March 2021 | Issue 1
Wind of change The Polar Express exclusive interview with CEO of Polar Capital
The year of the ox what's the outlook for investment in China?
Why we shouldn't fear market corrections Barclays Private Bank
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CONTENTS
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Welcome
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Assessments of value
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Polar Express
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Valuanalysis challenges growth vs value
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The Tesla valuation debate
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Why active investing outperforms passive
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The year of the Ox
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What are the pros and cons of cryptocurrencies?
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Will Woodford really return?
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The state of markets and why we shouldn’t fear corrections
Morningstar’s Andy Pettit considers how useful and effective these reports are for investors and advisers - and where asset managers need to do better in the next set of reports due soon
Wealth DFM talks to Gavin Rochussen, CEO at Polar Capital, about the growth of the business and why it continues to have strong appeal for investors
New research paper reveals why ‘undervalued’ is not ‘lowly valued’
Are you in or out? Momentum Global Investment’s Michael Clough highlights comparative valuation data and asks whether its forward P/E ratio might make investors a little nervous
ASI’s Harry Nimmo delivers a powerful and evidence-based argument on why attempting to beat the market is a winners’ game
Ninety One addresses the Chinese investment opportunities in the year of the Ox
Daniel Murray, Global Head of Research and Joaquin Thul, Economist at EFG Asset Management dive into the detail
Wealth DFM looks at the responses to the news that Neil Woodford is planning a return to asset management and examines how the news has been greeted by the investment community
WealthDFM talks to Gerald Moser, Barclays Private Bank, about why he believes corrections are healthy and investing in quality businesses is key
Designed by: Becky Oliver WealthDFM Magazine is published by IFA Magazine Publications Ltd, Tel: +44 (0) 1173 258328 3 Worcester Terrace, Clifton, Bristol BS8 3JW © 2021. All rights reserved
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March 2021 | WealthDFM
‘WealthDFM’ is a trademark of IFA Magazine Publications Limited. No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research and where necessary legal advice should be sought before acting on any information contained in this publication. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. WealthDFM is for professional advisers only. Full details and eligibility at: www.wealthdfm.com
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WealthDFM | March 2021
WELCOME
Wind of change
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elcome to the very first edition of Wealth DFM magazine, the magazine for wealth management and discretionary fund management professionals who appreciate the finer detail on today’s most relevant topics. It’s hard to remember a time when the world of investment and asset management has been quite so dynamic and exciting. Perhaps the Scorpions summed it up in their lyrics of 30 years ago when they declared: “the future's in the air. Can feel it everywhere. Blowing with the wind of change.” Sounds about right to me!
ESG AS A DRIVER The global battle against the climate crisis and the environment is changing the world of investment for good. Responsible investing and ESG (environment, social and governance) considerations have become a significant factor in stock selection and asset allocation strategies. It now looks set to become a mainstream consideration in investment decisions as well as corporate behaviour.
THE BATTLE AGAINST COVID-19 The use of vaccines is picking up across the world, bringing with it the hope that the worst effects of this cruel coronavirus pandemic can be overcome in time. With it, the hope is that economies, businesses and individuals can begin the long road to recovery from the immense impact which the past year has inflicted on the world and its people.
VALUE AND VALUATIONS Aside from the more traditional debates as to the relative merits of value or growth investing and the recent return
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to fashion of value stocks, there has also been much discussion and debate about whether the global bull market in equities is about to come to an abrupt end. As the world begins to face the future of living with Covid, the resulting debt it’s generated, the likelihood of inflation and the chance of rising interest rates as well as the rise of China as a world superpower, it means that keeping a clear investment head and employing an effective investment strategy has never been more important. And what does that mean for passive investment strategies? Might this really be the era of the active fund manager?
RETAIL THERAPY AND THE CRYPTO CRAZE We have all had our eyes opened by the activities of retail investors so far this year, using the power of trading apps and Reddit to try and take on the hedge funds. The rise of bitcoin has also grabbed the headlines, with Tesla’s flamboyant CEO Elon Musk, announcing on Twitter in early February that he’d invested $1.5billion into the cryptocurrency. It hasn’t done much for his personal wealth however as the price of bitcoin has been a rollercoaster ride in the latter part of February. Bitcoin fluctuations are now affecting shares in Tesla so the ripple effect of Musk’s fascination with crypto has real inroads into the value of the world’s most highly valued car manufacturer. All this means that there could hardly be a more interesting and pivotal time to launch a magazine which is focused on the issues dominating investment decisions for asset management professionals. Most of these themes are featured in this first edition. We hope you find it of interest.
Sue Whitbread Editor Wealth DFM
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MORNINGSTAR
March 2021 | WealthDFM
Assessments of Value A Useful Addition to the Library of Fund Reports Andy Pettit, Director, Policy Research, Morningstar, considers the asset management 'Assessment of Value' reporting and looks at how effective and useful these reports are for investors and advisers. He also assesses how the reports should be used in fund selection, and where asset managers need to do better in the next set of reports due soon.
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isclosure is a huge part of many financial regulations. Regulated disclosures attempt to ensure that investors get easy access to a minimum level of essential information about the investment products available to them. The corollary is that investors can be inundated with reams of documentation from which its hard to see the wood for the trees - prospectuses are typically intimidating, lengthy documents full of technical details in industry and legal lexicon. Annual and semi-annual reports are a bit more penetrable, typically including a fund manager overview and the latest portfolio holdings. The saving grace for investors was supposed to be the Key Investor Information Document (KID), but its successor is in danger of being a retrograde step.
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UK fund investors saw yet another document added to the list in 2020, in the form of an annual Assessment of Value. And heading into 2021 and beyond, firms and products will have to publish a growing set of ESG-related disclosures.
The saving grace for investors was supposed to be the Key Investor Information Document (KID), but its successor is in danger of being a retrograde step PRINCIPLES OF GOOD DISCLOSURES The most useful disclosure requirements insist on uniformity across submissions and presentations,
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MORNINGSTAR
enhancing investors’ ability to collect information and compare products. While there’s been incremental progress in this regard, it is not something in which the UK or Europe has excelled. When considering the clarity and consistency of investor disclosures, the US market has reigned supreme, coming out as the top market in all five Morningstar Global Investor Experience studies conducted since 2009 (with the most recent version here). Not resting on its laurels, the SEC has circulated proposals for a new streamlined shareholder report that will raise the bar further and will make it tough for other markets to beat the US standards in years to come. The SEC realistically acknowledges that investors feel overwhelmed by, and do not read much of, the documentation they receive and aim to layer the information so that it easier to consume the most important elements.
TWO SIDES TO ASSESSMENTS OF VALUE UK value assessments are a ground-breaking addition to fund documentation. Fund board directors are effectively compelled to wear the hat of their investors and publish a self-appraisal summarising a thorough annual review of their fund range, concluding whether or not the services provided by their funds represented good value for the fees they charged.
UK value assessments are a ground-breaking addition to fund documentation THE ASSESSMENT REPORT The reporting was never going to score the UK highly on our uniformity measure of good practice. That’s because the FCA adopted a deliberately non-prescriptive approach to avoid inhibiting how and what firms assess and report.
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Despite this FCA encouragement and their giving firms a blank sheet of paper, most firms have slavishly stuck to addressing only the seven factors specifically referenced by the FCA. It bears out a familiar trait of overly prescriptive regulation inadvertently set a ceiling, rather than a floor, to what a firm does and is a shame that the lack of prescription hasn’t encouraged firms to go above or beyond. Realistically, as with any workplace self-appraisal, some employees see them as an opportunity for some constructive self-promotion and the chance to succinctly remind their boss what they have achieved, where they fell short and why, and what to focus on going forward. It makes for an interesting and actionable review discussion. Others though, see the exercise a chore, treating the appraisal as a checklist, and providing minimalist commentary devoid of context or colour. Sadly, more firms’ value assessments are closer to the latter than former approach. On the basis that ‘if a job’s worth doing, it’s worth doing properly’, it’s not unreasonable to expect the reports to be easily navigable, with an investor-friendly explanation of what they are and why an investor is receiving it. Good examples include Rathbone, who are one of the few to provide commentary on factors over and above the FCA’s seven criteria, talking also about corporate culture and business improvements, such as eliminating initial costs across its fund range and rewriting documentation to make investment objectives much clearer. Vanguard employs a traffic light table to succinctly show how each fund measured up against the FCA criteria, as a forerunner to a discussion of each individual criteria. Franklin Templeton also stand out for doing a nice job of presenting information on a large fund range in a consumable manner. At the other end of the spectrum, Unicorn Asset Management’s assessment comprises the last few paragraphs of its 127-page annual report.
THE ASSESSMENT PROCESS While the reports are a mixed bag, where there is uniformity is where all firms largely concluding that
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MORNINGSTAR
their funds have offered good value. A recent report from Boring Money found that across 26 firms, covering 968 funds, a mere 3% of funds haven’t offered good value, with a further 17% being monitored with the aim of improving the value offered. These funds that have been called out and put on special measures usually comes from performance not been meeting expectations. At a minimum, the assessments evaluate costs of the fund, comparable market rates and the costs charged to other investors for comparable services, alongside the fund performance. On top of these, boards should explain if any economies of scale are provided to investors as fund sizes increase and justify why it is beneficial for any investors to be in a more expensive share class than a lower cost class for which they are eligible and that offers substantially the same terms. To complete the process, the quality of service provided by the firm is also analysed.
At a minimum, the assessments evaluate costs of the fund, comparable market rates and the costs charged to other investors for comparable services, alongside the fund performance Despite the criticisms and the learning curve, the assessments yielded some quick wins for investors. Firstly, they’ve been immediately instrumental in finishing a job started by Retail Distribution Review (RDR) in 2013, providing the impetus to finally transfer many of the long-term fund investors who had been languishing in expensive legacy share classes. And secondly, various firms attributed fee reductions to the assessment process and in some cases, restructured or even closed some funds. The unknowns as we head into the second iteration are whether firms adjudge they’ve made the significant changes already and how the funds that were put on watch have fared.
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March 2021 | WealthDFM
IMITATION IS THE HIGHEST FORM OF FLATTERY Whether connected or not, in the wake of the new FCA rules, ESMA, the European Securities and Markets Authority earlier this year briefed all national regulators on their responsibilities relating to costs. They include making sure all investors in a fund are treated equally and that costs charged to a fund or its unit holders are in the best interest of investors, reasonable, disclosed and don’t prevent the fund achieving its objective. Irrespective of EU regulation, it’s likely only a matter of time before a firm voluntarily applies the assessment process to its non-UK funds, whether as best practice or to gain a competitive advantage. In summary, while fund boards may be guilty of grade inflation in their self-assessments, we are optimistic that the quality of the reports will improve, as firms do a peer review and as the FCA take stock of this first round of reports. More importantly, until that plays out, just by virtue of the process having to be undertaken, investors have already seen material benefits, proving the adage that actions speak louder than words.
ABOUT ANDY PETTIT Andy Pettit, Director, Policy Research at Morningstar, works on policy activities that support investors’ interests, develops policy thought leadership, and monitors changes in legislation and regulation that will have an impact on Morningstar and its clients. Previously, Pettit led Morningstar’s Data Research and Methodology teams, driving content strategy and developing new methodologies. He has more than 30 years of experience in the financial information industry, accumulated in data management, technology, and performance measurement standards. He has held seats on many industry standards and statistics committees and was formerly vice president of global data operations at Standard & Poor’s Investment Services.
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WealthDFM | March 2021
POLAR CAPITAL
The Polar Express Gavin Rochussen, CEO at Polar Capital, talks to Wealth DFM Magazine about the growth in this specialist, active fund management business, what it offers investors and the types of fund its investment teams run.
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e begin our conversation by talking about how he became involved with the business and its key driver for success. Gavin Rochussen has been the CEO at Polar Capital since July 2017 when he took over from Tim Woolley, a co-founder of the business alongside Brian Ashford-Russell. The key driver for the group is the belief that if funds perform well, then they will attract investors which is why Polar Capital is all about performance not asset gathering. Rochussen explains that the business is structured to allow their 13 investment teams to focus on their portfolios while a best-in-class operational structure works on everything else.
THE COVID CRISIS Rochussen recalled the moment when he realised the global economy was heading towards a crisis as a
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result of Covid-19. In February last year he spent two weeks on an expedition to Antarctica with his wife, a photographer. “We were completely oblivious. We got back to London the same weekend the news broke of an outbreak of COVID in Italy” he said, pointing out it was only after the outbreak in Italy when the stock markets responded. “That was the last time I was on an airplane actually. It’s been quite an adjustment, but for the better I have to say.” 21st March 2020 was when the UK went into the first lockdown. This coincided with the lowest point in global markets, with many losing around 30% of their value in what was proving to be the fastest bull to bear rotation on record. Polar Capital funds consist almost exclusively of equities, and overall performance is entirely correlated to the movement in equities. Rochussen sums it up, “It was a scary time.” By last March, the equity markets had experienced the longest bull run in modern history, when in Rochussen’s view “a lot of people got complacent.”
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POLAR CAPITAL
March 2021 | WealthDFM
He pointed to the markets continued rise in January and February 2020, long after the initial outbreak in Wuhan. By the end of March 2020, their financial year end, Polar Capital’s AuM had plummeted to £12.2bn, having had £14.3bn AuM in October 2019. He comments “the full year results were very robust, of course we didn’t know what would happen going forward. We had no idea. We were modelling break-even scenarios, we had a very strong balance sheet, we always ensure we can pay dividends.” The strength of Polar’s balance sheet meant they chose not to furlough any staff, a good decision in retrospect. “That was the best decision we ever made because obviously the fiscal and monetary stimulus from governments around the world got the market going. Of course, the rest is history.” Between March and December 2020, Polar Capital’s AuM increased by a massive 55%, from £12.2bn to £18.9bn, with market moves and fund performance making up £5.6bn of inflows. 81% of the AuM performed above benchmark.
SO HOW HAS POLAR PERFORMED SO WELL? Polar Capital consists of 13 autonomous teams, the largest are focused on Technology and Healthcare, with strong inflows into both of these strategies over the pandemic. Rochussen pauses for a moment to reflect
The information technology sectors now make up 21% of the MSCI all companies world index. The five largest tech companies in the world are worth more than the entire London Stock Exchange
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POLAR CAPITAL
on quite how large the technology sector has become, after the last decade of such significant growth but he also reminds us of the awesome growth the sector has witnessed throughout the pandemic. “The information technology sectors now make up 21% of the MSCI all companies world index. The five largest tech companies in the world are worth more than the entire London Stock Exchange.”
reduce business risk for their shareholders. On the funds’ capacity constraints Rochussen is clear. “We don’t want them getting too big. In my experience, the larger a fund gets then the more difficult it is to produce alpha and out-perform. For us to continue to grow shareholder value over time, you cannot just keep adding to existing funds, you have to be adding new teams and new strategies.”
Going further, he points to tech’s presence in other sectors too. “Alibaba and Amazon now make up a third of the consumer discretionary sector. Half of the communications services is made up of Facebook, Alphabet, and Tencent. If you take direct technology out of consumer discretionary sectors and communications services and add that to information technology, around a third of total global equities is in technology.” Considering the boost in demand for services, it is no wonder that these sectors have grown so strongly throughout 2020.
Rochussen is always on the hunt for new teams. In 2020, Polar Capital announced the Healthcare Discovery Fund and an International Value Fund based in the West Coast of the United States. Overall, the approach is to complement biases. Technology and healthcare are high growth, but over 2020 these sectors were complemented by inflows of £234m into Polar’s Global Insurance Fund, £100m into their Emerging Markets Stars Fund and £90m into their UK Value Opportunities Fund.
The technology sector has now dwarfed the finance sector, which pre-2010 was so dominant.
LOOKING FORWARD
INVESTMENT STRATEGY Polar Capital’s fund management teams are autonomous, each with their own strategy, and they run a range of 27 actively managed funds. These cover single country, regional and global mandates as well as specialist thematic funds like tech, healthcare and financial sectors. The firm provides oversight and capacity constraints, in order to maximise returns for their clients, and
In my experience, the larger a fund gets then the more difficult it is to produce alpha and out-perform
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So where does Rochussen currently see the most attractive investment opportunities? We break these down into distinct areas.
TECHNOLOGY Looking forward, Rochussen expects to see continued demand for technology, which he called now “a core sector” providing growth with cash flow positive balance sheets, unlike the Dotcom bubble.
ESG On the future of ESG investing, Rochussen highlights that it is the Environmental and Social aspects of ESG which have accelerated throughout the pandemic, not least because lockdown had people considering their
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POLAR CAPITAL
carbon footprints through travel and other actions. He continues, “like we saw during the financial crisis, the pandemic has reinforced and brought about a lot of inequality. I think there’s a real focus from investors on these issues.”
You can enable more positive change by engaging with management rather than just not investing in a particular company Polar has done a lot of work throughout 2020 to integrate ESG principles and investing into individual teams, appointing a Head of Sustainability with a team supporting them. “It’s right at the heart of our decision making” he comments. The approach is based on company analysis where they fully engage with the management teams behind it, ranking each of their funds against an ESG benchmark to assess its direction of travel and ensure that sustainability measures are being met. Rochussen explains that when it comes to stock selection “we don’t negative screen.” So, if a fund invests in a company that has a low ESG score, “we make them justify why they invest in it. It’s about direction of travel. You can enable more positive change by engaging with management rather than just not investing in a particular company.”
EMERGING MARKETS & THE UK Two particular areas of interest for the years ahead in which Rochussen is excited are emerging market growth and value plays in the UK. Polar’s Emerging Markets Stars Fund has a ten year track record. Sustainability is right at the heart of this
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fund, with the flow of information being supported by a Shanghai research office. On the use of this Shanghai office, Rochussen clarifies the reason behind it is “because we believe most of the growth will come from China, we wanted to understand them.” He also points to a growing demand for value investments. One such receiver of inflows was the UK Value fund, that focusses on small to mid-cap UK companies. “It’s been a tough sector since the Brexit referendum.” He comments. Plagued by uncertainty in recent years as a result of the UK’s negotiations with the EU, it’s now an area that is coming back very strong. In summary, Rochussen is very positive for the outlook saying optimistically that he believes, “the FTSE 100 and even the all-share index will provide interesting returns in the near future.” He sees this as being linked to a likely boost in consumer spending following the pent-up demand over the pandemic. However, he stressed the overall importance of diversification as the key to how Polar will continue their hunt for returns in a way which ensures sound risk management principles are right at the core.
ABOUT GAVIN ROCHUSSEN CHIEF EXECUTIVE OFFICER Gavin joined Polar Capital in July 2017 from JO Hambro Capital Management (JOHCM) where he was Group Chief Executive. He joined JOHCM from Fleming Family & Partners, relocating from South Africa where he was a founding partner of Anderson Rochussen Crisp, a professional services practice, leading the firm between 1984-1996. Gavin is also an adviser to Amigona Holdings and an independent adviser to wealth managers James Hambro & Partners.
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GROWTH VS. VALUE
WealthDFM | March 2021
ValuAnalysis challenges
Growth vs. Value “The Price of Value” paper reveals why ‘undervalued’ is not “lowly valued”
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aluAnalysis, the independent investment boutique, which focuses on equities and specialises in valuation, takes aim at misleading ‘Value vs. Growth’ categorisations as it reveals factors that lead stocks to qualify falsely as value in its latest research entitled “The Price of Value”. This research: • Takes aim at misleading ‘Value vs. Growth’ categorisations • Reveals factors that lead stocks to qualify falsely as Value Categorisation of stocks into either ‘Growth’ or ‘Value’ is misleading, according to this detailed research. Instead, the independent investment boutique believes that the correct continuum is ‘low to high expected growth’ of any particular stock, at any level economic rent (free cash flow yield on economic assets).
A SHIFT TOWARDS VALUE The research comes amid relative outperformance by ‘value’ stocks since 9 November 2020, when positive news on the efficacy of the Pfizer/BioNTech vaccine
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was announced and investor sentiment shifted toward cheaper stocks, after long-term underperformance. In its latest paper, examining the ‘Price of Value‘, ValuAnalysis identifies factors that may cause a business to trade on multiples that are well below the median, and therefore qualify as ‘Value’ in most equity indices. An appreciation for these factors can help investors identify when a stock is just lowly priced, as opposed to truly underpriced. “Value traps” can come from an inability to produce sustainable revenue growth (the Jam Tomorrow syndrome), a temporary lull in the growth trajectory (the Growth Evaporation syndrome) or a failure to leverage top-line growth to the bottom line (the Unlevered Growth Syndrome).
JUDGEMENT IS NEEDED ValuAnalysis warns that investors must apply judgement or risk falling into “value traps”. Oracle enjoys a phenomenal level of economic rent, similar to Microsoft’s, but can only provide investors with Jam Tomorrow (no revenue growth) versus Microsoft’s ‘honey today’. Oracle trades on exactly half the Microsoft’s multiple as a result, despite a similar level of return on assets.
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GROWTH VS. VALUE
ValuAnalysis also identifies LafargeHolcim and Novartis as examples of stocks that should not be considered “Value”, despite their low earnings multiple, but simply “low growth”. Despite multiples of 17 to 22 times free cash flow, these stocks are adequately valued relative to their growth potential, says ValuAnalysis.
THE IDEAL VALUE STOCK The ValuAnalysis investment team, who between them have extensive equity research and portfolio management experience from Deutsche Bank, Vontobel and UBP, believe the ideal Value stock would combine the following features: • An accelerating rate of asset accumulation (aka “volume growth”); • An increase in the operational leverage, due either to revenue leverage or margin leverage, leading to an increase in the economic rent; • A decrease in the risk premium. The full ValuInsight paper, ‘The Price of Value’, can be found here on www.valuanalysis.com/assets
PASCAL COSTANTINI, MANAGING PARTNER, HEAD OF RESEARCH AND CO-PORTFOLIO MANAGER SAID: This artificial divide between growth and value was invented by the index providers largely for their own
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March 2021 | WealthDFM
benefit. It implies that a growth business cannot be “good value”, and, conversely, that only businesses that grow less than average are good value. This illogical symmetry would be inconsequential if it had not permeated the whole asset management industry, forcing managers to declare their allegiance, and putting stocks in boxes without context. An earnings multiple only measures expected growth and a risk premium. The “value” decision is about deciding if this level of expectation is right or wrong.
ABOUT VALUANALYSIS Authorised and regulated by the Financial Conduct Authority, ValuAnalysis is an independent investment boutique focusing on equities and specialising in valuation. The firm has developed a proprietary research model which identifies companies whose competitive advantage is underappreciated by market participants. The Partners have over twenty-five years of experience using, adapting and re -engineering the 'economic value-added' models used by industry consultants into stock market valuation models. These models replicate the thought process of an entrepreneur taking real investment decisions: what capital to commit where, at which cost, and for what return. Applied to the stock market, these tools provide invaluable insight about a firm’s sustainable competitive advantage and the level of its economic rent.
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WealthDFM | March 2021
TESLA – IN OR OUT?
The Tesla valuation debate –
are you in or out? Michael Clough, Analyst at Momentum Global Investment Management, highlights comparative valuation data for the globe’s largest car manufacturer and asks whether a forward P/E ratio of 206x might make investors just a tad nervous?
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et’s start with some high-level numbers. Since the start of 2020, Tesla’s share price is up 877% (to the time of writing on 10 February), its market capitalisation stands at over $780bn (up from $75bn over the same period), making it the 5th largest company in the US equity market, and it stands tall on a forward price/earnings (P/E) ratio of 206x. This compares to other renowned auto manufacturers, such as Toyota and Volkswagen, at markets caps of $253bn and $105bn and P/Es of 14x and 13x, respectively.
EYE-WATERING VALUATIONS In fact, Tesla’s market cap is now greater than the next nine largest auto companies combined. Of course, to the many willing buyers of Tesla at such high multiples, they see it not just as a typical auto company but something much more, namely a technological and renewable energy disruptor that is driving innovation and thus will be capable of delivering extraordinary
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growth rates long into the future, not just from electric vehicles but automated vehicles and its renewable energy business. Only then can a reasonable argument be made to support the current valuation of Tesla.
WHAT ABOUT THE COMPETITION? Whilst hitting or exceeding these lofty growth expectations might prove difficult alone, it becomes even more so when you consider the inevitable challenge from competitors who will eventually catch up with Tesla. For instance, US peers Ford and General Motors have recently committed to invest $22bn and $27bn in electric vehicles by the end of 2025. In Europe, Volkswagen has announced intentions to invest $86bn in electric vehicles and other technologies through 2025. Investment from peers will likely erode Tesla’s 18% electric vehicle market share over the coming years, though admittedly they might become a smaller piece of a much bigger pie.
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TESLA – IN OR OUT?
THE ESG PERSPECTIVE Tesla is also interesting from an ESG perspective. On the one hand, it produces highly energy efficient (as opposed to fuel guzzling) vehicles. On the other hand, critics have questioned the supply chain and labour management, and the governance of the company, not least the behaviour of CEO Elon Musk that divides opinion but, more so in the past, the board’s close ties to Musk’s other ventures including SpaceX. An interesting recent development is the company’s decision to invest $1.5bn of balance sheet cash in bitcoin, which if nothing else is a fascinating capital allocation decision given the stark difference in volatility profiles of the two assets. This raises the notion of legitimising the use of cryptocurrencies in the institutional space, but that’s one for another time! There is no doubt Tesla divides opinion, some love the growth story, others can’t look beyond the valuation. We would fall more into the latter camp today. We
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have some exposure through our underlying growth and momentum managers, whilst other managers, specifically those providing value and quality exposure, do not allocate. That leaves our Global Equity fund with a 0.8% position (as at end of January) which is below the MSCI World’s 1.2% allocation.
ABOUT MICHAEL CLOUGH Michael joined Momentum Global Investment Management’s investment team in Autumn 2018 as a research analyst, with a primary focus on manager research and selection. Previously Michael worked for Asset Intelligence Research where he was responsible for manager research and portfolio construction. He has an MSc in Financial Economics from the University of Leicester.
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WealthDFM | March 2021
ACTIVE INVESTING
Why active investing
Outperforms passive Harry Nimmo, Investment Leader, Smaller Companies at Aberdeen Standard Investments, has firmly held views on why active investing outperforms passive. Here, Nimmo uses data to back up this view and to show how active managers' participation in the market extends much deeper than matters of relative performance.
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here are 172 actively managed funds with a track record over a 10 year period with combined assets under management (AUM) of around £156 billion. 73 (42.4%) of these funds have outperformed the MSCI AC World Index and manage £110 billion – or 70.5% of the total invested in the sector. By this measure, active managers have handsomely outperformed. The pattern is similar across all the major sectors. In the UK All Companies, Europe ex UK, North America and Japan Investment Association sectors, active money-weighted performance was better than in the global group. In Europe ex UK, a whopping 87.5% of the
It’s fair to say that across all geographic sectors, money tends to gravitate towards the best-performing funds
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actively managed asset outperformed the MSCI Europe ex-UK index for example. The trend is in evidence across periods shorter than ten years, too. It’s fair to say that across all geographic sectors, money tends to gravitate towards the best-performing funds. This is what should happen when wealth managers and financial advisers are doing their jobs. The UK Smaller Companies sector gives us a stark example of this trend. There, 37 of 44 funds that have existed for the past decade have outperformed the Numis Smaller Companies (excluding Investment Companies) Index. These 37 funds account for 93.5% of the sector’s AUM. What is true is that many sectors contain far too many funds. Many will be under-performing, or taking in little money. Asset management companies often keep funds open longer than they should due to the expense and hassle of closing them down. The good news is that, as mentioned above, the flows tend to go to those funds that are producing better returns. When passive managers criticise their active counterparts, they tend to talk only of the number
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of funds in a given sector that are underperforming. We haven’t often seen them explain whether these numbers are significant in terms of the amount of money invested in the sector. For many businesses, Covid-19 has been a scary experience. Many companies in industries such as aviation, travel, leisure and hospitality have had to close down for months at a time. Of course, the closures have placed great strain on these firms’ workforces and their balance sheets. When they needed new equity capital to tide them over, active managers stepped up to the plate. EasyJet, Ryanair
Yes, passive managers can vote on resolutions, but they can’t take the ultimate sanction. They can’t just decide to sell the shares and Jet2 were among the 26 UK-listed travel & leisure companies that have had to raise money so far during Covid. 16 building and construction businesses have also tapped the market. By 15 November UK companies had raised a total of £19.4 billion, and £ 3.1 billion of this was on the growth-oriented Alternative Investment Market (AIM) (Numis Securities). Most of it came from placings. The vast majority of the money came from active managers. Where were the passive managers? Participation in placings can be challenging for their trading algorithms. They also tend not to participate in new issues before companies join indices. Allocation of capital is not really their bag. A passive manager once said that they wanted “to do what the market decides”. As passives gain market share, that “market” is becoming smaller and smaller. “Finally, I turn to environmental, social and governance (ESG) matters. Active managers have been building ESG into their investment processes
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March 2021 | WealthDFM
and engaging with companies for some years now. Representing the owners of the investee businesses as they do means that they must exert their influence on ESG issues. Passive managers, on the other hand, own whole indices. This means their portfolio can contain shares in thousands of companies, based all around the world. Engaging with them all individually would be incredibly time-consuming. Yes, passive managers can vote on resolutions, but they can’t take the ultimate sanction. They can’t just decide to sell the shares. In our view, active funds are the bedrock of stock markets. Rather than building in underperformance, active managers are showing that attempting to beat the market is a winner’s game.”
ABOUT HARRY NIMMO Harry Nimmo is an investment director at Aberdeen Standard Investments. His role focuses on the management of various UK Small-Cap portfolios as well as Global Mid-Cap and Global Small Cap strategies. He is also custodian of the smaller companies process, helping to ensure all portfolios are managed in line with the process he first developed in the 1990s. Harry spent the early years of his career as a Land Surveyor working both in the UK and in Saudi Arabia. In 1984, Harry graduated with an MBA and joined Aberdeen Standard Investments (formerly Standard Life) the following year. He has held various investment analyst and manager roles covering US equity funds, larger UK quoted company funds and was appointed to his current role in 1993. He has won a number of awards in recognition of his achievements across small-cap investing. Qualifications Harry has an MA (Hons), MBA, Diploma in Surveying
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WealthDFM | March 2021
NINETY ONE
The year of the Ox Ninety One addresses Chinese investment opportunities in the year of the ox.
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s China’s recovery from Covid-19 front-runs other major global economies, during the year of the ox much will hinge on whether China can sustain its recovery and pull other pandemic-weakened economies out of their slowdowns. But China will set the pace in more areas than just economic growth over the next 12 months and beyond.
PHILIP SAUNDERS, CO-HEAD OF MULTI ASSET GROWTH SEES THE POTENTIAL FOR BIG CHANGE FROM THE TRANSITION TO A CONSUMPTION-LED ECONOMY. HE COMMENTS: “China’s evolution into a fully developed economy based on domestic consumption is its biggest current challenge and , if successful, will radically re-orient the World economy and its markets. China had reached the end of the road of a bank financed economic model which was reliant on capital investment and exports as the sheer scale it has now achieved has become unsustainable. This transition to a consumption-led economy will require a dramatic ascent up the value chain, meaning a shift away from supplying western markets with high volume, low value added products, to the establishment of a broad array of local globally competitive producers and service companies – digital leaders such as Alibaba and Tencent already provide a glimpse of this future. Growth will be
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slower, but it should be higher quality and better in terms of returns to investors than the rapid growth of the past two decades.” “US and China relations will also be key in the coming year, with the Biden administration set to continue the more adversarial approach adopted by Trump as opposed to the Obama administration’s more accommodating approach. In contrast to the erratic, “policy by tweet” style of his predecessor we can expect a much more thorough and methodical policy implementation conducted largely behind the scenes and in conjunction with allies. Common ground could be found in the area of environmental policy, and this would represent an important litmus test of Biden’s pragmatism. American companies have much to lose if they are increasingly shut out of China as a market. Paradoxically the United States’ more aggressive policies towards China have served to strengthen its reform momentum and spur growth in a whole series of areas, chief amongst which is technology.”
At a global level, the past year has powerfully demonstrated how important China has now become to global growth
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NINETY ONE
“At a global level, the past year has powerfully demonstrated how important China has now become to global growth. China’s impressive record in dealing with Covid-19 and its consequent rapid economic recovery, has played a significant role in supporting global economic growth after the disruption caused by the rapid spread of the pandemic. Investors need to be paying far more attention to China’s impact on markets globally and the opportunities that are available in the country’s already substantial bond and equity markets which remain under-represented in investor’s portfolios”.
ALAN SIOW, CO-PORTFOLIO MANAGER OF NINETY ONE ALL CHINA BOND STRATEGY SHARES HIS VIEWS ON THE CHINESE BOND MARKET COMMENTING: “Covid-19 has seen global central banks and governments engage in a synchronous monetary and fiscal easing that has exacerbated the scarcity of safe, decorrelating yield. At approximately $16trn in size, and a daily trading volume of nearly $30bln USD, the Chinese bond market is roughly the same size as the stock of developed market debt that is negative yielding in nominal terms. This is set within the backdrop of China having an orthodox monetary policy in contrast with much of the developed world at the moment. It is one of the last remaining markets of sufficient size, depth and liquidity with a positive yield that is still able to fulfil the traditional role of “fixed income” in a diversified portfolio. And thanks to still low participation by global investors, correlations to other risk assets are still low.” “China’s importance in any investment portfolio stems from its existing and expected future prominence in global economic growth and trade. Even as headline GDP growth is expected to slow, China will remain a key driver for both emerging market and global growth. Furthermore, the country’s inclusion in the Bloomberg Barclays Global Aggregate, FTSE Russell, JPM Morgan GBI-EM Global Diversified indices cannot be ignored. As phased inclusions continue, it is expected to drive a further $150-200bn of flows.”
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“While onshore Chinese fixed income markets are now well and truly open, investors’ mileage may vary. There is already an attractive case for the upper echelons of Chinese fixed income – government and policy bank bonds. But other parts of the market, corporate credit for example, are clearly at an earlier stage of development and investors will need to be selective. The lack of credit differentiation and discrimination in the pricing of private credit will take some time to develop and mature and will be accompanied by defaults and potential disruption.” “In contrast, the offshore USD credit markets offer a distinct and compelling risk reward profile that deserves its own place at the table versus other global credit asset classes and is seen as a useful complement until both markets eventually converge in the future.”
WENCHANG MA, CO-PORTFOLIO MANAGER OF NINETY ONE ALL CHINA EQUITY STRATEGY, POINTS TO STRUCTURAL DRIVERS WITHIN THE CHINESE ECONOMY AS WELL AS MATTERS OF SUSTAINABILITY AS PROVIDING OPPORTUNITIES FOR INVESTORS, COMMENTING: “Growing disposable income and the rise of a middle class is one of the strongest structural drivers of growth in China. The size of the population with over US$10,000 annual disposable income is expected to grow from 280mn to 680mn by 2030. As a result, China’s consumption market is expected to double in size and reach a scale similar to the US. Chinese brands are capitalising on this opportunity, with strong national brands such as Midea and Haier emerging in China, gaining market share both domestically and abroad.” “Decarbonisation and a sustainable transition also present a significant opportunity for investors. With the launch of its ambitious 14th five year plan this year, committing to peak carbon by 2030 and carbon neutrality by 2060, the plan presents significant growth potential for leaders in the EV and renewable energy supply chains such as CATL and Xinyi Solar. The national carbon trading scheme is also expected to be rolled out this year,
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NINETY ONE
Growing disposable income and the rise of a middle class is one of the strongest structural drivers of growth in China starting with power generators, and gradually including other high emitting industries. The scheme could be an important part of China’s path to its carbon neutrality target, and should serve to encourage investment into higher efficiency and more advanced green technology.” “Representing the second largest economy and the second largest equity market in the world in terms of market cap, with a strong IPO pipeline for 2021 set to bolster this further, Chinese equities represent a strategic asset for long-term allocation. There are significant drivers for growth present across the Chinese market, yet Chinese equities are still under-represented in global investors portfolios. Rising domestic consumption, a green transition, and continued economic and capital market reforms are set to open up the opportunities even further, trends all captured by Ninety One’s 4Factor Chinese Equity Strategy.”
CHARLIE DUTTON, MANAGER OF THE NINETY ONE ASIA PACIFIC FRANCHISE STRATEGY SEES EXCITING INVESTMENT OPPORTUNITIES IN ASIA, PARTICULARLY THROUGH THE REGION’S LEADERSHIP IN TECHNOLOGY. DUTTON COMMENTS: “The Covid-19 crisis has reinforced key trends that were already present in Asia, in particular the acceleration of digitalization and the related productivity gains, for example through social media, e-commerce, and cloud implementation.”
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Looking ahead, the region’s leadership in technology is creating some exciting investment opportunities. For example, Asia is increasingly dominating the semiconductor industry, and with indications that Intel is reducing its investment in logic chip manufacturing, it looks like TSMC and Samsung could be left as the market leaders here. What’s more, local brands are asserting their dominance, offering investors the opportunity to get exposure to the dual trends of rising consumption in the region, and the growth of the premium market. This rise in quality is one of the key opportunities emerging in China and across the region more broadly. Back in 2007, there were just 100 stocks in Asia which fit our quality criteria, this has now increased to 300.
The Covid-19 crisis has reinforced key trends that were already present in Asia, in particular the acceleration of digitalization and the related productivity gains And with countries such as China expected to have surpassed the US in R&D spend last year, this high level of investment is driving the development of local healthcare providers, and creating some standout global leaders - particularly for more niche health products.” More insights on the theme of China, and other structural thematic drivers such as debt, climate change and technological change can be accessed through Ninety One’s Road to 2030 platform.
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CRYPTOCURRENCIES
What are the pros and cons of cryptocurrencies?
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Given the recent debate about Tesla buying Bitcoin, the subject of cryptocurrency is a growing topic of debate in asset management circles. Daniel Murray, Global Head of Research and Joaquin Thul, Economist at EFG Asset Management dive into the detail.
he price of one bitcoin in US dollars quadrupled last year, gaining over 160% in Q4 alone. This meteoric rise sparked widespread media and investor interest in bitcoin specifically and in cryptocurrencies more generally. Moreover, many payment platforms such as BitPay, Square and PayPal have started accepting payments in bitcoin and other cryptocurrencies. It is also becoming easier to trade cryptocurrencies on established platforms. Here, we look at some of the potential advantages and disadvantages of cryptocurrencies.
ADVANTAGES 1. Potential for high returns In the five years to 31 December 2020, the S&P 500 index of large cap US equities has compounded at an annualised growth rate of 14.5% (in USD, net dividends reinvested); over the same time period the price of
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bitcoin in USD has compounded at an annualised growth rate of 131.5% (see graph below). 2. Potential diversification Some have cited cryptocurrencies as an alternative hedging instrument to gold in a portfolio context. For example, the S&P 500 declined in 17 out of the 60 months to end December 2020, of which the price of bitcoin rallied in seven. In the five years to the end of 2020 a portfolio consisting of 10% invested in bitcoin and 90% in the S&P 500 would have generated compound annual returns of 26.8%. 3. Limited supply There is a maximum of 21 million coins that can be created or “mined”. At the moment around 18.5 million bitcoins have been mined leaving less than three million still to come into existence. A related feature is that the rate of production of bitcoins slows over time via a process known as halving. In 2009 each block mined was worth 50 bitcoins, the value is now 6.25 bitcoins per block.
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CRYPTOCURRENCIES
4. Protection from debased currencies and the threat of rising inflation The Global Financial Crisis (GFC) of 2008/09 was a catalyst for central banks around the world to engage in unorthodox monetary policies, notably large-scale asset purchases. Since the GFC the Fed’s balance sheet has expanded by 8x, the ECB’s by a little under 4x and the BoJ’s by nearly 7x. Some people are concerned this will result in a massive debasing of national currencies and associated increase in inflation. They suggest cryptocurrencies offer alternatives that cannot be debased in the same way. 5. Growing acceptance and usage A 2020 article on Coindesk.com claimed that Coinbase had seen $135 billion in cryptocurrency merchant transactions in 2019, a 600% increase over 2018. That same article cites a Chainalysis report that alleges payment processors saw approximately $4 billion worth of bitcoin activity in 2019. Separately, it is notable that there has been a significant increase in the number of bitcoin electronic wallets created over the past few years (see graph below) and there are an increasing number of institutional investors who are looking to invest in cryptocurrencies, the latest being Blackrock and Bridgewater.
DISADVANTAGES 1. High volatility and potential for large losses The annualised volatility of the monthly percent change in the price of bitcoin in US dollars is about 90% as
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measured over the past five years. This compares to annualised volatility of the monthly percent changes in the S&P 500 and the gold price of 15.3% and 13.4% respectively. To give some idea of what this volatility might mean for an investor, consider the range of returns: the maximum monthly bitcoin return over the 60 months to end December 2020 was 76.1% and the minimum -37.6%. The timing of an investment in bitcoin or other cryptocurrencies will have a significant bearing on the returns achieved. 2. Correlations As noted earlier, of the 17 months the S&P 500 fell over the five years to end 2021, the price of bitcoin went up in seven. To put it another way, of the 17 months the S&P 500 declined, bitcoin also went down in 10 of them, which is slightly less flattering. Of the five worst months for the S&P 500 the price of bitcoin declined in four of them – one could argue that bitcoin has a poor record of providing diversification benefits when they are most needed. The correlation between bitcoin returns and S&P500 returns is positive and stronger than the correlation between gold and S&P500 returns.
3. Endless potential supply Whilst it is true that the number of bitcoins produced will eventually be capped at 21 million and many other cryptocurrencies also have limited supply built into their protocols, there is currently nothing to stop an ever-growing number of new cryptocurrencies from being launched. Therefore, cryptocurrency supply is
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CRYPTOCURRENCIES
potentially limitless. It is also worth noting that several central banks are exploring the possibility of launching their own digital currencies, something that may take the shine off privately issued versions. 4. Poor store of value and limited acceptance Whilst bitcoin and some other cryptocurrencies are now accepted across a growing number of payment platforms, the number of places where one can exchange cryptocurrencies for real goods or services remains very limited. For similar reasons the volatility inherent in cryptocurrencies makes them a poor store of value given the fact that when converted back into an individual’s base currency the value of crypto will swing about wildly even on an intraday basis.
March 2021 | WealthDFM
the risks can be managed by appropriately sizing a cryptocurrency position within a portfolio of other investments. The overall decision on whether or not to add cryptocurrency exposure to a portfolio is based on each individual’s assessment of the balance of advantages and disadvantages, the main ones of which we have tried to highlight in this note. Distinct from the discussion on cryptocurrencies, there are a number of potential advantages in utilising blockchain technology more broadly within the financial system. Perhaps paradoxically given the current lack of regulation of cryptos, blockchain could be a powerful regulatory tool. Blockchain could also be used as a means of cost reduction to make the financial system more efficient.
5. Unregulated and unbacked Cryptocurrencies are a construct of the private sector with no official oversight or regulation. This means that cryptocurrencies are wide open to being exploited by criminals as a means to scam unwary investors. A 2019 academic study found that 25% of bitcoin users are involved in illegal activity and that 46% of bitcoin transactions are associated with illegal activity.
CONCLUSIONS This list is not exhaustive but it’s important to understand the potential for large losses. Supporters of cryptocurrencies would argue that this downside risk is offset by the potential for large returns and that
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Daniel Murray, Global Head of Research and Joaquin Thul, Economist at EFG Asset Management
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IN THE SPOTLIGHT
Will Woodford really return? News that Neil Woodford is planning to launch a new asset management business in the UK has, so far, not been received well by the investment community - nor indeed by the regulator. So what’s going on? And what are his chances of getting this new business off the ground?
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ike many others across the UK, the Wealth DFM team were somewhat surprised to read the interview with Neil Woodford published in the Sunday Telegraph in February. It revealed that Woodford was planning a return to asset management, albeit with a new business – Woodford Capital Management Partners Ltd –(WCM Partners Ltd) targeted at ‘professional’ investors rather than private clients and based in Buckinghamshire and Jersey. If the proposed plans were to go ahead, then WDM Partners Ltd. would work to advise Acacia Research, an American investment group which bought many of the unquoted assets from within Woodford’s Equity Income fund back in July 2020. The new venture would likely see Woodford investing (or “advising on”) again in illiquid, unquoted and fledgling businesses – most probably those within the healthcare, lifesciences and pharmaceuticals sectors with which he had become so infatuated whilst
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running retail money. And which had played such a huge part in his downfall. Of course, there are still many thousands of private investors still waiting for the last of their money back from his failed Woodford Equity Income Fund, along with other investors nursing serious losses from his management of other mandates.
If the proposed plans were to go ahead, then WDM Partners Ltd. would work to advise Acacia Research, an American investment group which bought many of the unquoted assets from within Woodford’s Equity Income fund back in July 2020
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IN THE SPOTLIGHT
So how was this announcement of his intended return greeted by institutional and private investors? It seems that the mood music so far is not encouraging for the fallen “star” fund manager.
“BUILT ON A LIE” With Financial Times reporter Owen Walker set to launch his new book in early March entitled “Built on a Lie – the rise and fall of Neil Woodford and the fate of middle-England’s money”, it’s likely that the Woodford name will be featured in the business pages as well as the news headlines for some time to come. “Built on a lie” were the words used not by Walker himself, but by the former Governor of the Bank of England, Mark Carney. The book’s content does not make happy reading for Woodford or anyone associated with him as it delves deeply into the whole history of his career in fund management. Warts and all. And talking of headlines, Jeff Prestridge, writing in the Financial Mail on Sunday in late February certainly didn’t hold back. The headline of his article read: “How CAN this clown return as a fund boss? Jeff Prestridge on Neil Woodford’s comeback”
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It left no one in any doubt that Prestridge was not at all happy to see the former ‘star’ fund manager return to the world of asset management.
THE REGULATOR’S RESPONSE Following the release of the Telegraph’s article, it didn’t take long before Mark Steward, FCA Director of Enforcement and Market Oversight, released a clearly worded statement on Woodford Investment Management Ltd and WCM Partners Ltd saying: “We have noted the recent comments by Neil Woodford on his future business plans. This statement sets out our position on specific points on which we have been asked for information.
The regulator itself has faced plenty of criticism over the years about the way it handled the oversight of Woodford funds “Since April 2020, when it varied its permissions, Woodford Investment Management Ltd is no longer able to offer investment services to retail clients.
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IN THE SPOTLIGHT
“Mr Woodford’s new business, WCM Partners Ltd, would need to apply for appropriate permissions before commencing any regulated activity in the UK. In taking any decision on whether to authorise a firm, we consider whether it is ready, willing and organised to comply, on a continuing basis, with our requirements and standards. That includes, for example, the sustainability of the firm’s business model and the fitness of its management. “There are reports that Mr Woodford’s future business proposal may operate out of Jersey. We are in contact with the Jersey Financial Services Commission ( JFSC) and agreed with them that we will both share information on any application made in in our respective jurisdictions (for both a fund or entity).” The regulator itself has faced plenty of criticism over the years about the way it handled the oversight of Woodford funds. However, the tone of this statement suggests that Woodford would have more regulatory obstacles to overcome should the plans proceed to the next stage of his proposed new venture.
A CALL FOR AN INDEPENDENT INQUIRY As well as the FCA, pressure is also being brought to bear by Alan and Gina Miller’s True and Fair Campaign. Following the news of Woodford’s planned return, the campaign has called for an Independent Inquiry into what they refer to as the “shameful” Woodford scandal. In an open letter to the Chairman and members of the Treasury Select Committee in mid-February, they urged the committee “to act with haste as Mr Woodford and the FCA actions discredit both the regulator and the UK FS sector. The British public deserves much better.” Again, they left no-one in any doubt at their anger and frustration which is not just focused on Woodford’s management but also on the regulatory powers which oversaw his failed organisation and funds. Their open letter, signed by both Gina and Alan Miller, states: “It is shameful that the FCA has allowed Mr Woodford to remain on its Register and to continue as an
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authorised person whilst its investigation meanders on. It also makes a complete mockery of the FCA’s Senior Managers & Certification Regime (SM&CR) – which replaced the previous discredited Approved Persons regime on 9 December 2019 – and was supposed to significantly raise the bar in standards of personal conduct and make management accountability more rigorous and transparent “It is clear that UK investors and savers are losing faith in the FCA’s supervision of financial services firms. At a time when public policymakers should be encouraging the public to save, it is simply unacceptable that major investigations such as the one into Woodford are being delayed in this way. We believe it ought to be a very serious source of public policy concern that high profile individuals such as Mr Woodford can be allowed to re-commence trading, with the slate ostensibly wiped clean, when over 300,000 people, some of whom may be your own constituents, are scrabbling to make ends meet after seeing their life savings decimated and their prudent actions and hopes for a secure and comfortable future suddenly and unexpectedly dashed.”
RYAN HUGHES IS HEAD OF ACTIVE PORTFOLIOS AT AJ BELL. HE COMMENTS: “With around £200m of money still stuck in his previous fund and original investors back in 2014 sitting on losses of over 25% and many thousands who invested later suffering much bigger losses, there will be little sympathy for Woodford and the comments he made in his recent interview. While some investors may well agree with Woodford’s view that investors would have been better off if his fund was not forced to suspend and liquidate, others will simply be glad that they have got some of their money back after being stuck for many months and will want to finally move on from this sorry saga. The potential new investment vehicle looks like it will be aimed at professional investors only with the investment approach once again focused on niche, higher risk, potentially illiquid investments that Woodford had such conviction in for his previous fund.
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IN THE SPOTLIGHT
March 2021 | WealthDFM
While he may well be right that there are some great companies to invest in, his track record showed that it is very hard to identify them and many need years of funding before they become successful, with plenty falling by the wayside along the way.
Given the broader damage in trust and confidence that this whole affair has caused to the investment industry, it looks unlikely that investors of any kind will find it so easy to forget Ultimately, it looks as if Woodford is looking for vindication that his original investment strategy was correct all along. While he has acknowledged that a fund for retail investors would look very different today to the one he previously ran, by focusing on professional investors, he clearly hopes that much of the emotion and fury that he has faced over the past two years will disappear. However, given the broader damage in trust and confidence that this whole affair has caused to the investment industry, it looks unlikely that investors of any kind will find it so easy to forget.”
WHERE NEXT? Clearly, Woodford and his associates at WCM Partners Ltd and Acacia Research have got an uphill task ahead of them if they are to get this proposed new business and alliance - off the ground. As WealthDFM went to print, The Treasury Select Committee was putting more pressure on the FCA to reveal exactly when they might announce the results of their investigation. The FCA has said that they will report by the end of May. In the meantime, it is likely that the heated debate and discussions will continue to run riot and that the Woodford name won’t be far from the news headlines.
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WealthDFM | March 2021
BARCLAYS PRIVATE BANK
The state of markets and why
we shouldn’t fear corrections
Wealth DFM’s Sue Whitbread talks to Gerald Moser, Chief Market Strategist at Barclays Private Bank, about why he believes corrections are healthy and investing in quality businesses lies at the heart of a sound investment strategy.
SW: When it comes to investment, many portfolio managers stick with the traditional 60/40 investment strategy – where 60% is typically invested in higher risk/higher reward areas and 40% in lower risk assets? What’s your view on this? GM: For many investors, I think that diversifying away from the typical 60/40 strategy makes sense at the moment. For those who do follow it, based on historical evidence, I can see why they do it. Over the past twenty years, the performance has been really strong. Equity markets have performed well and we’ve seen one of the strongest rallies ever in bond markets as interest rates have fallen to such low levels. We’ve still seen interesting yield addition to a portfolio too. Historically, the 60/40 strategy has been a powerful tool in investing and diversifying. We are now reaching a point where we struggle to see where capital appreciation might come from within government bonds – with global base rates at or close to zero. Yields too are low. Even at current
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levels, you’re not compensated for inflation so you’re losing money. Looking ahead, it’s difficult to see what the next five years will bring in terms of diversification and income within a portfolio from the sector. But there are other interesting opportunities – mostly in the alternatives space – including private markets, hedge funds or gold. SW: Let’s move on to talk more about the investment outlook. Are you bullish about things or do you suspect a bit of a correction might be coming down the line in the next couple of months? If so, what do you see as the drivers behind that? GM: It does rather depend on the timescale you look at. Returns are likely to be lower over the next five years. This is a result of the high valuations we are seeing across almost every asset class – equity, fixed income etc. Therefore, expectations should be lower, in terms of where we are now. That doesn’t mean that there aren’t opportunities though. Even where index levels are high,
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there are still opportunities for growth at stock level within that. Some companies will be growing. There are some global trends such as fighting climate change, SMART cities, connectivities etc. where there are good opportunities over the longer term. In the short term I think there is risk of a correction but it is almost impossible to forecast. SW: Have previous market sell-offs provided you with any particular wisdom on this front? GM: Even with hindsight you don’t necessarily identify the trigger for a particular correction. A market falls and the spiral leads downwards as people sell. It’s quite difficult to identify the actual catalyst for that fall at the time it happens. If interest rates start rising, that is a worry for equity valuations of course. But corrections are also healthy. It is very normal in a bull market to see a correction once a year of between 5 and 10%. This isn’t something we should be afraid of. For example in 2020, markets hit a trough in April and recovered 70/80% from there depending on which market you look at. If you look at the years after the two previous big recessions – after the tech bubble in 2003 and again in 2009, in each case the bottom was in March. Then there was a rally until around January/ February the following year, with gains around 50-70%. Which is where we are right now. After that, we typically saw two corrections- in both 2004 and 2010. I think it makes sense. If you think of where we are now, last April we started to think about the possibility of
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March 2021 | WealthDFM
vaccines allowing countries to unlock. We now see that light at the end of the tunnel.
It is very normal in a bull market to see a correction once a year of between 5 and 10%. This isn’t something we should be afraid of Once we start to see a recovery we think what next? Then we begin to see yields starting to rise – as we are doing at the moment and people asking do I have enough opportunity on the growth side to continue investing? The corrections we saw in 2004 and 2010 were markets questioning whether we can continue to rally at the pace we’ve seen for the past twelve months. I think it’s healthy and that it’s something we shouldn’t be afraid of. SW: Drilling down into matters of asset allocation, do you see value in value? Is there more froth in growth stocks? Or do you feel it’s more about diversification and a combination of approaches focused on the quality of the individual businesses in which you invest? GM: I believe that the quality of the business is the most important factor here. Value vs growth is a raging debate at the moment of course, but I think there’s some misconception about what value actually is.
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How do you value a company? If you look at the different index providers, MSCI value criteria differs from FTSE for example. The way they are created is quite different. Some will focus on price/earnings, or price/book, some on dividend yield and some will split the index composition into two, so you are either value or growth. Some will be more specific. The point is that there is not a clear definition on how to look at value.
Value vs growth is a raging debate at the moment of course, but I think there’s some misconception about what value actually is
The point is that we need to get growth – but growth with quality something we’re not reflecting properly within its valuation? Overall, valuation is difficult to assess. The rotation we’re seeing at the moment is a reflection of that froth in growth stocks we spoke of earlier. However if we just take those two options I’d have a preference towards growth. The important thing is the quality of the business. It’s not just about buying growth at any cost it’s about buying a business. Valuation is stretched.
When you look at valuation, we could look at the example of energy companies. A lot of these are trading on very low P/E ratios at the moment. But we have to question the earnings that you use here. If you try to assess the value of the company you will probably do a discounted cash flow analysis over the next 20 years. The challenge for an energy company is that they might have oil in the ground but they might never be able to extract it because the cost on the carbon side – so called “stranded assets”. So how do you value that oil that might never be extracted? This is something that the market is reflecting on.
Over the last ten years, depending on which market we look at, up to 100% of the return in Europe for example, has been delivered through valuation expansion. It was not through earnings growth. It was because central banks were pumping liquidity into the market and that pushed the valuation to the levels we’re at today. In the US it’s probably 90% explained by valuation. Over the next few years, we can’t rely on valuation expansion anymore. We’re already fairly stretched. As long as central banks support markets with liquidity I don’t think valuations have to come down. We have to live with those valuations. It’s not comfortable as an investor to buy equities at current levels, but as long as the central banks are there and supportive, valuations are likely to stay elevated.
If you have companies which appear very cheap, the first question is to ask – why is that? Is there
The point is that we need to get growth – but growth with quality. You want companies with strong cash flow, that
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BARCLAYS PRIVATE BANK
have capacity to generate a good return on cash invested as that means they have an IRR that allows them to grow. They’re not trying to engineer their return by share buybacks, distributing dividends etc. It’s growth with quality and a strong balance sheet is something which I think, considering that over the next few years we’ll see yields going up, will be important from a resilience point of view when it comes to equity investing. SW: And finally, it would be great to get your views on ESG – or sustainable investing – and how much of a driver this is becoming at the moment? GM: Responsible investing is different to sustainability. Responsible investing is making sure that as an investor you would pay duty to people who are giving you money and that you vote when it comes to important resolutions at the AGM for example. But sustainability is more long term and can be implemented through responsibility. You can define every company through an ESG filter. Is it a high or low compliance business? Everyone is aware of the “E”element – environment. There’s much talk around climate change and much scrutiny on company’s carbon footprint as they disclose more and more data on that front. I believe that with regard to the “S” element – society – the pandemic
ESG overall will be one of the first filters you will apply to any investment decision going forward
WealthDFM.com
March 2021 | WealthDFM
has highlighted the importance of the people working for you. Gender inequality is also extremely relevant. Finally “G” – or governance – this is the one which from a resilience perspective is probably the most important. If you think of recent accounting scandals, these might have been avoided if there was greater scrutiny on governance. ESG overall will be one of the first filters you will apply to any investment decision going forward. Other filters will be earnings growth, valuation, dividend yield etc. In the past you’d do some screens and maybe some qualitative work around the stocks which would have past the initial screening. Going forwards, ESG is going to be the first step before you decide to go deeper into company analysis when deciding what you want to include within your portfolio.
ABOUT GERALD MOSER Gerald is Chief Market Strategist at Barclays Private Bank. He is responsible for Barclays Private Bank’s investment views. With his team, he defines their advisory investment views through thematic and opportunistic investment ideas and also contributes inputs to the discretionary process. Before he joined Barclays, he spent several years at Credit Suisse in its Wealth Management section and almosta decade in the Global Investment Research division at Goldman Sachs.
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Performance (%) Artemis Corporate Bond Fund Markit iBoxx Sterling Coll&Cor TR Sector Average Position in sector Quartile
Since launch†
1 year
6 months
13.8
9.7
4.9
7.9
4.4
2.3
7.5
4.5
2.4
2/88
2/88
3/88
1
1
1
Past performance is not a guide to the future. Source: Lipper Limited, class I GBP accumulation units from †30 October 2019 to 31 January 2021. All figures show total returns with dividends and/or income reinvested, net of all charges. Performance does not take account of any costs incurred when investors buy or sell the fund. This class may have charges or a hedging approach different from those in the IA £ Corporate Bond sector benchmark.
Capital at risk
www.artemisfunds.com/corporatebond
salessupport @ artemisfunds.com
0800 092 2090
THIS INFORMATION IS FOR PROFESSIONAL INVESTORS ONLY. IT IS NOT FOR USE WITH OR BY PRIVATE INVESTORS. The above information reflects the current view of the managers and may change. For information about formal investment restrictions please refer to the fund’s prospectus. The fund is a sub-fund of Artemis Investment Funds ICVC. For further information, visit www.artemisfunds.com/oeic. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority. For your protection calls are usually recorded.
