would be swift. By 26 March, the fund was down -16.16% which supported their views. They since explained that if the FTSE remains where it is, (around 6,000) then the fund will rise by 44.42% over the next circa 4 years. Even if the markets drop 10%, the fund will return 32.96% over a similar period.
With using this fund, we were aware of the risks, but also of the likelihood of potential returns and this has played out so far.
What is the Positive Impact Portfolio?
This was our Ethical Portfolio and the aim is to invest in funds which deliver a positive impact on the world (hence the name). This mix of funds provides a different blend to the other portfolios.
For example, Civitas is a Social Housing Investment Trust, and Renewables Infrastructure invests in Solar, Wind etc. The portfolio leans towards those companies which demonstrate they contribute something positive to the environment and society in a financial setting.
We have found that in times of market stress this portfolio tends to perform better than the wider market, due to the focus on different, quality assets.
In the latest review we made some changes to include Stewart Investors Asia Pacific Sustainable Fund, Vontobel Sustainable Emerging Markets Leaders Fund and Legg Mason ClearBridge US Equity Sustainable Leaders Fund. The was to provide a globally diversified mix of assets.
We believe this provides improved ‘future proofing’ for the investments moving forward. For those who wish to diversify between two portfolios this provides an alternative option as the spread of investments is wider.
Coming into 2020, we believed that certain parts of the world would do better than others, and certain sectors would be natural winners. COVID-19 has, if anything, speeded up change, therefore we feel extremely comfortable with what we have proposed and remain excited for the future.
We are aware of the risk if there is a ‘dash to the trashed’, but we think this will be short lived. We are in an environment of lower growth and those companies laden with debt and positioned towards the old economy will struggle.
Interestingly, we are seeing cheap stocks start to recover, and quality drop back. As the current portfolios do have some value investments they may well benefit from this short term rally, and therefore as quality prices come down we may get the benefit of the short term rally in current holdings and buy into the new holdings at a slightly lower price.
However, we are not short-term traders and over the long-term our view remains that positioning towards quality companies, and specialist areas like technology and biotechnology as well as China and Asia will deliver stronger returns moving forward.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.