Sustained Rally & Continued Recovery in Value Funds
Tideway Market Update, 4th December 2020

For those not checking in on our client portal I am pleased to confirm portfolios have continued to rise over the last two weeks with positive returns from all our funds backed by strong market returns. After a couple of false starts earlier in the year, the recovery in the value funds has started with +20% returns on what had been our worst performing funds since the start of November. We are hopeful that this is just the start of a longer-term recovery for the investment style.

Our most popular Stable Return 2 (SR2) portfolio is now showing our clients a return of c.15% since the start of 2019 and after all fees. My thanks go to all the Tideway team for their calm approach and efforts through an extraordinary and often difficult year, although I don’t think any of us have missed the rush hour commutes!

Investment returns like this made a few points come to mind.

Portfolio Returns:

If we look at the 15% return on our SR2 portfolio it is ahead of the benchmark by about 2% over the last two years (and by far more since its inception in September 2016). We use the average return from funds in the IA Mixed Asset Sector with 20-60% in equities as our benchmark which includes fund costs but does not include a platform fee nor an advice fee. For most of our clients that is AJ Bell’s 0.16% p.a. cost and Tideway’s 0.75% p.a. wealth management fee. So actually, our collection of funds outperformed the average by nearer 2% a year. 

A cheaper alternative is to use index tracking funds; however, firstly, you have to ask what index funds do you want to compare against? If we took a 50:50 blend of a FTSE 100 tracker and a UK corporate bond tracker, the return over 2 years would have been roughly half at 7%.  If you were fortunate to have chosen an MSCI World index tracker rather than the FTSE 100 fund then you would have had a very healthy 23% return.

Looking under the bonnet of this we can see the MSCI index returns have been led by the big US techs in particular, which have been on a stellar run.  Noting the old adage - past returns are no guarantee of future returns, the question is are these big US tech stocks that now dominate the world index going to offer the best returns for the next two years?  Given current valuations we doubt it and if the last month is anything to go by, they certainly will not (note that Schroders’ Global Equity Income fund has outperformed the MSCI world index by c.11.5% since the start of November). This is all even before considering the drawbacks of passive investing in fixed income markets which we highlighted to you earlier this year.

The returns from the MSCI world index are a good lesson to us to keep our heads up looking for sectors and the managers who will spot where the next big returns will come from. For now, at least you can say that for the last month you have been catching up! 

Tax:

As night follows day, with investment returns comes tax, unless of course you are 100% invested in ISAs, which I don’t think any of our clients are.  We are reading a good deal at present as to how out of balance the UK and other Governments spending programmes are. Fortunately, money is cheap, and no one is looking to balance the books any time soon, but at some point, unless economies around the world expand significantly, tax rates will have to rise.

We are here to help.

  • For those of you investing with us outside of SIPPs and ISAs we will be contacting you in the New Year to minimise capital gains tax where we can. 
  • For those with SIPPs already, or now over £1m, we will be talking to you about your lifetime allowance planning and marginal income tax planning.
  • If you are fortunate to be fully ISA’d and SIPP’d up and have used your dividend and capital gains tax allowances, you may wish to consider investing into offshore investment bonds to shelter income tax.  We shall be doing a piece on this next week. 
  • For those older clients or with parents still alive do ask us about inheritance tax planning.

DB Pension Transfers:

The 15% return for the last two years is set against very low inflation likely to be less than 3% for 2019 and 2020 combined so it is equivalent to a real return of around 12%. Most of you who transferred with us would have had real return targets of less than 2% p.a. to beat the benefits you could expect from the DB scheme. Although future investment performance cannot be guaranteed, you have now had around six years’ worth of returns in two years significantly enhancing your likelihood of gains as compared to the defined benefits you left behind.

Last month we also received confirmation of the Governments plans to scrap RPI in 2031 when all such schemes will then track CPI for annual inflation increases. Of course, CPI has notoriously lagged RPI by 0.5% to 1% p.a. on average so this is quite a saving to DB schemes as inflationary increases on pensions and deferred pensions beyond 2031 will be lower, in turn lowering the value of the pension benefit you surrendered for the transfer value.

Bond Portfolios:

Finally, we have been working on new fact sheets for our three pure fixed income bond portfolios and you can see the new sheet for our low to medium ‘Bond Income Portfolio’.

We have been having a lot of conversations with clients about the drop in deposit rates of late.  The Bond Income Portfolio is not equivalent to a cash account, there are risks and as can be seen on the performance chart it was not immune to volatility in March this year.  However, it currently has a yield that is around 3% net of all fees and has also been generating capital gains as rates have gone lower and the fund managers exploit the imperfections of bond markets.  

A six or even three month ‘moving average’ of the portfolios performance chart would look a lot smoother and importantly on a two or three year time horizon this portfolio has much more certain returns than a pure equity or mixed asset portfolio.

If you, or colleagues still have cash ISAs, or more funds on deposit than you might need ready access to, but don’t want the risks of equity markets this is a great lower risk starter portfolio that we are very pleased with. 

Unless we see any major changes or events over the next couple of weeks, this will be our last Market update for 2020. We hope you have enjoyed them and found them interesting and wish you all a Merry Christmas and prosperous New Year.

Have a good weekend,
The Tideway Team

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Tideway Investment Group comprises the following entities: Tideway Investment Partners LLP and Tideway Wealth Management Limited. Tideway Wealth Management Limited is an appointed representative of Tideway Investment Partners LLP, which is authorised and regulated by the Financial Conduct Authority. FCA number: 496214.

Tideway Wealth Management Ltd
107 Leadenhall Street
London EC3A 4AF

+44 (0)20 3143 6100
info@tidewayinvestment.co.uk

© Tideway Investment Group 2021

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