Compass - July 2020
This month in Compass, we explore life after lockdown, investment company managers discuss their outlook for the major world regions, and Ian Cowie takes u
By Annabel Brodie-Smith
Well there’s not long to wait – in just one day the pubs and restaurants will be open. Although Leicester is back in lockdown and we are all too aware that we are not free of coronavirus yet. Perhaps, most importantly for my family, the hairdressers will finally be up and running. My youngest son can’t see out from under his fringe, my eldest has a crocked fringe after he decided to take the scissors into his own hands and my husband has a classic 1970s footballers’ mullet.
On this theme we have a release covering managers' views on the prospects for pubs, shops and leisure activities post lockdown. It’s clearly not business as usual but many companies are adapting to the challenges of coronavirus quickly. After over 100 days of lockdown in the kitchen or by the barbecue, my husband and I can’t wait to go out to dinner and experience freedom from clearing up!
You’ll have noticed I didn’t even mention my own hair above as you can see it in all its glory on the video…This week I have been talking to three fund managers who are all fans of smaller companies and have a wealth of experience. Hugh Young will have been managing Aberdeen Standard Asia Focus for 25 years in October this year and he spoke to us from Singapore. Francesco Conte will have been managing JPMorgan European Smaller Companies for over 21 years and Gervais Williams has managed Diverse Income Trust since its launch in 2011 and has been managing investment companies for a long time before then.
I would really encourage you to watch the video on the next page which looks at the impact of coronavirus, what Hugh, Francesco and Gervais have been buying, their concerns and their outlook. The managers are all very realistic about the tough times ahead but it’s encouraging to hear about the opportunities they have been finding. From Hugh finding technology companies to Francesco’s online pharmacy, they have been busy investing throughout the pandemic and they all think there’s a very strong case for buying smaller companies. Also look at the release which includes views on Japan and the US as well as the UK, Europe and Asia.
Interestingly, Gervais thinks it’s smaller companies that will be the star performers of the UK market in the future. This is because he believes the dominant trend of globalisation is retreating, with Brexit and the US-China trade wars reflecting this, and coronavirus contributing to our increasing isolation from the rest of the world. He thinks this will mean we are going back to a more difficult environment, similar to the 1980s when he started his career, where it’s harder for managers to make money as stock markets and assets will not all go up in value. Active managers will therefore have to work harder in this environment and he thinks they will invest in smaller companies that usually perform better over the longterm.
Investment company managers discuss the effect of COVID-19 on the regions in which they invest.
And perhaps if globalisation of trade is receding, it will have an impact on inflation as globalisation has been an important factor keeping inflation down for a while. We look at managers’ views on whether we are heading for an inflationary or deflationary environment. They all agree that the risk is disinflationary in the short term as the pandemic will cause rising unemployment and low levels of consumer spending but views are divided after this. Peter Spiller, manager of Capital Gearing believes: “Once the crisis abates public debt will be at levels not seen since the Second World War. The solution to such problems will be the same now as then: financial repression, a prolonged period of low interest rates and elevated inflation.”
Finally, our much-respected investment expert Ian Cowie describes how: “Investment companies bring the world within reach". It’s fascinating to hear about his globally diversified portfolio of investment companies. Some are defined by geography such as JPMorgan US Smaller Companies or Henderson Far East Income while other are focused on commercial sectors such as International Biotechnology or Polar Capital Technology. I found his holding in Aberdeen Standard European Logistics particularly interesting in the current situation where we are working from home and spending more money shopping online. As Ian explains: “Everything we order online has to be stored somewhere before it is delivered to our door, boosting demand for Aberdeen Standard European Logistics’ warehouses and distribution hubs across continental Europe.”
Compass is having a summer break in August but will be back in September. Our summer holiday plans are not surprisingly uncertain but I’m hoping the sun shines, the barbecue sizzles and we can go swimming in the river.
I’d like to wish you all a healthy and enjoyable summer.
See you in September.
Communications Director, AIC
What does the future hold for pubs, shops and leisure activities?
Non-essential shops have reopened and cafes, pubs and restaurants will follow tomorrow. The AIC has gathered comments from managers about how holdings like JD Sports, Hollywood Bowl and JD Wetherspoon have coped with lockdown, their strategies to manage social distancing and their longer-term outlook for the retail and hospitality sectors.
Coping with lockdown
Sue Noffke, Manager of Schroder Income Growth Fund, said: “The management team of Hollywood Bowl began to draw up plans to implement social distancing at their sites in mid-February, before the virus was widely known to be spreading in the UK. This put them on the front foot in managing the situation when the UK did introduce distancing measures in mid-March. Measures included closing alternate lanes, encouraging more pre-booking from customers, changing the layout of bar areas and temperature-checking staff during shifts.
“When full lockdown was enforced, the group’s preparation allowed them to quickly go into ‘survival mode’ to conserve cash. They closed all sites, suspended dividends, cut executive pay, placed 98.6% of staff on furlough and negotiated with landlords for rent-free periods or deferrals. To ensure they kept their balance sheet strength, on 17 April the company raised £10m through a stock market placing of 5% of their share capital. This covers more than six months of ‘cash burn’ in full lockdown.”
David Smith, Portfolio Manager of the UK portion of The Bankers Investment Trust, said: “During the lockdown JD Wetherspoon moved quickly to reduce its monthly ‘cash burn’ from £80m to £3m, benefitting from the government furlough scheme, business rate suspensions, rent reductions, capex deferrals and head office cost reductions. As its pubs reopen, the majority of these costs will come back without the full level of revenues in the short term, hence we don’t expect the company to return to full profitability over the medium term. However, over the longer term we believe the company will be one of the winners in the industry. Given the strength of the business model, Wetherspoons can continue to provide a value offer to its customers in a safe environment and maintain the investment in its estate.”
Abby Glennie, Manager of Aberdeen Smaller Companies Income Trust, said: “Some of the retailers that have weathered the crisis better than others are the ones that have committed to and invested in developing an online platform. For Dunelm, the strength of its online investment has come through during the last few months. Homeware sales were resilient in the last recession, and with COVID-19 people are happy to spend money on homes as they are spending more time there. Similarly, Hotel Chocolat has experienced a strong shift to online. Its management team have adapted and driven the business well through the situation, for example pre-bundling products and limiting ranges for distribution efficiency. It has shown community spirit through a 50%-off NHS keyworkers offer, which should also have helped its brand and attract new customers.”
Guy Anderson, Portfolio Manager of The Mercantile Investment Trust, said: “Stores remain closed until mid-June, but there has been a partial offsetting of lost sales through increased online revenues. Retailers with strong multichannel offerings have been particularly successful in this regard. For example, Dunelm reported significantly higher online demand versus pre-COVID levels following a phased reopening of this channel during lockdown.
“Meanwhile B&M, the discounter, benefitted from its status as an essential retailer and enjoyed strong demand even through the lockdown period – like-for-like sales grew by 23% year on year in April and May. Demand was strongest in DIY and gardening, but like-for-like sales grew by 10% even excluding this category. Forty-nine stores had been temporarily closed due to adverse trading conditions at the beginning of lockdown, but these are now open and trading again.”
Katen Patel, Portfolio Manager of JPMorgan MidCap Investment Trust, said: “The key focus for management teams has been on reducing the amount of cash that is being absorbed during the lockdown period and ensuring there is enough liquidity for the business to survive an extended period of little or no revenue. Cutting expenditure on more discretionary items such as overseas travel or big marketing campaigns are obvious areas, but also spending a lot of time renegotiating terms with landlords has offered up large cost savings. Leading retail outfits such as Dunelm are prized tenants and therefore landlords are more willing to renegotiate terms with them to ensure they don’t move to alternative properties.”
Prospects post lockdown
David Smith, Portfolio Manager of the UK portion of The Bankers Investment Trust, said: “When pubs are allowed to reopen it clearly won’t be business as usual. Capacity will have to be limited due to social distancing rules, while costs are likely to rise to cover extra equipment to safeguard employees and customers. After the company’s capital raise, JD Wetherspoon is in a stronger financial position to adapt its business to these challenges. Also the company benefits from an estate that has larger than average sized pubs, a wide range of trading throughout the day and their already successful order and pay app.”
Abby Glennie, Manager of Aberdeen Smaller Companies Income Trust, said: “Greggs has a great value offering, and social media has really driven new customer engagement in the past couple of years. Like many high street names, they have some challenges with footfall and social distancing, but their store base is quite diverse in terms of location and before the crisis they had been investing in digital areas, such as click and collect, and working with delivery partners. Games Workshop has already reopened shops in some other countries and will open its UK shops as and when government guidelines allow. This is a benefit of its global footprint. Their primary product – fantasy games – is well suited towards home entertainment, which will remain in high demand beyond the peak of the crisis.”
Katen Patel, Portfolio Manager of JPMorgan MidCap Investment Trust, said: “Those companies that have been showing strong growth in recent months and years, taking market share from others, and have had the balance sheet muscle to cope with the crisis, will come out of this well placed and should benefit the most. JD Sports is a great example of this, a global sports fashion retailer with very strong relationships with key suppliers. They have a net cash balance sheet and should emerge from the crisis well placed to resume the strong growth they have seen in recent years, driven by well invested stores, global expansion, a good online offering and access to exclusive products. Competitors with weaker balance sheets will not be able to invest in their stores or multi-channel offering and therefore may be less likely to get the exclusive product they want from key suppliers, further cementing JD’s position.”
Guy Anderson, Portfolio Manager of The Mercantile Investment Trust, said: “As lockdown measures begin to lift, we believe that one company that may be set to benefit is DFS, the furniture retailer. With some housebuilders and estate agents reporting renewed levels of interest in recent weeks, a bounce in the housing market, potentially helped along by supportive government policy, could feed through to increased demand for DFS.”
Outlook for the longer term
Sue Noffke, Manager of Schroder Income Growth Fund, said: “Hollywood Bowl entered 2020 in good shape. The UK’s leading operator of ten pin bowling alleys had a robust balance sheet, was generating strong cash flows and had a multi-year runway of growth ahead of it. However, as a result of COVID-19, all of their sites are now shut, revenues have fallen to zero, 98.6% of their staff have been furloughed and cash is flowing out of the business as they still have to pay fixed running costs such as rent and utility bills. Despite these significant near-term headwinds, their management of the crisis has given us confidence that the company will exit it in an advantaged position so that they will ‘carry on where they left off’- continuing to capitalize on the growing trends of ‘experiential leisure’ and ‘competitive socialising’.”
Katen Patel, Portfolio Manager of JPMorgan MidCap Investment Trust, said: “The retail sector is going through a period of significant change currently, accelerated by the lockdown measures put in place on their physical sites. Consumers that have been reluctant to experiment with multi-channel retail options have had to adapt and embrace it, which will benefit those that invested in their multi-channel offering in recent years to benefit from these trends. This is not to say that physical stores are dead, however, physical sites will need to adapt to the new environment and work harder to attract consumers.”
Abby Glennie, Manager of Aberdeen Smaller Companies Income Trust, said: “The retail landscape was evolving over the last few years and the pandemic has accelerated these changes. There has been a sharp rise in the trend to online shopping, but much of this will be sustained as and when lockdown eases. It’s not the end for bricks and mortar. Many destination stores and locations will continue to attract shoppers. A combination of bricks and mortar and a strong online platform will be a solid grounding for growth.
“There remains much uncertainty around consumer confidence and spending habits. Many furloughed employees are being paid 80% of their salaries but this will change as furlough unwinds and true unemployment rises. Not all retailers will survive and come through the recession. The strong will get stronger and the weak will get weaker. This is why we’re very selective. We feel confident that we are invested in resilient businesses with strong balance sheets, multiple distribution channels and importantly experienced management teams.”
Guy Anderson, Portfolio Manager of The Mercantile Investment Trust, said: “The UK continues to face significant economic headwinds, which the retail sector is not immune to, but we do feel that there are some bright spots that remain compelling. B&M may benefit from its market positioning as a discount retailer. Against an uncertain economic backdrop, there will likely be a switch to discount-oriented supermarkets as consumers look to save on essentials. In addition to this, with people spending more time at home, B&M should also continue to benefit from its wide product offering, including toys, cleaning products and a much improved homewares range.”
A global outlook
Investment company managers discuss prospects for their regions
The world is embarking on a long journey back to social and economic normality, but the full extent and long-term impacts of COVID-19 remain unknown. What effect has coronavirus had on different regions around the world? Where are managers seeing opportunities and what’s the outlook for investors post COVID?
On Tuesday 30 June 2020, the AIC hosted a media webinar with Hugh Young, Manager of Aberdeen Standard Asia Focus, Gervais Williams, Manager of Diverse Income Trust, and Francesco Conte, Manager of JPMorgan European Smaller Companies, to discuss the impact of coronavirus, how their portfolios are positioned and the outlook for the regions in which they invest.
Their views have been collated alongside comments from Nicholas Price, Manager of Fidelity Japan Trust and Tony Despirito, Co-Manager of BlackRock North American Income.
Hugh Young, Manager of Aberdeen Standard Asia Focus, said: “Obviously COVID-19 has affected the whole world badly. Asia is a curate’s egg, most countries have dealt with it well and virtually all arguably better than the UK. Clearly it will be a recessionary year for the region as a whole, and a number of companies may well fold whilst others will seize the opportunity.”
Nicholas Price, Manager of Fidelity Japan Trust, said: “In Japan, we were in a semi-lockdown for around 1-2 months. The mortality rate and hospital cases look to have peaked here. Tokyo exited from a partial lockdown at the end of May (with regional areas before that), and the Japanese government is in the process of lifting the remaining voluntary restrictions on businesses and domestic travel. At a company level, overall balance sheets are in good health relative to other regions and the banks have plenty of capacity to lend. We are seeing some dividend cuts and I would expect buy backs to be more limited going forward, but I don’t see that causing a significant impact.”
Tony Despirito, Co-Manager of BlackRock North American Income, said: “Upbeat fourth-quarter earnings, improving business sentiment and a phase 1 US-China trade deal compelled US stocks higher to begin the year, until the global spread of coronavirus brought a swift and sudden reversal. Concern over the human and economic toll of COVID-19 has prompted emergency measures from governments and central bankers. Some investors have only experienced bull markets, as we’ve lived in one for 11 years.
“Volatility never feels good, but the foundation underlying it is important. Daily market moves in response to the COVID-19 outbreak have matched the scale of those seen during the global financial crisis, but we believe this is not 2008. The coronavirus shock is not one caused by a crisis in the core of the financial system and spreading to the rest of the economy. The economy is on a much stronger footing and the financial system is much more robust. In fact, we believe policy measures and safeguards put in place since 2008 have only strengthened the financial system.”
Gervais Williams, Manager of Diverse Income Trust, said: “Generally, I think the prospects for the UK economy are unexciting. The government has bridged the corporate cashflow squeeze at present, but if there are ongoing virus hotspots, we worry that the government won’t be able to keep borrowing at an elevated rate for too long. So overall, we think the economic recovery won’t be robust, and that at times we may face further setbacks. This is a difficult environment for mainstream companies to grow, as it is hard for those with major market shares to grow when the world isn’t growing.
“In contrast we anticipate that small cap companies will be able to take market share from those that have become insolvent. Some will acquire insolvent businesses and keep the skilled labour but reinject additional working capital, to generate an attractive cash payback. I think this will lead to small caps outperforming the mainstream stocks. In that regard the UK is very different from most other stock markets, it is the world leader in quoted small caps. Overall, in my view the UK stock market will outperform most others because of its quoted small cap universe.”
Francesco Conte, Manager of JPMorgan European Smaller Companies, said: “Europe’s strength is its ability to manufacture highly engineered premium products that are exported worldwide. It should not be a surprise that with global trade having been bruised as a result of the pandemic, Europe’s dominance in premium cars, aeroplanes and luxury goods will have had a negative impact on the region. Conversely following unprecedented fiscal and monetary policy, we should not be surprised that as the current anaemic economic recovery morphs into a synchronized global recovery, Europe will once again benefit. From a valuation viewpoint, the case for equities remains compelling. The shape of the path to recovery is uncertain but our investments include many world leaders in markets that should grow.”
Tony Despirito, Co-Manager of BlackRock North American Income, said: “Stock volatility is likely to persist as investors weigh the impact on corporate earnings and global supply chains. We expect earnings will be hard hit in 2020 but see coronavirus as a transitory event (perhaps three to six months) that does not permanently impair the world economy and company earnings power.”
Nicholas Price, Manager of Fidelity Japan Trust, said: “Japan continues to offer an attractive combination of cash-rich companies, low relative valuations and secular growth opportunities. Being here on the ground is invaluable for looking at the micro level and speaking to company management to fully understand the current dynamics. This puts us in a strong position to continue to identify mispriced winners and reward investors.
“Globally, bear markets often create turning points and changes in market leadership, so I am looking at some of those discarded stocks that are not being focused on and are likely to emerge from this changing situation. Significant fiscal stimulus and government subsidies are likely to throw up new leadership and new winners from discarded losers. Although volatility may continue in the short term, this enables us to invest in strong growth names at attractive valuations, which should create positive long-term outcomes for clients.”
Francesco Conte, Manager of JPMorgan European Smaller Companies, said: “Analysing the trust today, the most common threads in our investments can be grouped under wellness, technology and the environment. COVID-19 has not changed these trends but in fact reinforced the importance of them.
“Wellness – Amplifon, the global leading hearing aid retailer, looks well placed to benefit from the need for personalised and distinctive hearing solutions for a rapidly growing ageing population. With an excellent management team, rising revenues and a cash-generative business model, we believe the Italian company is well placed to continue growing rapidly through organic and acquisitive growth.
“Technology – Online shopping has grown rapidly over the last few years and was accelerated during the pandemic. One company that has benefited from this trend has been the German online pharmacy, Shop Apotheke, as people avoid social contact. Moreover, the German parliament has made it mandatory for all prescriptions to be online by 2022, raising the possibility that the market may accelerate further in the future.
“Environment – we believe that reducing pollution, plastic, and our carbon footprint is key to better welfare. These trends should accelerate further as European companies prepare to adopt new rules that will require them to disclose their environmental, social and governance risks from 2021. There are several companies in Europe spearheading the drive to environmental sustainability. Tomra based in Norway is by far the world leader in reverse vending machines for the recycling of plastic bottles. Last year, thanks to their machines, some 3.5 billion bottles were recycled.”
Hugh Young, Manager of Aberdeen Standard Asia Focus, said: “Small caps in Asia offer a myriad of opportunities, there are thousands of them across geographies and sectors. The key is to sort the wheat from the chaff. Hence our large, long-established team across the region. There are also opportunities from price movements – when markets fell sharply we were able to invest in certain companies that were on our radar screen or top up existing holdings where we could still be confident of the prospects notwithstanding the impact of the virus. For example, we recently took advantage of share price weakness to initiate a holding in Singapore’s Raffles Medical, a leading healthcare provider with hospitals and clinics across Asia. Its long-term prospects appear attractive, fuelled by its expansion in China.”
Tony Despirito, Co-Manager of BlackRock North American Income, said: “The healthcare sector has held up better than the broad market since the downturn began on February 19. The MSCI Health Care Index was down nearly 22% through March 16 versus an S&P 500 decline of roughly 29%. This is what we would have expected given the sector’s defensive characteristics and limited reliance on the economic cycle. We continue to like healthcare for its history of resilience.”
Gervais Williams, Manager of Diverse Income Trust, said: “We fear that virus hotspots will continue to keep popping up, and that this will slow the economic recovery. Specifically, we fear that there will be numerous redundancies, and that many over-levered companies will go bust, most especially within the consumer sectors. In general, Diverse Income Trust has avoided the consumer sectors, unless they are taking market share such as companies like AO World.”
Nicholas Price, Manager of Fidelity Japan Trust, said: “In Q1 a number of factors came into play. The large uncertainty created by the coronavirus starting in Asia severely affected holdings in areas like automotive semiconductors, tech and travel. As the crisis worsened, I looked at company balance sheets and survivability, reducing some of the winners from 2019 which I thought were vulnerable to profit taking. On the ground, we’ve obviously gone through a poor earnings season but it has been encouraging that stock prices generally haven’t reacted, which I think indicates a lot of the bad news is already discounted in prices.”
Hugh Young, Manager of Aberdeen Standard Asia Focus, said: “There are always plenty of risks from the political, macroeconomic and epidemiological points of view, but our concentration is on the risks at the individual company level, where we rely on our thorough due diligence. Long-term business outlook, experienced professional management, strong finances and good governance - incorporating all ESG aspects - are vital to our process. This, with a spread across sectors and countries, mitigates risks.”
Inflation vs deflation
Managers discuss the longer-term impact of COVID-19
With lockdown restrictions having caused sharp drops in demand and rising unemployment, the impact of COVID-19 has been disinflationary. The UK and US have registered the lowest levels of inflation since 2016 and 2015 respectively. Is this set to continue, or will government stimulus measures lead to more significant inflation over the longer term? The AIC has spoken to investment company managers about how they’re viewing the prospects for inflation and how their portfolios are positioned.
Charles Luke, Manager of Murray Income Trust, said: “The pandemic will impact the UK and global economy in a myriad of areas, but higher inflation is unlikely. In fact, just like in the aftermath of the global financial crisis the risk is more of a disinflationary threat. Any pockets of price pressures that may have built up from supply constraints will be more than offset by weak demand. Rising unemployment and the likely staggered recovery in consumption will weigh heavily on the outlook for wage and price growth. Fiscal and monetary policy stimulus should help cap some of these disinflationary forces, but are unlikely to fuel inflationary pressures over the next two years.”
Peter Spiller, Manager of Capital Gearing Trust, said: “Any demand shock is in the short term deflationary, and in this regard COVID-19 is no different. How the balance of supply and demand evolve over the coming months and years is more complex and harder to predict. Marginal capacity will be mothballed and investment in new capacity put off but all this will take time. The desired savings rate for both consumers and corporates will rise: a natural psychological reaction to these tumultuous events. Governments have already stepped in to attempt to fill this demand gap via various stimulus measures, furlough schemes and so forth. Further fiscal stimulus remains likely though its exact form – whether student debt forgiveness, a green new deal, or helicopter money – is not clear. Globalisation of trade, the single greatest factor in keeping inflation in check over the last 20 years, has come to a halt and may yet go into reverse: driven partly by a souring relationship between China and the US and partly by the newly apparent fragility of ‘just-in-time’ globalised supply chains.”
Hamish Baillie, Fund Manager of Ruffer Investment Company, said: “The debt-financed promises from governments to protect jobs and the economy require negative real interest rates in order to be affordable. This will result in bond yields being nailed to the floor and a relatively laissez-faire approach being taken to inflation running above target. In addition to the benefits and necessity for government finances, this is also politically palatable as it acts as a transfer of wealth from savers (the elderly and well-off), to borrowers (the younger and indebted generations).”
“At a company level, supply chains and balance sheets are going to change from an ‘optimised’ just-in-time model to a just-in-case model. This will result in closer control of supply chains, greater inventory and some rainy-day reserves being held on balance sheets. All things being equal this will reduce profitability and so prices will rise to match this – the costs of those places in a half empty aeroplane, restaurant or hotel are going to be more expensive not cheaper.”
Walter Price, Portfolio Manager of Allianz Technology, said: “We expect inflation to stay low for the next year with a 20% unemployment rate and workers that have to find new jobs to replace those in many areas that aren’t coming back soon.”
Simon Edelsten, Fund Manager of Mid Wynd International Investment Trust, said: “Our priority in managing Mid Wynd is to achieve real returns to investors over the long term and we are well aware that the greatest threat comes from periods of unexpected economic turbulence. The current pandemic and governments’ lockdown measures have led to a sharp decline in economic activity and higher unemployment though these may moderate as lockdown measures end. These factors tend to be sharply deflationary. However, we have also seen announced very large stimulus measures around the world and this expansion can concern investors and tend to be inflationary and may make some currencies weaken.”
“The need for inflation”
Peter Spiller, Manager of Capital Gearing Trust, said: “Most important of all is the need for inflation. Once the crisis abates public debt will be at levels not seen since the Second World War. The solution to such problems will be the same now as then: financial repression, a prolonged period of low interest rates and elevated inflation. The tools available to governments and central banks are the same as then, we cannot see the outcome being any different.”
Simon Edelsten, Fund Manager of Mid Wynd International Investment Trust, said: “Mid Wynd invests in companies which have very strong market positions and which, therefore, tend to be able to raise prices when there is modest inflation or deflation – for instance Thermo Fisher, the world leader in scientific equipment, faces little price competition, rather competes on quality of product. Indeed a long period of deflation, such as has been seen by global investors in Japan over the last twenty years, tends to favour growth stocks with world leading technology over other investments. Very high inflation, perhaps triggered by excess public spending, is a challenge for equity and bond investors so we have a modest allocation to gold mines in the fund which should offset part of this risk to capital value if it arises – we do not expect it to happen, but we are prepared just in case.”
Charles Luke, Manager of Murray Income Trust, said: “The portfolio is not driven by top down themes. However, on the basis of our assessment of fundamentals the portfolio has limited exposure to banks which would tend to benefit from an environment of higher interest rates and a more meaningful exposure to pharmaceuticals and consumer goods companies, such as AstraZeneca and Diageo which should benefit from a relatively low inflation environment.”
Peter Spiller, Manager of Capital Gearing Trust, said: “Low interest rates and elevated inflation means strongly negative real interest rates. The best performing asset class in this environment is likely to be index linked bonds. We favour US TIPS but also hold index-linked bonds in Japan, Sweden and Australia. Gold could do well too, though of course it is rather harder to value. In such an environment any cashflow that is reasonably secure with good inflation correlation should become more highly valued by the market. To that end we have been buying property, particularly with long leases and good covenants.”
Hamish Baillie, Fund Manager of Ruffer Investment Company, said: “What don’t we own? Conventional bonds, cash other than for short-term tactical reasons and a large exposure to equities. What do we own? Government backed inflation-linked bonds in the UK and US, gold and a low weighting to equities.”
Longer term - globalisation “more important” than technology
Peter Spiller, Manager of Capital Gearing Trust, said: “Since the onset of COVID-19 the impact of monetary policy has largely been to inflate the value of asset prices rather than prices in the real economy. We expect this to change as prolonged low interest rates are combined with expansionary fiscal policy over an extended period of time. Technological developments have and always will be deflationary. However, the pace of technological change today is no greater than average over the past 200 years and possibly rather slower. Of greater significance in recent times has been the impact of globalisation and the entry of previously untapped labour pools into global markets. As the tide of globalisation turns and perhaps starts to ebb, this trend should reverse.”
Hamish Baillie, Fund Manager of Ruffer Investment Company, said: “At a geopolitical level, globalisation is in retreat. Trade wars and reshoring are in the ascendency. The removal of the deflationary force of globalisation will see upward pressure on prices. Technology has been a deflationary force for the last 20 years but as some of the more monopolistic large tech businesses mature they will focus on profitability over growth and so in some sectors there will be upward pressure on prices. In others, like automation, there may be continued downward pressure on prices and wages, but this will likely be dwarfed by the aforementioned inflationary pressures from the fiscal and monetary channels plus the growing impetus to tackle income inequality.”
Charles Luke, Manager of Murray Income Trust, said: “The longer-term outlook for inflation will depend on the impact of COVID-19 on some of the secular drivers of inflation that had been in place over the past few decades. Technological progress has also had a huge bearing on inflation and will continue, intensifying international competition and suppressing wage growth.”
Ian Cowie takes us on a tour of his globally diversified portfolio
Investment companies bring the world within reach, including business being done in foreign languages and stock markets that trade while we are asleep. This can maximise returns, by giving investors exposure to professionally-managed income and growth opportunities wherever they may be found. It can also minimise risk, by diversifying our assets over a wide range of companies, countries and currencies to reduce our exposure to unexpected setbacks, wherever they occur.
Never mind the theory, what does it mean in practice? You only have to look at the performance of British shares recently, compared with other stock markets overseas, to consider the cash value of allocating your assets over more than one country. For example, the FTSE 100 index of Britain’s biggest shares has fallen by 18% over the last year and, at the time of writing, stands 6% lower than it did five years ago. By contrast, the Morgan Stanley Capital International (MSCI) All Countries World Index (ACWI) stands 2.8% lower than it did a year ago but has risen by 21% over the last five years, according to independent statisticians at Bloomberg. The explanation is that the coronavirus crisis has presented a global threat to health and wealth over the last year. But Britain’s decision to exit the European Union has cast additional uncertainty over UK shares for several years - and continues to do so.
British shares also lag behind returns from the biggest stock market on earth. The Dow Jones index of America’s longest-established shares has fallen by 4% over the last year and increased by 45% over the last five years. The Nasdaq index of America’s technology companies has done even better, surging upward by 25% over the last year and soaring by 104% over the last five years.
That’s why I hold a globally-diversified portfolio of investment companies’ shares; to give me professionally-managed exposure to economic opportunities wherever they may arise. Some are defined by geography - such as BlackRock Latin American (stock market ticker: BRLA), JPMorgan US Smaller Companies (JUSC) or Henderson Far East Income (HFEL) - while others are focussed on commercial sectors - such as International Biotechnology (IBT), Polar Capital Technology (PCT) or Worldwide Healthcare (WWH).
Investing internationally even enables me to benefit from bad news, on occasion. For example, the coronavirus crisis has increased spending on the search for a vaccine, helping some businesses among IBT’s and WWH’s top 10 holdings, while also boosting demand for digital services, rebooting PCT’s portfolio.
As more people work from home and spend more time and money online, another of my holdings, Aberdeen Standard European Logistics Income (ASLI) is gaining from the growth of internet shopping. Everything we order online has to be stored somewhere before it is delivered to our door, boosting demand for ASLI’s warehouses and distribution hubs across continental Europe.
While the past is not a guide to the future, I expect some trends prompted by the coronavirus crisis to continue for the foreseeable future; including increased awareness of the importance of healthcare and online commerce. An internationally-diversified portfolio of professionally-managed investment companies gives me exposure to these changes in the global economy - even though I know next to nothing about epidemiology or computers.
Home bias - or the tendency for most investors to favour funds and shares focussed on their own economy - can reduce returns and increase risks. By contrast, the internet and online investment platforms mean it has never been easier to analyse markets and allocate money overseas.
Dividends do not stop at Dover nor do growth opportunities end at Gravesend. I monitor returns using the AIC website and occasionally rebalance asset allocation depending on dividend income and/or special situations - such as when my fears of a renewed America/China trade war prompted me to sell trusts heavily invested in the latter.
While it is natural to focus on recent and ongoing events, a longer term view may help us to keep our current concerns in perspective. For example, back in 1868, the oldest and one of the biggest global investment companies, the F&C Investment Trust (FCIT), said in its original prospectus: “The object of this trust is to give the investor of moderate means the same advantages as large capitalists, in diminishing the risks of investing in stocks by spreading investment over a number of different stocks.”
That strategy remains as sound today as it was more than 150 years ago. Technology has changed but individual investors’ needs remain much the same. Investment companies online mean the world is just a click away.