What has performance been like?
Performance over January and most of February was generally positive following on from extremely positive returns in 2019. The last week of February saw equity markets reduce sharply and has continued into March. Up until the 9th March bonds performed well as a “risk-off” asset, and were cushioning equity falls well, but over the week that followed, the selling became more indiscriminate. Against this backdrop MPS has performed as we would expect with the lower risk portfolios falling less than the higher risk models but still seeing some negative returns.
What has worked and what hasn’t year-to-date?
In the equities market, we have seen growth stocks continue to outperform and so Baillie Gifford in the MISM North American fund, Lindsell Train in the UK Equity fund and Investec UK Equity Income have done well on a relative basis. Conversely, the weakness in value stocks (concentrated in financials and oil & gas) has continued due to lower interest rates and the oil price war between Russia and Saudi Arabia.
In the active Balanced portfolio over February, bonds gave a positive return in the portfolios, whereas Absolute Return was off a little over 1%. During March there have been times at which bonds have sold off strongly and others where they have rallied. Absolute Return has been negative, but has at least added some diversification over the period. At one point (9th March) the 10 year yield on gilts touched a new low of 0.09%. Absolute return funds should give investors a positive return over cash over a three-to-five-year period and act as an alternative, diversifying the exposure at a time when bonds (the traditional form of diversification) are at very low yields.
What changes have been made to MPS year to date?
The MPS Investment Committee recently agreed that it was time to make an investment in Muzinich Global Tactical Credit and BNY Mellon Short Dated High Yield. These are two interesting strategies run by exceptionally skilled managers, who are current cautiously positioned in their asset classes and, we believe, able to take opportunities when they arise. These two strategies replaced Jupiter Absolute Return which we have been monitoring closely for some time. In the active MPS we also removed a European manager (JOHCM European Continental) whose value strategy we felt could be replaced more cheaply by a blend of active and passive exposure.
In stressed times for markets there are often forced sellers of assets and ideally we want to be in a position to be buying at these times. Wealth managers are in a fortunate position of generally having a long term horizon and so can take advantage of situations like these. In some of the market turmoil of the past few days, the MISM Bond fund took advantage of the lower transaction costs on offer by executing an institutional cross for £10m in one of the mandates.
In agreement with the MPS Investment Committee we have widened the tolerances in MISM funds to allow defensive managers to grow to a greater share of the funds. Where appropriate we are also letting cash levels drift higher in the funds
We have also been speaking with certain managers on a more frequent basis to assess possible opportunities and allowing them to draw down on capital when requested.
Are we likely to make any ad-hoc rebalances outside of the normal pre published dates?
We are planning to stick with our monthly dates as scheduled but we will respond if the asset allocation committee believes it is necessary. We are conscious that re-balances can be inconvenient for advisers and investors and if investors are out of the market for short periods when volatility is high they can miss out on strong up days as well as strong down days.
What changes are likely to take place?
The current situation remains fluid and we are discussing whether it might make sense to introduce certain distressed assets and strategies into the MISM funds at some point in the future. The next Asset Allocation Committee meeting is in early April. Currently we are expecting to rebalance the models as scheduled, taking market liquidity into account before we take any action.
Brewin Dolphin’s remote working set up and business continuity plan is robust and the fund managers that we rely on have similar measures in place.
Suspended Property Funds
We do not hold any of the suspended property funds within MPS, as this topic has been in the news recently. Our analysts are not particularly keen on the asset class and many of the funds’ positionings have not been in the great place to recommend them.
How are we doing compared to our competitors?
MPS does have a higher weight to UK equity than some of our competitors and UK equity has been hit quite hard in recent weeks, so has not performed as well as US equity in the sell-off. However, the UK is offering better value as measured by the CAPE.
Given the fall in MPS active and passive why is active not sheltering us from the downside more effectively given the similarity in performance between the two?
Given the nature of the sell off it is not something that was easily anticipated, but active managers are investing in companies they see value in and think are robust. Where active managers will be earning their keep right now, is by seeing where those falls are and where valuations have opened up opportunities with companies that will be successful in the future over 3-5 years.
The value of investments and any income from them can fall and you may get back less than you invested. Past performance is not a guide to future performance and performance is shown before charges which will reduce the illustrated performance. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser. The opinions expressed in this publication are not necessarily the views held throughout Brewin Dolphin.