Investment Committee Update – Plotting the Journey…

As governments around the world start to consider their exit strategies from lockdown, they will be thinking long and hard around the risks and how best to manage them. It will be imperative to have plans in place to monitor and evaluate containment, so they can ensure the country can navigate its way forward. Effective planning is at the forefront of delivering a successful outcome, and this applies as much to COVID-19 as it does to any other aspect of life. Here at DB Wood our Investment Committee meet for their second quarterly meeting of the year this Friday morning to do exactly the same thing, though they could be forgiven for being sick of the sight of each other, even if that is via video stream rather than in person.

A key aspect to our planning tomorrow will be to look at how we expect developed economies to emerge from COVID-19. There are several permutations, and we will be analysing and planning for all of them. As anyone emerges as a clear front runner over the months ahead, we will alter things accordingly. For now, we marginally favour a U-shaped recovery as a central case, as we are around 15 months away from having a vaccine that can be implemented across a whole population. Strong progress on testing and treatments will allow more restrictions to be lifted than are in place now, though economic growth will likely remain below its February 2020 levels until that vaccine creates herd immunity.

Our portfolios are tilted heavily in favour of large quality assets, with a broad geographical spread. In our lower risk portfolios, we are not overweight in stock and shares, which will mean that we will not climb upwards as rapidly as others if investment markets go to the races in the very near future. Similarly, if the virus has a second wave, we will not be damaged as significantly as others. We have made a conscious effort to pick up income producing assets, which means as our central case plays out and economies take slightly longer to recover, we will pick up steady returns.

This outlook is not the only path possible. Friday is about setting contingencies and looking at triggers for those contingencies. It will also be about monitoring our progress compared to our objectives.

In this respect, our model portfolio range has always been centred on managing volatility. This is achieved by controlling the downside correlation when investment markets fall and then adding value and opportunity as things improve. The combination allows the portfolios to benefit to a greater extent on the way back up, than they did on the way down.

Since 23rd March the market environment has improved considerably. Swift and large-scale policy responses have provided support, and the virus’ trajectory has improved, plateauing and even falling in most countries. The UK equity market has rallied over the last few weeks, adding 11.86%. Comparatively our Low to Medium Risk Portfolio has added 8.72%, equivalent to a correlation of 74% i.e. for every 10% the market has gone up, it has gained 7.4%. As the graph opposite shows, when markets fell, our correlation, whilst higher than we would have liked, was much lower than our upside correlation, meaning when markets return to parity, we are on course to be well ahead.

What is perhaps more reassuring, as mentioned before, is that we have not had to increase risk materially to achieve this. We are in fact today more cautiously positioned than we were at the start of the year when things were looking expensive yet there was no obvious sign of a pending recession.

This gives us confidence that if things got worse from here, we would be in an even better place to protect our clients’ money. This balance of better protection but strong upside opportunity we feel places us in an excellent position for the months ahead, though you can be sure that instead of positioning purely for our central case; a gradual release of some restrictions across the summer months but with many still in place until a vaccine is available in the summer of 2021; we are planning for a variety of outcomes, both positive and negative.

In the meantime, we are invested in high quality businesses, offering excellent income driven returns that will continue to trickle in. As the story evolves, we will stick to our active stance, determined to plan effectively and deliver a journey that over the long term provides sustainable returns.