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Reviewing our strategy

May 8th 2020 – Written by Andrew Chorley

In this week’s update we look back to one of our publications from January 2019 – Annual Report 2018 and Beyond -  where we set out a two stage strategy to first deal with potential risks and then to look for opportunities.

The purpose of this publication is not self-congratulatory or to say “I told you so”; it is to highlight the importance of having a plan for investing that is based on evidence and robust theories developed by investors over history and infinitely more intelligent than us! None of us could have predicted Covid-19 and its impact now and for the future; what we did and do know though is that historically events unfold in a similar pattern. If it had not been this it could have been something else that would have altered sentiment and changed the direction of one of the longest equity “bull” markets in history.

All of our recommended funds hold equities in varying amounts and proportions and these declined in 2020 along with all major markets; however, they remain the best long term source of investment growth and will always have their part. Investors cannot and never will be completely free of risk whatever asset they hold and this is what makes diversification of how returns are generated so crucial. Whilst we lost in equity markets these losses were offset by gains elsewhere – our plan remains unchanged and we continue to try to make more winning than losing decisions, avoiding large capital losses and generating a long term reasonable rate of return.

  • Cash - this provides protection from market volatility as capital values remain intact; it also offers liquidity that can be invested as opportunities arise. 

    Whilst cash detracted from returns in what was a positive year for equities in 2019 it provided excellent protection in the extreme volatility in March 2020

  • Gold – this can be quite a divisive holding with critics citing its lack of income and “goldbugs” it’s worth as a store of value dating back to Roman times. Our view is that it could provide protection against inflation or deflation. Whilst it is not perfect by any stretch of the imagination, its value as a “safe haven” asset makes it an essential part of our plans. If we see inflation investors worried about maintaining purchasing power look to Gold; if we see deflation characterised by poor investor sentiment, a weak economy and a decline in the value of currencies, again investors will turn to Gold. The real prospect of Helicopter Money that would almost definitely devalue currencies making Gold an attractive option. Helicopter Money (putting funds directly into the hands of the population) arrived; in the UK the Chancellor announced plans for the furlough scheme and grants to small businesses among other measures. Whilst we are seeing a more deflationary environment the value of Gold as a safe haven with the price rising by around 35%.

  • Index Linked Gilts & US Treasury Inflation Protected Securities – both of these offer us not only protection against rising inflation as their capital and income rises with RPI in the UK and CPI in the US, but they can also perform well in a deflationary environment. The reason for this is that at maturity there will be a return of capital the par value. We favour the US equivalent TIPS as they have a positive yield – if a bond has a negative yield if you hold it to redemption it will result in a loss of capital. At the same time “breakeven rates” in the US are currently 1.73%; this means that if inflation is above this level over the next 10 years TIPS will outperform conventional bonds. This makes them ideal for now and stage two. The value of these holdings will ultimately be seen in the longer term when the risks of inflation return; however their value in the near term in a deflationary environment described also resulted in returns for 17% for TIPS and 14% for Index Linked Gilts from the start of 2019 to date.

  • US Treasuries – unlike the rest of the World, yields on US Treasuries are around 3% as a result of the rise in interest rates. If we were to see deflation, we would expect these to perform well as yields could fall to similar levels to their UK and European counter parts that would see capital values rise. US efforts to raise interest rates proved an opportunity too good to miss for investors as yields hit 3%; with investors seeking income and then a safe haven these assets enjoyed a return of just over 19% since 2019.

None of the options that we have are perfect and it is increasingly difficult to diversify a portfolio to protect it from declines in a World where we feel most things are overvalued. However, we hope this approach coupled with some small positions in opportunities that arise will mean that portfolios can generate a reasonable return in stage one whilst avoiding significant declines in value.

EST. 1999