Authorised and regulated by the UK’s FCA to provide investment accounts, we are bound by CASS rules to segregate and protect client assets.
Our clients pay us to deliver them absolute returns, not equity market beta dressed up as a balanced portfolio. A case in point: the S&P500 crossed the 2,900 mark nine times between the middle of April and the end of August. With volatility like that, this is not the time to sit in equities and hope that markets continue their upward trajectory.
Taking stock of the world around us, we see challenges in almost every direction. A US/China trade war, UK/EU Brexit negotiations, a political revolution brewing in Hong Kong, central banks easing policy, and Middle East uncertainty (more so than usual). This geopolitical skittishness is reflected in bond yields hitting all-time lows – the entire German Bund curve is into negative yields – although it remains some way off the Swiss sovereign curve. We also witnessed the first large bank going to negative yields on cash deposits for customers – in this strange world, the best way to preserve cash might appear to be storing it under your mattress.
From our perspective holding equities over the last year has generated nothing but volatility for clients
We are only talking nominal bond yields here – for private clients the
focus is on absolute real returns. Despite subdued inflation in much
of the developed world, looking at bond yields, there is a smaller and
smaller component of the fixed income market that is able to provide
positive real returns net of fees. What is more, to hold these securities
you have to be comfortable with a substantial combination of duration
risk, credit risk, sovereign risk and currency risk.
This skew in fixed income yields has seen a lot of investors reaching out on both the duration and the credit risk front in this never-ending hunt for yield. It has also seen a lot of investors forced into the equity market in an attempt to generate positive returns for either their own portfolios or for those of their clients. This is also driving the rise of crypto-currencies and interest in cannabis and other alternative investment opportunities that have delivered a short period of above market returns.
Our use of a Macro-Valuation-Sentiment-Technical (MVST) model across both fixed income and equities helps our positioning and timing within markets. Working across multiple time-horizons allows us to construct both short-term and medium-term views on positioning. A lot of our competitors talk about long term holdings of equities, but their portfolio constructions are fundamentally flawed. A rising tide may lift all boats, but in the past 11 months the market has returned +0.10 per cent (S&P500) with realised volatility of 15.5 at the time of writing. From our perspective holding equities over the last year has generated nothing but volatility for clients.
Looking at the macroeconomic component of our model, it is undeniable that we are in the latter stages of a growth cycle and central banks have begun easing in an uncoordinated manner. From our standpoint we believe that this will generate opportunities to dip into equity markets when investor sentiment turns too bearish – but the two- to five-year case for holding equities is incredibly limited.
We do jump to the other end of the spectrum with some of our holdings, though. Our discretionary models have a small number of single stock holdings which form part of our longer-term thematic concepts. This is where we look through economic cycles and add stocks that we believe will grow substantially above the relative index over the coming 5 to 15 years. These stocks will be driven by fundamental shifts in consumption patterns, geopolitical power and demographic trends. In the last quarter, we made four such acquisitions across two of our thematic ideas.
A long-running theme is that of technology – but what is the future for technology? We are currently seeing a growing backlash against several companies – Alphabet, Amazon, Facebook and others – over privacy concerns. There is a growing awareness among consumers that the most valuable thing that many of them possess is their own data – and a growing realisation that many of them gave it away for free to Facebook and other companies, which made vast profits in turn. How does the rise of ‘concerned consumers’ when it comes to sustainability, renewable energy, recycling and vegetarianism filter through to technology companies? The top companies in the S&P500 continue to rotate at a faster and faster pace – if we fast forward 10 years will we still be looking at these tech giants trying to morph into something different to stay one step ahead?
There is a growing awareness among consumers that the most
valuable thing that many of them possess is their own data
Rather than trying to work out whether Facebook or Alphabet will be the better performer, we start with the consumer – we look at how consumption habits are evolving. Starting from the basics of what we need as humans to survive: food, water and shelter. In our last Quarterly Investment Outlook, we looked at the future of food – looking at how the planet will cope as more consumers switch from a plant-based diet to consuming more meat, and the subsequent strain on our planet’s natural resources. This quarter, we follow this up by looking at water – starting from water consumption patterns, the impact of climate change and the impact of changing eating habits on water usage. One of the shocking statistics is that close to 30 per cent of water in UK water pipes leaks out before it reaches consumers. In a recent study, Southern Water was rated as the ‘best’ water provider because leakage amounted to 80 litres per property supplied per day – in contrast with the 140 litres of water used per person per day in the UK. At a national level, this equates to 3 billion litres of water leaked every day.