2018 sits at the end of a decade of generally strong investment markets. With interest rates at super low levels, the flow of money into all assets has been consistent and relentless for much of this period. Even in cautious mandates, where the majority of your return comes from secure income-producing assets like bonds, we have seen stellar returns – over 10 years the DB Wood Low Risk Portfolio has produced over 65% net of all fees at the time of writing.
The problem with keeping interest rates low forever is that the next time a recession comes around, policymakers have no tools in the toolkit. So, whilst the sun shines, Central Banks are making hay, trying to walk a tightrope by slowly raising interest rates without killing confidence. The UK is an excellent example of this, where despite significant Brexit uncertainty, the Bank of England have still increased rates twice in the last 14 months.
Just as reducing interest rates increases the majority of asset valuations and fills the markets with liquidity, increasing them does the opposite. It is, therefore, not surprising that outside of US technology (which we think is highly risky), it is very hard to find an asset class that hasn’t lost you money year-to-date. With cash providing a close to zero return, even that is eroding the value of your money, especially when allowing for inflation.
So, investment markets have been going through a shakeout. We have been expecting this for some time and we know it’s good to have a shakeout from time to time. It is not normal for markets to go up in a straight line, as what comes up invariably comes down. It’s not right that less effective companies are rewarded the same as more effective companies through increased share prices, or for bonds to offer you a derisory1% income per year – these are the times we are moving away from. Challenging times, absolutely, but crucially important for restructuring portfolios for the years ahead.
2018 has been a year of capital preservation and reorganisation, we have largely stayed away from bonds, even in our cautious mandates, and we have also been selective with our equity exposures, where we have been looking for opportunities to add value. We were buying when equity markets got cheaper in February and March and did so again in October. We have recently taken some profits from our commercial property holdings into cash to wait for more value to emerge elsewhere. We have reallocated some oversees equity into UK equity taking advantage of the weaker pound to obtain more value and ensure we’re well balanced irrespective of the Brexit outcome.
Our clients will not see the results of this work yet, but we expect it to come as and when things improve. We still think stock markets will remain choppy for a while, we expect to see markets increasingly rise and fall. In the meantime, our Portfolios offer a core holding of low risk stable assets, which will continue to meet your short and medium term needs, together with a strong underlying yield that is buying more units as your longer term investment in equities fluctuate, and our team look for opportunities at the right price (see recent blog – https://www.dbwood.co.uk/blog/ic-insights/hidden-power-income/ )