Investment Update – January 2019

With a very rocky 2018 behind us and with 2019 stretching out in front of us we felt it was time for an update on our current investment positioning, thoughts and considerations.

Firstly, a look back. It is easy to see current volatility and, in some cases, short term losses on portfolios and lose perspective. We are, in all likelihood, nearing the end of the current economic cycle’s growth phase. It has been an unusually long period of growth and it has done very well by most investors. In the 10 years to January 2019 global equity investors have seen returns of over 200%, and the average 20-60% equity managed fund (formally called the Cautious sector) almost 75% (74.97% according to the Investment Association).

As we near the end of the cycle, the press and pundits naturally switch focus and try to spot the next recession. We see lots of reason to be cautious. Globally central banks are beginning the tricky process of monetary tightening (made trickier with the backdrop of quantitative easing programs to manage) and the ongoing threat of a major trade war rumbles on. Domestically Brexit is going to be a continuing theme for the year and the impact on domestic assets and the value of sterling will be important areas for us to consider regularly. But at any point in time there will always be big ‘landmines’ on the horizon for investors. Our role is to judge them with a clear head and position our portfolios to deliver the best long-term performance we can.

Against the backdrop of a possible recession, global trade wars and a possible ‘ctrl, alt, delete’ on the UK’s international trade policy what have we done?

Currently we are neutral in our positioning to both equity globally and to UK assets overall. We have taken the step to reduce our exposure to mid-cap UK equities (which we normally hold through FTSE 250 index trackers) and we have introduced active management in how we hold equities in emerging markets. These decisions are based on concerns around Brexit related volatility (for the UK equity move) and on the impact on developing market companies of rising US interest rates (for the emerging market move).

We have the ability to move our equity allocations up (if we are confident of a short/medium term rise) or down (if we are confident of a short/medium term fall). To change our equity allocations is a material change risk in our portfolios and so we would only do so when we had conviction. As it stands we have no reason to believe the current bout of volatility will be the start of further drastic falls in value. Equally we still think equity is the best place to invest for long term growth but would not have conviction that we will see a rapid correction upwards in the coming months.

Longer term positions for us remain in place. We have not held any UK government bonds for many years and with rate rises a near certainty in the coming years we expect this to continue. We have overweight positions in corporate debt with less than five-year maturities and in actively manged funds trying to deliver a low and steady positive return in all market conditions. We expect these positions to shelter us from the losses some fixed income positions may see if rates rise quicker than expected.

Why aren’t we panicking yet? Underlying statistics in the economy remain good. Unemployment numbers in most markets continue to be impressive, inflation is not running wild and consumer confidence remains above the long-term average. Although the tightening of monetary policy is going to be challenging for markets we are conscious that rates are unlikely to get near historic highs and also that this cycle has a key difference with the ongoing presence of the liquidity pumped into the market from quantitative easing programs. As we see fundamentals shift and growth look a challenge we can take this into account and consider trimming our equity content.

We would be remiss to not also turn our focus onto Brexit. The media coverage of Brexit so far has been almost non-stop but (unsurprisingly) so poor in explaining some key issues that Brexit-fatigue is completely understandable. With apologies to those suffering from this fatigue we must point out that 29 March is (at the time of writing) the conclusion of only the first and easiest stage of the process.

From our reading of the situation the only thing we can be sure of is that something will happen on or before March 29th. With such extreme outcomes (remain, a delay and continuation of the current stalemate, hard exit with no deal) all still in play it is not possible to sensibly position a portfolio for all of the risks.

We have considered our positioning should we have a known outcome for the next three months of Brexit. The areas of most concern would be our holdings in UK property and our exposure to the pound.

We hold UK property exposure in large ‘open ended’ funds which purchase bricks and mortar property assets throughout the UK. There has already been some outflows from these funds and they have in turn adjusted their pricing to allow for this and protect investors. Despite some headwinds for UK property prices we have held our positions here for some time as the yield available has remained attractive compared to the return in fixed income and the risk in equity assets. We will carefully consider our position in property in 2019, property remains an important asset class for us but also an expensive one to buy and sell.

We have our next formal Investment Committee meeting on 6th February. We will monitor markets before and after this but at the meeting will review data on all of the issues above and position our portfolios accordingly.

We agree with consensus that 2019 is likely to be another challenging year in the markets. But with a long-term focus and sensible short/medium term positioning for global events we are confident there is no need to panic.