INVESTMENT UPDATE – Q1 2020 PERFORMANCE AND ANALYSIS

Investment Notes
Notwithstanding the serious health challenges the world is currently facing, we at London Wall Partners are mandated to advise on how to optimise your financial situation.  It seems appropriate, given the current extreme economic and volatile market conditions, to provide a detailed account of how the portfolios, on which we advise you (and in which we also invest), are performing compared to the markets.
 
The information in this update is, of course, not specific to you, but should provide a reasonably reliable indicator of what is currently happening to your money.  Your next periodic client review will account for any differences due, inter alia, to the timing of when investments were implemented, personal preferences, investment restrictions due to citizenship (PFIC rules), individual asset allocations and the inclusion of legacy holdings.
 
Your main questions are likely to be: (i) how have portfolios performed compared to the markets, and (ii) are we recommending any changes?  To answer the first question, we have focused on our Adventurous model portfolio, which has a 74% allocation to company shares, 15% to real assets (infrastructure and commercial property) and 10% to bonds, with 1% in cash.  This model is used by many clients and we believe is a fair demonstration of performance.  However, we have also provided data for our Balanced and Moderately Adventurous model portfolios, with higher levels of bonds and lower levels of company shares, and our Highly Adventurous model portfolio, with a lower level of bonds and a higher level of company shares.  The figures are net of all fund manager related fees.
 
Overall, the model portfolios have performed with resilience relative to the main market indices.  They have been helped by the quality of the company shares held and by the inclusion of the highest-grade sovereign bonds, which have increased in value.  We view the bonds as “insurance” in the event of an unexpected shock and, unlike corporate bonds (of which we have none, and wouldn’t recommend in most market conditions), sovereign bonds have shone through and done their job in the quarter.  The Adventurous model portfolio has fallen by 11.2% in Q1.  The equivalent for the Balanced model is a fall of 7.1%, for the Moderately Adventurous model a fall of 9.3% and, for the Highly Adventurous model, a fall of 13.3%.  See here for cumulative performance figures, noting relative outperformance.
 
To place these returns in perspective, the leading UK 100 company index fell by 23.8%.  Market performance, as measured by other major indices, is as follows: the leading US 500 company index in Q1 fell by 19.7% in dollar terms (or 14.2% when translated back into sterling) and the leading world company index reduced by 19.7% in local currency (or 15.7% in sterling terms).  As you can see, the performance of “the market”, as a general concept, can be markedly different from the reality of how and where your money is invested.  The analysis below further highlights how misleading short-term general market gyrations can be, and why we must look through them when thinking intelligently about our investments.  
 
The resilience of our portfolios is further illustrated by the performance of the individual companies they contain.  In our seven main recommended funds that invest in company shares globally (let’s call them M7), the value of the top 100 hundred businesses has fallen by 9.5%.  The next 96 businesses (representing virtually the full complement in M7) fell by 5.8%, giving an average fall for the c.196 listed businesses of 7.7%, which is less than one third of the fall in the leading UK 100 company index. 
     
In terms of performance attribution of the Adventurous model portfolio, the 196 or so businesses in M7 represent just over half the model, or over two-thirds of the overall company shares.  The remainder consists of one fund focused on global smaller companies, two funds focused on Japan, which collectively fell by an average of 18.7%, and three listed private equity investment trust companies, the share prices of which have reduced by 12.1%, 34.5% and 22.5%.  Overall, the company share attribution to the model has fallen by 9.3% in Q1.
 
The 15% allocation to property and infrastructure has disproportionately detracted from returns, reducing the Adventurous model portfolio value by a further 2.7%.   Most notably a UK commercial property REIT, which was 3% of the model portfolio, has reduced in price by 34.6%, which is disappointing.  Within the portfolio, the 12.0% fall in company shares, property and infrastructure has been somewhat offset by the positive contribution from the sovereign bonds, which accounted for 10% of the portfolio, leaving the value of the Adventurous model portfolio down by 11.2% overall.
 
In contrast to our portfolios, the leading UK 100 company index includes many cyclical and commoditised businesses (such as oil, mining and bank stocks), which have experienced a substantial reduction to date, whereas our funds, and the M7 in particular, are focused largely on healthcare, technology and consumer non-durable sectors across the globe and have experienced more modest falls to date.  It is this sector differentiation coupled with a focus on quality businesses in the right sectors that has led to the resilience in our model portfolios over Q1.  
 
In summary, the quality assets have fared well and should continue to prosper in the future; as long-term patient investors, we believe the assets in which we are invested are well-positioned and there is no need to change them.  As for some of the lowly valued company shares on high yields, which are not typically held by the funds we recommend, many of them will be priced as such for a reason and the yields may not last, as witnessed by banks announcing the cutting of dividends.  We want to continue investing in quality, resilient businesses that should withstand testing times and ensure we invest in quality sovereign bonds or cash for the short to medium term depending on expenditure, inter alia.  Much of personal investing depends on overall plans and objectives, and this is where the financial planning at an individual level is critical, as are the asset allocation and fund manager selection.
 
A farmer friend in Yorkshire used to test his wheat was ready by gently pulling the ears of corn off the stalk into his hand.  He then rubbed the corn ears together to separate the chaff, which he blew away before tasting the wheat to see if it was dry enough to harvest.  This separation process is a reminder of what we are currently experiencing in markets.  We believe our portfolios are well placed for the future, but we will continue to monitor the situation closely and provide recommendations if we believe any re-planting is required.  Make no mistake though, it is likely to be a stormy Spring and Summer from an economic and investment point of view, and cool heads will be required if we are to continue producing a fruitful harvest over time.
 
Nick Fletcher
Senior Partner
London Wall Partners
Friday, 3 April 2020
 
 
 
Source: Bloomberg, Financial Express and London Wall Partners LLP as at 31.03.2020. From 30 September 2018, we have used dirty prices for gilts to more accurately reflect actual client returns and historic numbers have been updated accordingly.  Returns are quoted in sterling unless otherwise stated.  Returns from investments in markets / currencies other than those of an investor’s own country of residence may increase or decrease as a result of currency fluctuations.
 
The information, data, analyses, and opinions contained herein are provided solely for informational purposes and may not be copied or redistributed; neither do they constitute investment advice offered by London Wall Partners and therefore are not an offer to buy or sell any security.  London Wall Partners expressly disclaims any responsibility for trading decisions, damages or other losses resulting from any use of the information herein.  Investments fluctuate in value and may fall as well as rise and investors may not get back the value of their original investment.  Past performance and forecasts of financial markets, any investment, sectors or specific securities should not be used as a guide to future performance.
 
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