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The summer of 2019 was always going to be a tricky time to navigate. When trading volumes lighten, macro news can cause elevated volatility across asset classes. Unlike most investment managers we do not believe in holding equities simply to have equity exposure in our client portfolios, if the risk/reward is not balanced in our favour we would rather sit on the sidelines. Our clients pay us to deliver them absolute returns, not equity market beta dressed up as a balanced portfolio. The S&P500 crossed the 2,900 index level thirteen times between the middle of April and the end of August. This is not a time to sit in equities and hope.
When we take stock of the world around us we see challenges in almost every direction. US/China, UK/EU, China/HK, central bank easing and middle east uncertainty. We have seen this geopolitical skittishness reflected in bond yields going to all-time lows – with the entirety of the German Bund curve moving into negative yields – although this remains some way off of the Swiss sovereign curve. We witnessed the first large bank moving to negative yields on cash deposits for customers – we live in a strange world where the best way to protect you cash in some regions appears to be storing it under your mattress.
We are only talking nominal bond yields here – for private clients the focus is on absolute real returns. Despite inflation being subdued in much of the developed world, looking at bond yields after inflation and fees, there is a smaller and smaller component of the fixed income market that is able to provide positive real returns net of fees. In order to hold these you have to be comfortable holding a substantial amount of some combination of duration risk, credit risk, sovereign risk or currency risk. This skew from a fixed income yield perspective has resulted in a lot of investors forced into the equity market in an attempt to generate positive returns. This hunt for yield and returns is partly behind the rise of crypto-currencies, interest in cannabis and other investment opportunities that have come along that have demonstrated a short period of above market returns.
The usage of our Macro-Valuation-Sentiment-Technical (MVST) model across both fixed income and equities helps on our positioning and timing within markets. Working across multiple time-horizons allows us to construct both short-term and medium-term views on positioning.
We see a lot of our competitors talking about long term holdings of equities, but the focus of their portfolio construction is fundamentally flawed. Whilst a rising tide lifts all boats, and the equity markets have been that rising tide up until nearly 12 months ago, in the last 11 months the market has returned +0.10% (S&P500) with realised volatility of 15.5.
“From our perspective holding equities over that time period has generated little else but volatility for clients.”
Looking at the Macro component of our model, it is undeniable that we are in the latter stages of an economic growth cycle and central banks in fairly co-ordinated fashion have now entered an easing phase. From our investment standpoint we believe that this will generate opportunities to dip into equity markets when investor sentiment turns too bearish – but the 2 to 5 year case for holding equities is incredibly limited.
We do jump to the other end of the spectrum with some of our thematic single stock holdings. We look through the economic cycles and look to add stocks that we believe will grow substantially above the relative index over the coming 5 to 15 years driven by fundamental shifts in consumption patterns, geopolitical powers and demographic trends. We added in four separate holdings within two thematic ideas over the last quarter
One of the longer running investment themes is that of technology – but what is the future for technology? We are currently seeing a growing backlash against several of these companies – Alphabet, Amazon, Facebook and others – over privacy concerns. There is a growing awareness amongst 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. How does the rise of ‘concerned consumers’ filter through to technology companies when it comes to sustainability, renewable energy, recycling and vegetarianism. 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 faced with these technological behemoths that try and morph into something different to stay one step ahead of society?
We prefer to look at it differently. 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 we looked at the future of food – looking at how the planet will cope as more consumers switch from a vegetable based diet to a meat based diet combined with a larger population 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% of water in UK water pipes leaks out before it reaches consumers. In a study Southern Water was rated as the ‘best’ water provider because leakage amounted to 80 litres per property supplied per day – This is in comparison to the roughly 140 litres of water used per person per day in the UK. At a national level this equates to 3,000 million litres of water leaked every day.