June Performance Update – How Are We Doing & What Matters From Here?…

A famous economist once said “it is better to be roughly right, than precisely wrong”. This bares truth in investment management just as much as anywhere else. As an industry, we are obsessed with trying to forecast the future, down to specific details such as how many people will file for unemployment this week, or will UK GDP be -6.4% this year or -6.5%. The reality is that these small differences seldom matter, and instead, just understanding the key trends provides the greatest edge.

The problem with specific forecasting is that it draws you in to focus on the very short term. But as we all know, we invest for the medium to longer term, and therefore should be more concerned with results over that timescale. As we have highlighted across a number of recent blogs, our main focus remains concentrated on buying the equity and debt (bonds) of quality businesses, with strong balance sheets, in favourable sectors that are less affected by the current pandemic. Market noise may cause the prices of those assets to move up and down over days and weeks, but the long-term trajectory is determined by how the business performs.

This focus is then overlaid by some bigger picture economic views, based around the perceived consequences of key events and data trends. In March our view was that the virus trend would alter once lockdowns were imposed, and in recent weeks we have felt it is highly likely that second spikes occur in specific areas across the world (though importantly, these should be more easily contained by testing and contact tracing at local level). We do not need to be right about the whole story, but just the general theory.

Market volatility has picked up significantly in recent weeks as concerns over a second wave have started to fester. However, our portfolios continue to perform well, adding between 0.80% (Low Risk) and 1.24% (High Risk) in June so far. In fact, all our portfolios sit in positive territory over the last 12 months, comparative to the FTSE 100 index which remains well below its previous peaks.

Outside of our continued focus on quality businesses, looking forward, there are several events that we feel are key influencers of the medium to long term trajectory of our portfolios; the control over the virus and in particular to avoiding a significant second spike, the timing of a vaccine, the progress of Brexit talks, and the outcome of the US election. At present we are positioned quite defensively, in anticipation of a second spike, though we have plans laid out of what to buy if overnight a vaccine is found. We are less optimistic about the UK in the short term, as the Brexit outcome looks very unpredictable. We therefore hold an underweight position to UK assets. There are other things that will move markets day to day, but these events will have the biggest impact over 12 months and beyond.

We are not aiming to predict these outcomes, but to consider the consequences, and to adjust our view and the portfolios’ positioning as we receive more information. In this respect, our team are fully focused on building on the good work so far this year, planning for a variety of scenarios, and then quickly implementing once we are confident things are moving in that expected direction.