The Investment Committee
4th November, 2020
October Performance Update…
After six straight months of positive portfolio returns, October looked to be inevitably more challenging. The political world has seldom faced more pressure in such a short space of time, with Brexit negotiations and US election campaigns seeming like drips in the ocean compared to our wider global challenge. The bad news has been laid out; Brexit negotiations have seen deadlines come and go, the US election looks mightily hard to call, and without further restrictions, Europe is facing a second wave as challenging as the first.
However, that gloomy picture doesn’t have to last long. On the virus front, there are big differences between now and March, with stage three vaccine trials due imminently, better treatment, and a more advanced (albeit certainly not perfect) testing system that should continue to improve. By far the most important of those is vaccine trials, and whilst there are no certainties here either, we have to pay some credence to the progress of science. In addition, political noise will be resolved one way or the other in the next few weeks and often what might be deemed a poor outcome, at least provides certainty. Markets don’t like the unknown – hence the October jitters we have seen in markets.
What we do know for certain is that irrespective of any outcomes, the next few months are going to be extremely tough for businesses and households alike. However we should not lose sight of the reality is that things will improve from here, and when the clocks spring forward next March, the view from the top may well look very different.
Investment wise, markets are having to deal with the same emotional challenge we are. So unsurprisingly markets reacted with increases in volatility. The US market recording its biggest one day drop since March followed by the UK market falling to values last seen in April.
In terms of our portfolios, we have written recently about our decision to become gradually more cautious as valuations have risen. We reduced equity exposure to take profits, with a view to build cash in the hope of finding improved valuations and opportunity down the line. So whilst our portfolios ended their 6 month positive run, in a relative sense, October was another good month, as they protected recent gains, falling between -0.03% (Very Low Risk) and 1.26% (High Risk). All portfolios remain positive gross of costs in 2020. To put this in perspective, the UK top 100 companies (FTSE 100) is down 24% year to date (to 31/10/20).
In terms of our ‘Brexitometre’, we feel that whilst there is still a good chance of a no-deal Brexit at the end of the year, our pendulum has more recently swung back towards some form of skinny trade-deal, with politicians on both sides of the channel unlikely to want to add more disruption to their already very disrupted economies. It’s still in the balance though, and it’s too early to call the outcome. We have remained very light on our UK exposure so far this year and this remains the case – at least for the moment.
Looking forward from here then, we see two big risks. The first is a lack of any positive news from the vaccine trials with a noisier political backdrop and the second is a rapid change in environment brought about by good news on all those fronts. The latter may not seem risky, but from a portfolio perspective we are just as wary; missing that boat could mean missing significant positive returns. Our main objective still remains the same, to protect client’s money when environments are difficult. Our performance shows we have delivered this well so far this year with October being another example of this. Moving forward though, as the forward opportunity set increases, we need to ensure we are able to play our advantage when the positivity tide turns. The question is not ‘if’, but ‘when’.