Spotlight - September 2020
We talk about the US election, overlooked UK opportunities and how Ian Sayers learned to love notice periods on open-ended property funds.
So the kids are back at school, those summer tans are fading, I've got my woolly jumper back on – all the usual signs of the turn of the season. And yet despite the government’s exhortations for everyone to go back to Pret, things aren’t back to normal – far from it. The question is not so much when that will happen, as what ‘normal’ will look like when we get there.
Take property funds, for example. The 'material uncertainty' over valuations has been lifted and a handful of funds have reopened for trading. But the remainder of the suspended property funds have yet to open the floodgates and nor have we much idea when they will.
The more interesting question is what form a new-look open-ended property fund might take. Both the FCA and the Investment Association have acknowledged the problems with the daily-dealing structure for handling illiquid assets. Yet there is still resistance to the idea of notice periods, with arguments ranging from their perceived complexity to worries about ISA inclusion. Our Chief Executive Ian Sayers takes on these arguments – and I think rebuts them pretty convincingly – in his latest article. What do you think?
Making America vote again
It doesn’t seem four years since we were pondering the impact on investors of a possible Trump victory in the last US presidential election. Now we’re pondering all over again, with the difference that Trump is the known quantity this time.
Since Trump took office on 20 January 2017, the S&P 500 index is up almost 50%. This is despite the sell-off this week, and the fact that in March this year the index plummeted back almost to where it was at the beginning of his tenure. Much as Trump will try and take credit for the market gains, a longer view reveals that the last few years have been the continuation of a period of excellent performance for US equities that dates back at least a decade and arguably further, to the trough of the financial crisis.
This world-leading performance, according to F&C Investment Trust’s Paul Niven, has been driven by superior profitability and earnings growth, which investors have been prepared to pay for. In some respects the pandemic has only accelerated trends that have been helpful to the growth of the US’s leading companies, including the tech giants. With Apple’s valuation recently surpassing that of the entire FTSE 100, the resilience of big tech during COVID-19 has perhaps finally laid to rest the ghosts of the dotcom bubble and the idea that this is a fragile, frothy sector that suffers particularly badly in downturns.
As Jonathan Simon, Manager of JPMorgan American Investment Trust, puts it: “Tech has rallied in the US because it is at the heart of everything we do, and this has only been increased by COVID-19.” There are many more comments from US managers on the election, stock market valuations and the tech sector in this month’s Spotlight.
That stat about Apple and the FTSE 100 seems to dramatise the way in which the London market, once the mainstay of UK investors’ portfolios, is becoming just another slice of the global equity allocation pie, and not a particularly generous one at that. We’ve seen it in the investment company industry, as the big global generalists have moved away from benchmarks and asset mixes with a pronounced UK overweight. However, the time will surely come for our domestic market to shine, and Jean Roche, Co-Manager of Schroder UK Mid Cap, thinks it might be sooner rather than later. She gives her thoughts on opportunities within the ‘homebody economy’ in this issue.
Finally, two bits of good news. You may have heard that Seneca Global Income & Growth has become the first investment company to be risk-profiled by Dynamic Planner. We hope more will follow, helping advisers to put the risks of multi-asset investment companies in a familiar context and measure them against open-ended options.
Meanwhile, we’ve been working hard over the summer on our brand-new Investment Company Screener. I say ‘we’ but I haven’t done much except look over the virtual shoulders of our excellent website team and make encouraging noises from time to time.
Built with Morningstar technology but adapted to the needs of advisers who want to research investment companies, the Screener complements other tools on the AIC website, such as Find and compare investment companies. Needless to say, it’s completely free to use and it enables you to do some things you couldn’t do (easily or quickly) before. You can read more about how it works in this month’s Spotlight or just try it right away. Let us know what you think!
Nick Britton, Head of Intermediary Communications, AIC
Explore the closed-ended universe with our Investment Company Screener, a brand-new research tool for investment professionals.
At the AIC, we're always trying to improve the data and information we provide for financial advisers and other investment professionals. Our new research tool, Investment Company Screener, allows you to filter and compare investment companies in quite a few ways that haven’t been possible before.
For example, you can now filter investment companies by their gearing level, ongoing charge or even the tenure of their fund manager. It’s also possible to identify investment companies with a certain equity style – value or growth.
Introducing the Screener isn't the only change we've made to our research tools. We've also introduced daily Morningstar factsheets in PDF format, which can be accessed by logged-in advisers. More about these below.
We developed these tools following extensive feedback from advisers and we hope you like them. We would, of course, welcome any further feedback or requests for enhancements we might be able to make to the Screener in future.
So how does the Screener work?
Investment Company Screener allows you to filter and compare relevant investment companies in three easy steps.
Step 1. Search or Filter Investment Companies
You can filter investment companies by 18 different criteria, including AIC sector, ongoing charge, dividend yield, market cap, discount/premium, gearing, manager tenure, dividend frequency, dividend cover, annualised total returns and equity style.
Tip: Click on 'Show More' to see the full range of data points you can filter by.
Step 2. Review and Analyse Your Search Results
If there are investment companies that match your criteria, you'll see them below the heading 'Review and Analyse Your Search Results'. You can select up to five of these companies to make a detailed comparison (click on the icon shown below to compare investments).
Tip: By clicking on the tabs along the top of your results list ('Overview', 'Price Performance' and so on) you can see some key stats about the investment companies that have made it through your filters, to help you select the companies you want to compare in depth.
Step 3. Compare in Depth
The final stage of the process allows you to compare your chosen investment companies across more than 50 different data points including performance and portfolio characteristics.
Accessing the Screener
You'll need to log in as a financial adviser to access the Screener (though we have made it available without logging in for a limited period).
Try the Screener now
Investment Company Screener was developed especially for the AIC by fund data provider Morningstar.
Daily Morningstar factsheets
In addition to the new Investment Company Screener, we've also introduced daily Morningstar factsheets on every member investment company.
You can access these PDF factsheets by clicking on the Daily factsheet icon on an investment company's information page (shown below).
The company information page can be accessed in various ways, most simply by searching for your chosen company from the AIC's home page.
When you click on that Daily factsheet icon, a PDF factsheet is generated using the most recent Morningstar data for that company. This contains key statistics, performance data, risk measures and essential portfolio information such as top ten holdings and asset allocation.
An example of the daily PDF factsheet can be seen below (click on the image to zoom). Alternatively, click here.
US election special
We talk to US and global portfolio managers about Trump, tech and whether it’s worth paying up for the strong growth potential of US companies.
Despite the S&P 500 recently reaching record highs and Apple’s market value topping $2trn for the first time, US tech-driven market rallies are showing signs of easing. But how are investment company managers viewing the market, what is their outlook for technology and how are they positioning their portfolios ahead of the upcoming presidential election?
At a recent media webinar hosted by the AIC, Paul Niven, Manager of F&C Investment Trust, Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust and Fran Radano, Manager of The North American Income Trust, discussed the US market, implications of the election and their outlook for the US.
Their views have been collated alongside comments from Jonathan Simon, Manager of JPMorgan American Investment Trust, Gary Robinson and Helen Xiong, Managers of Baillie Gifford US Growth Trust, Robert Siddles, Manager of Jupiter US Smaller Companies and Tony DeSpirito, Co-manager of BlackRock North American Income Trust.
How could the election affect your portfolio?
Robert Siddles, Manager of Jupiter US Smaller Companies, said: “The prospect of a Democratic clean sweep should make investors nervous – this has not happened since 1992 (although that lasted only till 1994 when the Republicans regained the Senate). Higher corporate taxes and tighter labour regulation would adversely affect corporate profits. Having said that, the US system is very different from the UK or Europe and resulting policies may be diluted: the US is run by business interests and politicians interfere with this at their peril. One positive of Democrats in government, however, is that they tend to spend a lot, which is good for the economy in the short term at least. We are trying to make sure that companies in key areas that are affected by government regulation, such as health and education, are closely aligned with public policy.”
Fran Radano, Manager of The North American Income Trust, said: “The betting markets, which have proven to be much more accurate than polls, continue to forecast a victory for Democratic Party candidate, Joe Biden, albeit with narrowing odds. Nearly equally important for the Democrats is the ability to wrestle control of the Senate away from the Republicans if they want to be able to implement their platform. If both of these events were to happen, you would expect higher taxation on both corporations and high net worth individuals. Additionally, increased regulation in the financial, energy and utility sectors is likely. Conversely, a Biden Presidency would likely entail more favourable outcomes for both global trade and immigration which are important for the long-term health of the economy.”
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, said: “The US presidential election will certainly be an important focal point for markets in the short term, and remains a highly uncertain outcome at this stage, even if polls are showing a gap opening up between both candidates. The likelihood of there being a long, drawn-out process to determine the eventual winner is also a distinct possibility. Disputes over election procedures and vote counting could once again be decided by the Supreme Court, meaning the next US president may not be known until late in 2020.”
Where are you seeing opportunities?
Gary Robinson and Helen Xiong, Managers of Baillie Gifford US Growth Trust, said: “We are excited about cloud-based infrastructure platforms such as Stripe, Shopify, Amazon Web Services (AWS) and Twilio. These businesses are helping to lower barriers to entrepreneurship. Instead of investing vast sums of money up-front in building data centres and other types of infrastructure, companies can rent access via these platforms. For example, through Shopify online retailers can gain access to all the tools they need to run their business, from order management to fulfilment. Twilio enables its customers to build communications functionality into their applications without the need for relationships with telecoms companies or millions of dollars in capital investment. It has never been easier to start and scale an online business.”
Tony DeSpirito, Co-manager of BlackRock North American Income Trust, said: “Exposure to high-quality sectors with good trends such as technology and healthcare offer us long-term growth potential, at valuations which in many cases are justified by the potential. Sectors with more deeply discounted valuations like financials and energy offer potential for outperformance, but selectivity is key given the inherent risks.”
Jonathan Simon, Manager of JPMorgan American Investment Trust, said: “On the value side of the portfolio, we like Booking.com. In March this company was in the eye of the storm, however it has responded to the challenges of Covid-19 effectively, adjusting its cost structure to the new reality. We believe the unique proposition of Booking.com, which includes apartment bookings, as well as their subsidiaries Open Table and KAYAK, will be well-placed to emerge on the front foot from the downturn.”
The US has rallied very strongly: is there further to go?
Paul Niven, Manager of F&C Investment Trust, said: “The past decade has seen the US market deliver returns significantly above other developed markets, driven by superior profitability and earnings growth. While current valuations leave little room for disappointment, the pandemic has accelerated many previous trends and consolidated the position of companies with strong financial and market positions. Looking forward, while there are clearly numerous risks, the dominance of the US market will likely continue. Valuations are high but not yet prohibitive and many of the trends which have driven US outperformance remain in place.”
Fran Radano, Manager of The North American Income Trust, said: “The market strength since the lows in March has actually been focused on a narrow subset of names largely in the technology sector. Because of this lack of market breadth, we continue to be able to find value in several industry leaders with strong cash flows trading at fair valuations.”
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, said: “There are many ways to look at the market valuations at the moment. With regards to price/earnings (p/e) multiples, we believe that against the current sharp recession (which will be followed by a rebound in earnings), there is the risk that p/e multiples based on forward multiples do not capture a normalised level of activity and therefore of earnings. Shiller p/e multiples, which have an element of cyclical adjustment, are likely to be a more valid way to look at valuation levels during this period.
“On that basis, equity valuations are not stretched versus historic levels for European and global equities, while the US equities market is closer to the top of its historic range, but even there, one needs to consider the constitution of the index, given the sizeably increased weight of technology in the US market versus historic averages.”
Robert Siddles, Manager of Jupiter US Smaller Companies, said: “Although the overheated large-cap tech sector could be due for profit taking, the market is just fine at the moment given Fed support. It is a common misconception that stock market valuation affects the market’s direction: the key drivers are monetary policy, investor sentiment (a contrary indicator) and profits growth – as long as we have at least two of the three, the market will be inclined to rise.”
What are your thoughts on tech?
Jonathan Simon, Manager of JPMorgan American Investment Trust, said: “Tech has rallied in the US because it is at the heart of everything we do, and this has only been increased by Covid-19. While we have a significant exposure to technology, it extends beyond the tech sector itself into areas such as consumer discretionary and ecommerce, where we’ve seen a really strong digital shift in a post Covid-19 world.
“In ecommerce, the total online retail sales in the US have expanded from just 1% in 2000 to 11% in 2019, and have outpaced general retail sales by roughly 15% over the past five years. Mastercard spending data shows us that since the outbreak of Covid-19, ecommerce represents around 22% of retail sales with many new customers entering the market. In the US market, the top 10 online retailers account for 60% of ecommerce. Amazon remains the clear leader in this space: it is seven times larger than its nearest competitor and has seen huge growth through its cloud business too.”
Gary Robinson and Helen Xiong, Managers of Baillie Gifford US Growth Trust, said: “We think that arbitrary sector classifications such as ‘technology’ are of limited use, given the pervasiveness of technology today. Instead of classifying a company as a ‘tech’ stock, we categorise companies by the key societal change they are exposed to, for example the rise of online commerce, the evolution of entertainment and the application of machine learning.
“Lockdowns introduced to slow the spread of the virus have disrupted regular patterns of demand. Consumers have turned to online services for their shopping and entertainment needs. Workers have embraced digital collaboration tools, for example video conferencing, to stay connected with colleagues. Patients have increasingly been meeting with their doctors via telemedicine services. On the other hand, demand for real world services, for example travel and entertainment, has been negatively impacted. Most of our holdings have been beneficiaries of these shifts, although some have been on the wrong side of them.”
What are the key risks in US equities?
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, said: “There are areas of the economy facing high degrees of uncertainty, such as the transportation, tourism and hospitality sectors in particular, but there are also question marks about office space usage, and ultimately real estate overhang as a result. There is also a higher likelihood of increased tax levels, both corporate and household, in the mid-term, which could weigh on economic activity. We have therefore already taken the prudent approach of increasing our corporate tax rate assumptions in our financial projections for all companies that we hold in the portfolio.”
Tony DeSpirito, Co-manager of BlackRock North American Income Trust, said: “The lockdown-driven decline in economic activity and spike in unemployment has left the US economy more vulnerable, at a time where US stock valuations are high versus their long-term history. There is less room for bad news should downside risks emerge or investor sentiment wane. We are mitigating these risks by ramping up our stock-level stress testing, and have assumed long lasting adverse scenarios when conducting research on companies.”
Gary Robinson and Helen Xiong, Managers of Baillie Gifford US Growth Trust, said: “We believe, and academic work has shown, that long-term equity returns are dominated by a small handful of exceptional growth companies that deliver outsized returns. Most stocks do not matter for long-term equity returns, and investors will be poorly served by owning them. In our search for exceptional growth companies, we will make mistakes. But the asymmetry inherent in equity markets, where we can make far more in a company if we’re right than lose if we’re wrong, tells us that the costliest of mistakes is excessive risk aversion.”
The homebody economy
Schroder UK Mid Cap’s Jean Roche on the potential rewards of investing in our own digital backyard.
Jean Roche, Co-Manager of the Schroder UK Mid Cap Fund
It is clear that UK shares are unloved. No likes, no shares, no new friend requests. The level of gloom surrounding this market is remarkable even amongst UK based investors, who, you might think, should feel more comfortable investing here.
This is not just pandemic queasiness. Although the UK economy is service-led to some extent, it is not uniquely disadvantaged by the fallout effects of Covid-19.
And indeed, the government’s support schemes such as Eat Out to Help Out have focused on supporting the more vulnerable services element of the economy.
Should we blame Brexit? Last year, we saw a similar spell of despondency when international investors shunned British shares ahead of the withdrawal deadline. Once they realised the world wouldn’t end, UK mid-caps bounced back very strongly.
We’re back there again. Global fund managers are at their gloomiest, in terms of an underweight to UK equities, in two years, according to the most recent update of a monthly survey by Bank of America.
There’s no guarantee history will repeat itself. But it seems reasonable to assume that current fears will subside as the usual brinkmanship around EU negotiations results in an agreement of sorts, and that UK share prices will rally.
One chart, from Peel Hunt, captures the story from a different angle. It shows analysts’ consensus for increases in earnings per share for certain markets. The FTSE 250 is forecast to recover with more gusto than other major markets not only in 2021E, where the data are skewed by loss making companies but, more interestingly, in 2022E, shown below.
Source: Refinitiv Datastream
The forecasts included should not be relied upon, are not guaranteed and are provided as at the date of issue. Forecasts and assumptions may be affected by external factors and are subject to change.
Valuations are also worth considering. UK small and medium-sized stocks trade at a discount of around 25% discount to similar stocks globally, based on a blend of valuation yardsticks including price-to-earnings and price-to-book.
Regardless of whether confidence returns, we’re focused on a certain characteristic of the market – the “homebody economy”.
Why the “homebody economy” is flourishing
The term will be familiar to those in the US; less so elsewhere. It is the increased shopping, studying, working and entertainment we’ve all been doing at home during lockdown. “Homebody” is no longer considered a derogatory word; it reflects a trend that’s widespread, growing, and a force to be reckoned with. Most importantly, you can get plenty of exposure to it in the UK, through underappreciated technology or technology-enabled growth companies, and their enablers.
In my world, as an investor focused largely on medium-sized FTSE 250 companies, or mid-cap, I see industries and sectors that are firmly in this space.
You will have noticed these trends yourself – the boom in pet ownership, for instance, thanks to the likely new normal of two or three days a week working from home. This shift in pet ownership has been a boon to Pets at Home, an out-of-town superstore for pet owners.
The increase in gaming has also been widely reported. With non-existent commutes and more time available at home, many people are spending more of their wages on entertainment. It’s not just desktop gaming either; table-top gaming has flourished too. The likes of Warhammer, a table strategy game previously associated with pre-teen boys, has seen demand soar. Its owner, The Games Workshop, has reaped the benefits.
Refurbishment is another trend that may resonate with anyone who has sat at home long enough to notice the rooms in dire need of a makeover. As a result, retail park-based companies such as DFS, a furniture chain, and Dunelm, a specialist in affordable and well merchandised homewares and furnishings, have seen demand rise.
All this increased working from home is only made possible by good connectivity and reliable ‘kit’ however. Homeworkers are at the whim of technology, so companies providing infrastructure and support have naturally thrived amid the homebody digital economic boom. Examples include under-appreciated UK tech companies such as Computacenter (which seems to keep upgrading its earnings forecasts) and Softcat.
Other trends are less obvious. The increase in stock market trading has been helpful to online trading companies. This is the result of a section of the population, having more time (and privacy!) to dabble, more money after saving on travel costs, and the inspiration of a breathless rally for high-profile stocks, such as Apple, Amazon and Tesla. Digitally advanced UK online financial spread betting companies, IG Group and CMC Markets, for example, have significantly expanded their audiences.
And what of office stocks? Well, these can benefit from an increasingly digital world too. IWG, the largest flexible office space platform, is well placed to respond to what is likely to be a rapidly evolving backdrop, with employees mixing and matching working from home alongside collaboration sessions in the office.
Much rests on which of these trends hold. The government has told us to go back to the office. But changes which were already happening have been accelerated by the pandemic. The shrewd investor must judge the extent to which they will persist. Only then does assessing the long-term winners and losers become possible.
Any references to companies is for illustrative purposes only and not a recommendation to buy and/or sell. The article is not intended to provide, and should not be relied on for investment advice. Information and opinions contained herein are subject to change. Reliance should not be placed on any views or information in the article when taking individual investment and/or strategic decisions. The value of investments may go down as well as up and you may not get back the amount you originally invested .
A strange love of daily redemption
The AIC’s Chief Executive Ian Sayers takes aim at the arguments against introducing notice periods for open-ended property funds.
Ian Sayers, Chief Executive, AIC
‘Even investors who should have the longest horizons seem to have a fetish for liquidity,’ said the Bank of England recently. Striking language, but it highlights a contradiction in parts of the finance industry which lecture investors on the need to think long-term whilst treating daily redemption as sacrosanct. A sort of financial doublethink, to reference another dystopian classic.
Given this obsession with daily redemption, it’s not surprising that the FCA’s proposals for notice periods for property funds of, say, six months has been met with some resistance. However, the arguments offered against notice periods do not stand up to scrutiny:
Investors won’t like them
Only because they have been told for years that they can have daily redemption, so feel they are losing something. Investors also don’t like long suspensions, fire sales or funds holding large amounts of cash (on which fees are being charged) to try and prevent those suspensions and fire sales.
It reduces choice
Investors might like a fund that could guarantee daily dealing at asset value and full exposure to the asset class. Unfortunately, it doesn’t exist and never has. A false choice is not really a choice at all.
Disclosure is a better option
Good disclosure is necessary, but its track record in preventing consumer harm on its own is poor. Disclosure is not a substitute for having a robust structure which protects consumers.
They are complicated
Investors manage OK with fixed-term deposits. Notice periods are less complicated than suspensions, swing pricing, deferred redemptions, side pockets and other mechanisms suggested to tackle these problems.
Investors won’t know what price they will get
When investors in open-ended funds redeem their units, they are paid out of the assets of the fund. In times of market stress, it’s reasonable to wait and see what price can actually be achieved for properties that are being sold to meet redemptions. If the price ends up being lower than expected, why should remaining investors subsidise those who want to leave in the midst of a downturn?
They won’t work in model portfolios that need rebalancing
Then leave them out of the model and treat them as the client’s separate long-term holding. And how exactly do you rebalance a model portfolio if a fund has been suspended for nine months?
They won’t qualify for ISAs
Then change the ISA rules.
They will cause a flood of redemptions leading to more suspensions
If sensible changes have this impact, then it just confirms how unstable the current structure is and why reform is required.
Notice periods will lead to a reduction in investment in property/property funds
Probably the biggest myth of them all. In Germany, property funds require one year’s notice to redeem investors’ units. The chart to the right shows net inflows/outflows for German property funds compared to the UK.
In the last two years, the UK has seen consistent outflows, stemmed in recent months by widespread suspensions. By contrast, Germany has seen inflows, even in the post-COVID period.
Since July 2018, the German sector has grown from £77bn to £101bn*. The UK sector has shrunk from £19bn to £13bn. The idea that notice periods are ‘bad for business’ is simply not true.
If we get notice periods right, investors will have a genuine choice. An open-ended fund which can remain fully invested, which investors can leave at asset value on giving reasonable notice. Or a closed-ended investment company, which investors can leave at any time at a price determined by the stock market.
Either structure will perform exactly as intended, and neither will require fire sales at times of market stress which not only harm investors in the fund, but also spread contagion to other funds and the broader economy.
A brave new world, perhaps?
“In Germany, property funds require one year’s notice to redeem investors’ units”
Ian Sayers, Chief Executive, AIC
* UK and German fund flows and asset sizes excluding feeder funds and fund of funds. Source: Morningstar.