These are testing times for investors and the newsflow is likely to get worse before it gets better. Whether or not the pandemic is short-lived, it is affecting many parts of the global economy and will continue to do so perhaps for some time. This sad episode reminds us yet again that few markets rise without interruption – corrections are part of the investment cycle. Even so, the temptation can be to sell and this may be the right decision in the short term. What investors must not do is panic – keep calm and carry on.
As previous columns have highlighted, the evidence highlights the importance of staying invested over the long term and the repercussions of trying to time the markets. Research from Fidelity has shown that over the period 1980-2012, which included the last financial crisis, investing in global equities for 12 years or more produced no negative returns. By comparison, five-year periods produced a 16 per cent chance of a negative return.
Fidelity has also shown that missing out on the 10 best trading days of the MSCI World Index over a 10-year period from 31 December 2002 would have resulted in negative returns of -4.6 per cent. Missing the best 20 days would have extended the loss to -32.1 per cent. Meanwhile, Barclays has suggested investors who tried to time the market from 1992 to 2009 were down 20 per cent compared with those who had remained invested.
Few can accurately predict when markets will start climbing the wall of worry. But the portfolios’ commitment to well-chosen equities over the long term remains robust. Accordingly, they will remain invested while seeking to add value over time. Such an approach also allows the full harvesting of dividends, which have accounted for the majority of returns over time, and recognises that markets can rise quickly once they turn a corner.
Indeed, while an important investment discipline in itself, this approach is particularly relevant when harnessing the potential of investment trusts. For this correction has once again highlighted the extent to which they can be volatile, with discounts having widened markedly during the correction, and why we must therefore look to the long term to best reap their superior returns.
Recent research from the Association of Investment Companies (the industry’s trade body) and Morningstar points to average prices falling 16 per cent over the period 31 January to 13 March, at a time the FTSE 100 and S&P 500 were down 27 per cent and 13 per cent in sterling terms. However, being weighted averages, the figure masks much bigger falls for many companies given some larger trusts have performed better – including Scottish Mortgage Trust (SMT).
Sector performance has been varied. Among the portfolios’ holdings, Renewable Energy Infrastructure, Infrastructure and Biotechnology & Healthcare have performed relatively well, as might be expected. However, Commercial Property and Bonds have disappointed as concern about the economy and corporate debt has risen and discounts have widened significantly.
In keeping calm and carrying on, an investor should continue to scrutinise the markets. A feature of the recent correction has been the unprecedented rise in correlation between many asset classes, including property and bonds, which has surpassed that of even 2008. This has implications when seeking diversification to reduce losses in a downturn, which need to be explored further – something future columns will address.
Portfolio changes
Otherwise, the portfolios made a number of changes during the first quarter of 2020. In January, the Growth portfolio reduced its exposure to Henderson Smaller Companies (HSL) and used the proceeds to introduce BlackRock World Mining Trust (BRWM). Prices achieved were £10.83 and £3.81, respectively.
HSL is primarily invested in medium-sized companies and has an excellent track record under Neil Hermon. However, following a very strong run, the discount to Net Asset Value had all but disappeared – it having been in double figures fairly recently. Furthermore, maintaining portfolio balance remains a priority. Therefore, given the portfolio’s other UK smaller company exposure, the holding was top-sliced.
BRWM invests in a diversified portfolio of mining and metal assets worldwide. Shareholders should benefit from strong dividends and buybacks courtesy of the sector generating close to record free cash flow at a time balance sheets are robust and companies remain focused on capital discipline after a difficult decade of restructuring. Meanwhile, the dividend is covered. Patience will be rewarded.
January saw the Income portfolio introduce BlackRock World Mining Trust (BRWM) and top-slice Herald (HRI) at prices of £3.81 and £14.86. In February, SQN Asset Finance Income Fund (SQN) was sold and CQS New City High Yield (NCYF) added to at prices of £0.52 and £0.59. In March, Aberdeen Standard Equity Income (ASEI) was sold, Scottish Mortgage Trust (SMT) top-sliced and JLEN Environmental Assets Group (JLEN) introduced at prices of £2.40, £5.34 and £0.98, respectively.
HRI has an excellent performance record. It had seen a strong run as the UK market climbed the wall of worry as the general election came and went. Its focus on smaller technology companies under its longstanding lead manager, Katie Potts, bodes well courtesy of the sector’s positive outlook and valuations. However, given the portfolio’s other technology holdings and the importance of maintaining balance, the holding was top-sliced.
SQN recently announced a review of the valuation of its Anaerobic Digestion (AD) plants. The company’s credibility has been called into question and management changes have since taken place. The company has now assumed a higher risk/reward profile, which is not best suited to portfolios representing the latter stages of an investment journey.
NCYF achieves a generous level of income by investing predominantly in high-yielding fixed-income securities, with the remainder of the portfolio consisting mostly of convertible and preference shares. The company has performed well under its respected management, with some metrics suggesting the asset combination has made for its 10-year risk/return profile being one of the best in its peer group – and superior to both UK equities and gilts.
While always endeavouring to support good companies during the inevitable periods they underperform, ASEI was sold given its consistent underperformance. By way of contrasting fortunes, SMT was sold after its strong run in order to maintain a modicum of portfolio balance as it had become a relatively large holding – it is remaining a core holding, given the growth remit and track record.
JLEN has usually been standing on a 5-15 per cent premium given the income-producing and defensive nature of its portfolio. The company invests in a diversified portfolio of environmental infrastructure projects, which generate predictable and stable revenues, many of which are correlated with inflation. Recent market volatility once again presented an attractive buying level. The company was yielding 6.8 per cent when bought.
