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Market Comment  10/12/2020

Risk Managed Funds – Review of 2020

2020 has been challenging for global investors, and as we approach the end of the year, we reflect on the way in which the Risk Managed Funds have navigated this period.

2020 has been challenging for global investors, and as we approach the end of the year, we reflect on the way in which the Risk Managed Funds have navigated this period. Active management is at the core of our investment philosophy, and we used the flexibility afforded by our unconstrained approach to asset allocation and de-risking ability to position the Funds against a changing backdrop – mitigating risks where possible, and taking advantage of investment opportunities as they arose in order to deliver for our clients.

The funds ended 2019 at NAV highs as investors became more confident that global economic growth was set to accelerate. We had progressively increased equity risk during the final quarter of 2019. This included increasing exposure to UK mid-caps ahead of the general election in the United Kingdom, which subsequently outperformed on the back of the stronger than expected Conservative victory.

Following the first market tremors concerning the news that a novel coronavirus was circulating in the Chinese population in February 2020, we reduced risk by top slicing some equity positions (mainly international equity ETFs). Then, as it became clear that there was a risk that the virus might spread globally, we reduced equity exposure further (both UK and International equities).  In doing so, we reduced the UK equity portfolios’ sensitivity to the economic cycle. Some of the proceeds of these sales were used to add to diversifying asset classes, such as infrastructure and gold. These moves were beneficial in terms of shielding the funds from the worst of the sell-off when markets subsequently moved sharply downwards in March.

At the nadir of the sell off, the funds were holding higher levels of cash given the derisking exercise undertaken earlier in the quarter. Whilst uncertainty was exceptionally high concerning the quantum of the Coronavirus’s impact on economies, the negative sentiment expressed in asset prices appeared excessive to us given (i) swift policymaker responses, and (ii) management actions to cut dividends and shore up corporate balance sheets. We, therefore, began to add risk back into the portfolios in a measured way, favoring those assets (such as convertible bonds and investment grade credit) we believed were by then exhibiting asymmetric and positive risk-return profiles.

We also topped up some direct UK equity holdings which we believed had been sold down disproportionately relative to the risks they faced.

Over the second quarter of 2020, risk assets, in general, started to rebound strongly as evidence built that lockdowns could contain the spread of the virus, many industries were capable of being managed ‘from home’ (or in a COVID secure manner) and policy makers continued to support asset prices via massive injections of quantitative easing.

The funds followed suit, with the Progressive fund up 16%*[1] over the quarter. The technology sector was a standout performer, as were our active managers across a wider range of sectors and strategies. In terms of positioning over the quarter, again our focus was on maintaining our investment exposure, but ensuring that our risk allocation within that was appropriate against the changing backdrop. We viewed the extraordinarily sharp recovery in the share prices of some of the remaining UK equities within our portfolios with direct exposure to COVID social distancing policies with suspicion and used the recovery to reduce exposure to these areas still further. Proceeds were again invested into convertible bonds, credit and infrastructure.

Having ridden out the market volatility over July, we marginally increased exposure to equity markets in August. Whilst we had added risk back into the funds since the market falls in March, we had refrained from returning risk exposures back to the levels observed at the beginning of the year, in light of our expectation that as lockdowns eased COVID-19 case numbers would start to rise and economic recovery optimism would take a knock.

Over the course of October however, we added risk back into the funds more materially and took advantage of the buying opportunities still presented within the UK equity market by increasing exposure to holdings, which had underperformed year to date. Given the number of vaccines in development, we believed there was quite a strong likelihood that at least one would be found to be effective. We also believed that the UK equity market was becoming increasingly attractive given the stock market had been one of the worst performers year to date, international investors were significantly underweight and Brexit clarity allied with a global economic reflation narrative would be catalysts for a reappraisal of the market’s prospects.  For similar reasons, we also took the opportunity to increase the amount of Sterling hedging in the portfolios, in order to protect asset values should Sterling strengthen.  In our lower risk portfolios, the allocation to specialist (less economically sensitive) areas of real estate was increased, as we topped up exposure to investments which are still generating a decent level of yield.

The prior increases in equity risk and GBP-hedging ahead of the large market moves upwards in November benefitted the funds’ performance, and they ended the month at new all-time NAV highs.

Whilst November brought a rapid and positive reappraisal of the outlook for profits generated by more economically sensitive companies, we believe this dynamic has further to run as investors look forward to vaccines being rolled out, lockdowns coming to an end and a second half of 2021 when nominal GDP growth (and, thereby, profits growth) is likely to be exceptionally strong.

[1] FE Analytics, D Acc TR GBP.

Fund Performance to 30 November 2020

Past performance is not a reliable indicator of future results.
Cumulative performance, net of fees. Performance based on ‘D’ Accumulation Shares (For Managed Income Fund, based on Income Shares).
Since Launch: 4th May 2010
† 11th April 2005
For the period to 31st January 2011, performance data for these funds is based on an adjusted B share class and is representative of the performance a retail investor could have expected if this share class had existed since launch.
*20th March 2015
RPI Index used is the Retail Price Index (all items). RPI data is the latest available. This will normally be from a data point at least one month earlier. For example, performance reported for one year to end April will be shown against the latest RPI available, i.e. 12 months to end.
Source:  Morningstar

Hector Kilpatrick
Head of Risk Managed Funds

Important Information

The value of your investments and the income from them may go down as well as up and neither is guaranteed. Investors could get back less than they invested. Changes in exchange rates may have an adverse effect on the value of an investment. Changes in interest rates may also impact the value of fixed income investments. Past performance is not a reliable indicator of future results. The information in this document does not constitute advice or a recommendation and investment decisions should not be made on the basis of it.

The Authorised Corporate Director of the company is St Vincent St Fund Administration, a trading name of Smith & Williamson Fund Administration Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. The registered and head office of Smith & Williamson Fund Administration Limited is 25 Moorgate, London EC2R 6AY. The specific details of the funds including investment policy, charges and the associated risks are explained in the full Funds Prospectus and in the Key Investor information Documentation (KIIDs).

© Morningstar 2020. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed ; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

The Authorised Corporate Director (ACD) has selected the above target benchmarks as the ACD believes it best reflects the target of returns above inflation over a five to seven year investment cycle after costs.

Market Comment  11/11/2020

Risk Managed Funds Positioning Update - 11th November 2020

Two events of real significance (concerning US elections and vaccine development) have occurred during the last week. Hector Kilpatrick gives an update on the positioning of the Risk Managed Funds in light of this.

Read more

Market Comment  11/08/2020

Market Commentary - August 2020

Hector Kilpatrick gives our latest Market Commentary of last month and Investment Outlook for August.

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