Looking back on the pandemic

Chris Brown, CIO, 20th September 2021

Back in early 2020, when the Coronavirus first hit and equity markets lost -30% or more in a few short weeks we wrote several update notes to keep you informed on the (dramatic) market movements we saw. As markets and the economy have continued to recover this year we have not written any of these shorter ad hoc notes. However, we don’t want you to think we only write when there is bad news! So here is a brief (and happily more positive) update as we reflect on the journey markets and your investments have taken since the global pandemic began in January of last year.

But first a reminder of where we have come from. Here is what we wrote on 19th March 2020 when the (financial) crisis was at its peak and UK All-Share Index was down -35% for the first 3 months of the year (markets eventually bottomed a few days later on the 23rd):

Is this a market to buy?

Over longer term time horizons our answer is yes. The journey to making these gains is essentially unknowable however. This feels most like we are fighting a war. (The UK government’s new Covid-19 bill gives them unprecedented powers to fight this outbreak for example). The good news is that the young look to be unaffected and, ultimately, we will win this war, either via a vaccine or the virus passing through enough of us that we develop the so-called herd immunity. However, wars have a habit of going on longer and having a far greater cost than people thought going in to them.

We pretty much stand by this. The war is nearly over and we will win it. Though the virus will remain with us as a nasty (sometimes fatal) disease, a successful vaccination program (as we have seen in the UK) means that we can go back to living our lives with our personal freedoms intact. From an economic perspective, UK employment hit pre-pandemic levels last week. For equity markets, corporate profits are back above 2019 levels. That said, the fight against the virus will continue to drag on. Vaccination programs for most countries will roll on into next year and international travel will only really resume when enough countries have reached their vaccination goals.

As for our investment strategy, here is what we wrote in our 20th May 2020 client update:

What does all this mean for our positioning for client portfolios? We have written before that our focus remains on capturing the upside when and if we emerge out of this crisis and riding out the volatility in between.

This, again, proved the right approach. The fact that we kept our risk on, added where we could and rode out the volatility and uncertainty over the course of the pandemic has meant that all of our client portfolios have recovered their Q1 losses and then some. In fact, our returns since the start 2020 are now ahead of our longer term targets and the internal benchmarks we set ourselves. If nothing else this is a reminder that, in investing as in other areas of life, crisis can also spell opportunity.

Our longer quarterly review note is due in a few weeks’ time and we will use that to look forward to how we are thinking about and positioning for the next 12 months and beyond. We want to finish here by discussing the performance of our “alternative” assets and the changes we made to them. These are designed to offer some diversification away from traditional equities and bonds and have added real value to our client portfolios over the last 24 months.

  • Continuing with the theme of “sticking with it”, part of our alternative investments is in listed trusts that own assets such as solar and wind farms, social housing, batteries and commercial property. As the crisis hit these were met by a wave of panic selling that drove prices well below the value of the underlying asset (such as the valuation of a solar farm for example). The income these assets produced was, however, more or less untouched by the impact of the pandemic. As the initial market panic passed, the stability and reliability of these cashflows became very attractive to investors. Prices quickly recovered and much of our portfolio now trades at a premium to this asset value and where it traded at the start of 2020. These trusts have grown in importance in our alternatives portfolio and the pandemic only proved their worth.
  • In contrast, we had for a long time an allocation to absolute return type strategies. These were designed to offer stable returns whether equity markets or interest rates rose or fell. The returns were also (by design) hard to predict over the shorter term (which was part of their attraction as diversifying assets). However, this unpredictability meant that we could not be sure they would be well positioned for economic recovery and our focus was on capturing this upside as and when it came. We therefore exited the majority of these positions in the first half of last year. We reinvested the money in cheaper, distressed assets (such as corporate credit) that have subsequently recovered. With hindsight, this was the right call. Looking forward, our focus will be on looking for new opportunities like this and on the trust market. We don’t think absolute return will be forming a material part of our alternatives allocation over the next few years.