Politics, Vaccines and the Big Rotation
Tideway Market Update, 20th November 2020

James Baxter

Equity markets were already rising in the lead up to a tight US election. Investors don’t like rapid change and the consensus appears to be that Republicans will control the Senate so that when (if they can get him out!) the current incumbent leaves the White House the new Democrat President will be prevented from pushing through big changes too quickly.

However, the bigger news for investment markets has been that vaccines are imminent and test results appear to be at the top end of expectations. All investments have generally risen since that news at the start of November, but some a lot more than others. As predicted by our research partners, TS Lombard, the vaccine news has prompted belief in a wider economic recovery halting the meteoric rise in technology stocks and prompting a big rally in undervalued stocks that had sold off heavily since March. The rotation from ‘growth’ to ‘value’, from one of the largest diversions ever seen and as eagerly anticipated in this column, finally prevailed. We will see if it continues. There is certainly plenty of room for valuations on many of these ‘out of favour’ companies to rise further to get back to more normal levels and metrics and against a backdrop of very low interest rates.

Overall, I am pleased to report we have seen around a 2.5% rise in our assets undermanagement and our average portfolio values since the start of November. Our fixed income funds have continued to rise, our global growth funds have held steady and gained a bit and our equity income ‘value’ positions have risen as much as 20% in some cases and 10-15% across the board. Save for those who have invested with us post March 2020 it is still a bit too early to celebrate. Pre March 2020 investors are still going to see negative percentages against some of the Schroder funds and the Unicorn UK Income fund when they log on to the client portal. However, these losses are now a lot smaller and for all our investors these funds have delivered the best performances of all our funds since the vaccine announcements (see below). Patience, and conviction finally getting rewarded.

Portfolio Changes - Nick Gait

As the more vigilant of you may have noticed, we have made some changes to your portfolios since our last communication. An Investment Committee was held on the 6thNovember approving the addition of two new funds to our buy list which have now made their way into your portfolios. These are the Montanaro Better World Fund and Fidelity Asia Pacific Opportunities Fund which we will explain in more detail for you below. We also opened a position in a third fund, Artemis Short Dated Global High Yield Fund, for multi asset strategies after adding this to our fixed income portfolios earlier this year.

The Montanaro Better World Fund is our first ‘impact’ investment with the dual objective of delivering attractive returns to clients whilst also investing in companies that make a positive impact on the world. The Montanaro Better World fund employs a detailed three stage process (Impact, Quality, Valuation), underpinned by detailed analysis of company fundamentals, to identify Small & Mid Cap companies with high quality and growth potential which have a positive impact on society. Impact is assessed through alignment to UN Sustainable Development Goals which have been simplified into six broad investment themes; “Environmental Protection”, “Green Economy”, “Healthcare”, “Innovative Technologies”, “Nutrition” and “Well Being”.

To help you understand how your investment is contributing, according to Montanaro’s 2020 impact report, a £1 million investment supports the impact of:

  • Environmental Protection; 600 tonnes of CO2 emissions avoided
  • Green Economy; 90,000 MWh of renewable energy generated
  • Healthcare; 700 patients treated for illness or disease
  • Innovative Technologies; 7,000 sensors helping to reduce car emissions
  • Nutrition; 3,000 people given access to healthier foods each day
  • Well-being; 50 homes & businesses protected by smart systems

If you are interested in reading more about the impact your monies are having, then please get in contact with your adviser for a copy of the full report. It is an interesting read and has won awards in the past for the quality of its content.

The differentiated investment strategy and established investment process (the company has been running smaller company equity strategies since 1991) makes the fund a complementary addition to your portfolios providing the first dedicated ‘impact’ strategy whilst providing additional geographical diversification within our smaller companies’ allocation. The portfolios should benefit from an attractive return profile benefitting from the cumulative Small Cap, Quality and Impact effects. To emphasise, we do not believe we are sacrificing returns by investing in companies that positively impact the world.

Fidelity’s Asia Pacific Opportunities strategy was added to portfolios in order to increase your portfolio’s overall exposure to Asia. Typically, the Asian economies such as China have succeeded in controlling the second wave of the Covid-19 virus much better than UK, European and US counterparts and have not needed to enforce nationwide lockdowns with companies therefore benefitting from economies remaining open. Even though the announcement of several viable vaccines ensures the lockdown affected countries will get back on track faster than they would have otherwise done (making the Asian trade less attractive), we are of the belief that the wider peer group is broadly underweight in both Asian and Emerging markets and presents compelling long-term opportunities for the patient investor. The increased allocation also provides some additional insurance in the event of logistical delays distributing the vaccine throughout Europe and the US which would have a negative effect on economic output.

The fund itself has good synergies with our existing holdings in the regions; Blackrock Emerging Markets and Jupiter Asian income, with low levels of holdings crossover and is notable for a lack of investment in Tencent and Alibaba which dominate the top holdings of funds that invest in this area of the market. To add to this the fund has a higher overall allocation to developed markets in countries such as Australia (14.1%) and New Zealand (2.8%) which is not part of Blackrock’s investment universe. The fund is style agnostic though typically tends to add contrarian positions and invests on a total return basis unlike Jupiter Asian Income which is mandated to invest in companies with a yield. 

As well as providing style diversification to our existing Asian allocation, manager Anthony Srom, has delivered excellent returns for investors since his appointment as fund manager in late 2014 outperforming both the fund’s benchmark and the wider peer group by a significant margin. Although these returns will be difficult to replicate, we are positive on the forward-looking return potential considering the wide range of sources the manager has achieved his returns from in the past; not relying on the largest tech names to drive returns. The manager’s track record of managing risk is also notable and we expect the fund to perform well, in relative terms, in a downturn.

We are excited about the changes that we have made on your behalf, but perhaps the most significant decision at our most recent committee meeting was to maintain conviction in our Value positions, most notably our holdings in Schroder Income and Schroder Global Equity Income. Although we do not like to review short term performance, they have outperformed the wider market by a large margin since the first announcement of viable vaccine earlier this month, an event that TS Lombard forecasted would act as a catalyst for the value style of investing. Although we cannot predict the future, the discrepancy between the value and growth styles of investing is still exceptionally wide compared with historical levels and we still maintain there is a large opportunity for relative outperformance looking forward. At the very least this is a timely reminder of the benefits of investing in managers with different investment philosophies.

In a similar vein we are happy retaining our investment in managers such as Baillie Gifford who have benefitted significantly from the outperformance of the growth style of investing and the tech sector over the last couple of years. Unlike some other growth mandates, the Global Alpha strategy is relatively diversified from a sector and country perspective and derives its returns from other companies in addition to the tech giants. With the rotation into cyclicals and lofty valuations of some of the higher quality growth names we expect the manager will begin to add some names which will benefit from economic recovery. To add to this, the managers of this fund are very disciplined when it comes to position sizing and have not hesitated to take profits on their best performing names (think Tesla) to keep the fund within their desired risk parameters. We think the Global Alpha offering will continue to offer a compelling risk reward offering going forward.

In summary, we have increased our overall exposure to Asian companies, executed our first ‘impact’ investment, added to our existing smaller companies position and increased the diversification of our fixed income book. Furthermore, the decision to maintain our deep value positions and UK overweight has proved accretive in the short term and is a trend that we think will continue looking ahead. Should you wish for further details on the trades we have placed on your behalf then do not hesitate to get in touch with your adviser.

Have a good weekend.

The Tideway Team

Have a good weekend,
The Tideway Team

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