Market Updates

Reasons to be Cheerful

October 15, 2021 – Written by James Baxter

We are conscious that the last few weeks have seen one of the few downturns in portfolios since the pandemic shock of March 2020. The latter half of October 2020, before vaccine Monday, was the largest drawdown in equity markets, using S&P 500 as a proxy, falling -6.23% versus the -5.12% seen over the last six weeks at its worst point. It is easy being an investor when asset prices are rising, it is much tougher when our accounts go down in value. So here are some quick reminders of do’s and don’ts when this happens.

Do remember we are long term investors. We don’t plan to spend all our invested money in the next 12 months or even 36 months, it is how the investments will look over longer time periods which should be our primary concern.

Do remember, in our multi asset portfolios, in addition to the natural income provided, we have some less volatile investments, including short-dated bond strategies which have been little affected and can always be sold to avoid selling equities post a large market sell-off, if you need some cash. This is the great benefit of time horizon planning and holding segregated investments in our accounts that can be sold strategically if needed.

Do remember that in the credit markets, with fixed coupons and agreed redemption prices, that mark to market prices are less of a concern if these securities are held to maturity and there are no negative credit events or defaults. Movement in credit markets most recently can be explained by rising yields, which does not typically affect our shorter dated credit strategies nearly as much and any larger movements are quickly recovered as bonds approach maturity (again assuming no negative credit events). Furthermore, rising yields can actually be beneficial for fixed income holders over the longer term as managers are able to reinvest incremental cashflows, whether that is new money or bonds that are maturing, at higher rates.

Don’t look so often if you are worrying about daily movements. Our online valuations offer great transparency, but the daily price movements can be distracting from the longer-term objectives. The less often you look the less volatile your accounts will appear. The best example of this is residential property which has risen over the longer term but would appear much more volatile if daily prices were obtainable.

Don’t forget our fund prices lag market indices: The majority of funds are priced at midday UK time and are not published until the following day with some of our fixed income funds having a two-day reporting delay. This 12pm pricing point also means that any big moves seen in the afternoon in the UK or in the US market which opens at 2:30pm, are not priced until the following UK midday pricing point with the additional one-day delay for this price to be published. Currency moves can also have a meaningful impact over such periods.

Don’t get distracted by headlines, “FTSE 100 in freefall after inflation shock!” I could be a journalist! The FTSE 100 is not in freefall, in fact just this morning it hit a new 52 week high. We don’t invest directly in the FTSE 100, it is a decent proxy for some of our value funds, but we are globally diversified and investing for growth as well as seeking value. Yes, there is some supply chain induced inflation, but it is still to be seen how far inflation goes. Bond markets are pricing in very modest longer term rises. Although inflation may average 3% not 2% over the next ten years it’s unlikely to go back to 70’s style double digits.

A couple of sailing induced conversations over the last week have reminded me why we should be optimistic about the prospects for many companies.

A friend I gave a lift to the sailing club last week works in IT for a FTSE 100 PLC who have just signed a £100m contract with Microsoft for the next 5 years, just for their cloud computing. We were aghast at the number, as he compared it to spends of previous years, but I felt mildly smug knowing that it is one of our top equity holdings. Digital data storage is exploding. My friend gave a great analogy: Imagine children in a playroom building with Lego each with a box of bricks, they build something then have to dissemble it to build something else. Now replace the boxes of bricks with a permanently accessible free flowing brick vending machine, structures get bigger and they no longer have to dismantle them but can move to the next project on an infinite supply of bricks. Expect Microsoft to do very well in the next decade!

Last night at a charity sailing dinner (with Sir Ben Ainslie, just to name drop!) I sat next to another physicist, except this one, a 30-year-old, was actually doing physics and engineering for Rolls Royce (a company to which we also have exposure to). He looks after a team that works on the UK’s ten nuclear powered submarines that run off Rolls Royce engineering. We know Rolls Royce no longer make cars and we know the troubles in their per flight hour jet engine contracts, which will be recovering, but clearly they are at the heart of de carbonisation and net zero projects around the world in many different areas. They are leading a consortium on Small Modular Reactors and working on numerous projects in the energy creation, supply and usage chain. I was mildly jealous of both the youth and engagement in this exciting area.

Both Microsoft and Rolls Royce shares are up by around 50% in 2021.

Budgets & Inflation

Investment Insight, 01/10/2021