The word ‘unprecedented’ was deemed the most overused word of 2020, but there are few better ways to describe the past year. As light starts to flicker at the end of the tunnel, we reflect on an extraordinary period and the lessons we’ve learned along the way.
 
Across our investment teams, we have an enormous amount of experience when it comes to dealing with recession and stock-market crashes. But there was something quite different about Covid-19. An overnight coordinated devastation of the global economy was new territory for us all, and we had to hold firm, trust our judgement, and believe in the fundamentals of our investment thinking to help us navigate the year.
 
Despite the difficulties of 2020, we feel encouraged by our performance relative to our peers and optimistic about how we are positioned for the future. As a business we are made up of several teams of experts, such as fixed income, equities, or real assets. Although we each have our own objectives and tactical approaches, we share the same fundamentals, which have stood us in good stead throughout this crisis. Here are some examples of how those ground rules were tested, how we reacted, and the positives we gleaned along the way.
 

  1. Only invest in sectors and companies that can ultimately prevail

Our unwavering commitment to the longer-term performance of portfolios means that occasionally we need to be ruthless in our decision-making. As the Covid-19 crisis unfolded we were forced to cleanse our portfolios and remove assets that looked set to deliver disappointing returns, even after the Covid clouds lift. Two bold decisions included the removal of all UK oil stocks, and also government bonds, which are yielding next to nothing. While these decisions were made with the future in mind, they also had a positive impact on short-term returns, helping us beat the market average.
 

  1. It pays to remain well informed across all sectors and companies

For many years, it has been hard to find good entry points in several attractive high-quality businesses, simply because they have been too expensive. But that didn’t stop us watching those stocks and understanding their business fundamentals in great detail, just in case an opportunity arose. And arise it did. Thanks to our in-depth knowledge, we were able to make quick and important decisions when the market crashed in March, buying positions in good companies that were left behind amid the surge in technology stocks. These included Accenture, SAP, Novartis and Heineken – some of which we have been watching closely for 10 years.
 

  1. Liquidity is key

If there is one thing that keeps investors awake at night, it’s being trapped in an investment they can’t get out of. And there’s nothing quite like a global crisis to bring that to pass. In the fixed-income market, we saw traders trying to offload bonds at a 20 percent discount to the market value as they had no choice but to liquidate their assets. Similarly, in some parts of the commercial property sector, investors were stuck with expensive properties and no rent coming in.
 
We try to ensure that our portfolios are as liquid as possible while still maintaining exposure to the sector. For example, we prefer to invest in property through real estate investment trusts (REITs), which means we are investing in listed companies that invest in property rather than the properties themselves. While other investors worried about being trapped in their investments, REIT’s remained tradeable throughout the crisis allowing us to buy assets that were trading at a discount.  Our longer term focus has kept us away from offices and retail outlets, and towards distribution centres, cell-phone towers and data centres – examples of commercial property that have benefited from the pandemic.
 

  1. Have courage in our convictions…

We spend a lot of time analysing and making investment decisions based on a structured and rigorous process. This year has reminded us that it is important to trust our convictions and lean against the prevailing trend rather than panic when it feels like the world is about to end. Despite the desperate outlook, we believed in the long-term validity of the companies we were invested in, largely because they were selected for their strength and depth in the first place. So far, that philosophy has been vindicated.
 

  1. … but ensure every stock continues to earn its place

Of course, that doesn’t mean we sit back and hope for the best. Throughout this year, we have continued to stress-test holdings for durability and resilience. As long as the companies within our portfolios don’t become too expensive and can deliver reasonable profits, they should perform well in an otherwise low-return environment.
 

  1. There are always opportunities if you are prepared to look for them

It’s true that, despite a global recession, markets are looking expensive. Equity valuations are high, and there is little yield available from bonds. But that only tells part of the story. Within the equity market, there are still businesses that have been left behind by the recovery – especially in sectors such as travel. And the UK market could also yield some excellent opportunities – particularly if a trade deal with the EU can be agreed. At the same time, we have replaced a large proportion of our government bonds with short-term corporate bonds. That’s because they can provide at least some return with a high degree of certainty. While the returns might not be exciting, this approach ensures we maintain the risk diversification we need across the portfolio.
 

  1. Don’t try and second-guess the outcome

Vaccine or no vaccine, trade deal or no trade deal, we focus on finding high-quality businesses that can prevail regardless of the outcome, and that is one of the reasons our portfolios have performed well this year despite the huge levels of uncertainty.

 

Looking ahead

So, as 2020 draws to a close, we can all hope for a better year ahead. We know it’s not going to be easy, and there will be a price to pay for the depth of the crisis we have found ourselves in. But as this year has shown us, that doesn’t have to mean financial ruin. We will continue to stick to what we know best – discipline, detailed analysis, and trust in our process and colleagues, while also adapting to the new economic landscape and the opportunities that brings, of which there will be many. As the saying goes, “Never waste a good crisis”.

 

Phil Smeaton
Chief Investment Officer



All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

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