Top-performing quality-growth funds like Fundsmith Equity, well-known trusts such as Scottish Mortgage and passives tracking commodities have been grabbing Trustnet readers’ attention over 2020 so far.

With markets going through a massive crash and a sharp rally, we reveal which fund, trust and ETF factsheets have been most heavily viewed during the volatile first six months of the year.

Within the Investment Association universe, the most viewed factsheet on Trustnet has been Fundsmith Equity. This should come as little surprise, given that this is one of the largest and best-known funds in the business.

Headed up by FE fundinfo Alpha Manager Terry Smith, the £20.3bn fund has a quality-growth approach that has kept it at the top end of the IA Global sector since launch. This outperformance continued in the opening half of 2020, with the fund’s 7.61 per cent total return putting it in the top quartile of the peer group.

 

Source: Trustnet, FinXL, data to 30 Jun 2020

Six of the 20 most-viewed Trustnet factsheets are from the IA Global sector, including Michael Lindsell, Nick Train and James Bullock’s quality-growth offering Lindsell Train Global Equity. Seen as one of Fundsmith Equity’s biggest rivals, this fund has slipped into the second quartile this year.

Rathbone Global Opportunities is another global fund that focuses on quality stocks and has had a strong year, with its 15.60 per cent total return being far higher than Fundsmith Equity’s 2020 gains.

At the start of April, manager James Thomson told Trustnet how he was positioning the £2.5bn fund for a rally that will be “astounding in its speed and ferocity” – which duly followed.

Also from the IA Global sector are Baillie Gifford Global Discovery and Baillie Gifford Positive Change. They are having a very strong 2020: Baillie Gifford Global Discovery’s 35.90 per cent total return is the second highest in the peer group while Baillie Gifford Positive Change is in third place with 34.25 per cent.

These aren’t the only Baillie Gifford funds be popular with Trustnet users in the first half of 2020, as they are joined by Baillie Gifford American and Baillie Gifford Managed. Both of these funds have posted some of the highest returns of their sector – the American fund is up 54 per cent.

Four of Vanguard’s five LifeStrategy funds have made it onto the list, showing the mulit-asset range's continued popularity with both professional and private investors.

Vanguard LifeStrategy 60% Equity and Vanguard LifeStrategy 40% Equity are in the top quartile, while Vanguard LifeStrategy 80% Equity is in the second and Vanguard LifeStrategy 100% Equity is in the third.

Despite the fact that the IA UK All Companies sector is the largest in the Investment Association universe, just three of its members are among the 20 most-viewed Trustnet factsheets.

CFP SDL UK Buffettology, LF Lindsell Train UK Equity and Liontrust Special Situations are all top quartile for the first half of 2020, but the underperformance of the UK market means they remain in negative territory.

 

Source: Trustnet, FinXL, data to 30 Jun 2020

When it comes to the most-viewed investment trust factsheets, Scottish Mortgage came in first. Again, this shouldn’t be too surprising given its standing as the world’s largest investment trust with assets of £13.1bn.

It’s not just the trust’s size that has attracted investors, however. James Anderson and Tom Slater’s trust made 41.98 per cent in the opening six months of 2020, which is the IT Global sector’s highest return; it’s also in first place over one, three, five, 10, 15 and 20 years.

Many of the most-viewed trusts are in their sector’s top quartile over 2020 to date, such as Monks Investment Trust, Edinburgh Worldwide, Finsbury Growth & Income, Allianz Technology and Smithson Investment Trust.

However, there are some well-known names that have made some of the worst returns of their sector this year. Temple Bar, Murray International and European Opportunities are all in the bottom quartile.

 

Source: Trustnet, FinXL, data to 30 Jun 2020

In the exchange-traded funds (ETFs) sectors, Trustnet readers have been looking at those tracking commodities.

WisdomTree WTI Crude Oil has been the most viewed ETF this year, but the collapse in the oil price means it is down more than 55 per cent. A fall of around 40 per cent hit WisdomTree Brent Crude Oil.

The rally in the gold price on the back of demand for safe havens has seen interest in offerings like WisdomTree Physical Gold and iShares Physical Gold ETC. Both are up around 24 per cent.

Investors were also looking at other precious metal products, including Xtrackers Physical Rhodium ETC – which is up 57.28 per cent. Rhodium is considered the rarest and most valuable precious metal in the world, above even gold and silver.

Aside from commodities, ETFs focusing on the UK, the US and tech stocks – which have led the recent rally – have also been at the top of Trustnet users’ research lists.

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Much has been written about the emotional cycle of fear and greed in investing. Both panic and excessive optimism alike can create extraordinary opportunities for those who can afford to be patient and lean against prevailing sentiment. But investors do not merely buy high and sell low because they are fickle, irrational creatures. While some may indeed fit that description, for many it is simply a case of having spare cash to invest when times are good and the need to call on that money unexpectedly when times are hard.

It is all too clear how this dynamic is playing out in its latest manifestation. While now easing, travel restrictions and widespread physical distancing measures ushered in some of the toughest times seen for many years, triggering an economic shutdown that affected nearly everyone. Small businesses have been hit particularly hard, and for many people faced with job losses, ill health or self-isolation, conditions have become very tough very quickly.

As is their nasty habit, financial markets have a way of piling on the misery just when it is least welcome. During the market panic in March, it seemed to us that many individuals found themselves forced to sell some of their stock market investments to meet urgent short-term needs. But a much bigger wave of forced selling came from professional investors who were aggressively positioned for perpetually good times. Their strategy of borrowing at low rates to juice returns on the assumption of low volatility, rising asset prices and endless liquidity has suddenly come to a crashing halt.

In nearly two decades, this is the third major bear market that I have seen. Of all the lessons I have learned, the single most important one is to stay relentlessly focused on the long term. It also happens to be the easiest thing to say when everything is going well, and the hardest thing to actually do when it really matters.

The big question I ask myself is, what new opportunities will stand out as exceptional bargains when we are looking back five or ten years from now?

Experience has made me mindful that big global events can often accelerate societal change. “Never let a crisis go to waste” is the mantra of many an astute politician. Caught in the here-and-now of the immediate crisis, big structural changes can sneak by unnoticed.

Take the dotcom bust of 2000-01 as a prime example. While investors were preoccupied with the “New vs Old Economy” debate and the market volatility that ensued, the really big change that was occurring, and which dominated the next decade, was China quietly joining the World Trade Organization and ushering in a natural resource bonanza in the decade that followed.

Similarly, in the aftermath of the global financial crisis of 2008, instead of debating whether or not to wade back into banks or to stick with something more defensive, the more insightful investors were following the advent of the smartphone, which enabled entirely new business models to emerge and dominate in the 2010s.

As bottom-up stockpickers, we rarely allow ourselves to try to guess what the next big thing will be. But the lesson of these previous historical episodes is that it does pay to think laterally and beyond the knee-jerk questions. What is quietly happening off to the side while everyone is debating the fate of travel companies and makers of toilet paper and hand sanitiser?

During this current crisis, one possibility we would offer would be climate change. We would like to believe that the pandemic will prompt greater cooperation on other challenges facing the human race. If so, one example of a beneficiary might be Vestas Wind Systems, the world’s largest manufacturer of wind turbines. Our research suggests that not only is wind power today environmentally favourable, it is also economically superior— beating fossil fuels in cost effectiveness for the first time in history. As electricity demand grows in the decades ahead, there is both the room and the need for renewable power such as wind to grow approximately eightfold. Vestas, as the industry leader in both profitability and market share, appears to have a particularly bright future. But during the darkest days of March it sold off by 30 per cent over a few weeks despite no change, or perhaps even a marginal improvement, in its long-term prospects.

We realise that it is almost impossible to turn away from the noise when it feels like the world is crashing down around you, but it is absolutely critical to remain aware that while a crisis is ongoing, there may well be deeper structural changes underway at the same time. Often these trends will have a far more long-lasting impact on the world, on economies, and on markets. Being aware of these trends, and focusing on the long-term, could very well be the recipe for success.

 

Ben Preston is manager of Orbis Global Equity. The views expressed above are his own and should not be taken as investment advice.

When the US Federal Reserve announced they would commence bond-buying programmes to support against the economic fallout caused by the Covid-19 pandemic, it effectively helped rescue falling global bond markets.

With the sell-off in financial markets that rattled corporate bonds now behind us, it is worth looking back to see which corporate bond funds managed to limit volatility during the crisis without sacrificing returns.

When a bond fund has high returns and high volatility, it can imply they are taking more risk and getting compensated for it. However, when a bond fund has high returns and low volatility, the implication is that it generally has a higher risk-adjusted return profile.

This is an important consideration for investors who want to assess the consistency and smoothness of returns of their fixed income allocation.

Therefore, Trustnet looked at the funds in the IA Sterling Strategic Bond, IA Sterling Corporate Bond, and IA Global Bond sectors that were top-quintile for both returns and low volatility during the first six months of 2020.

Of the 376 funds across three sectors, only 16 funds delivered top-quintile returns while also ranking top-quintile for low volatility during the first half, as shown below. Where available, the five-year return is also shown.

 

Source: FE Analytics

Of those funds, nine were IA Sterling Strategic Bond funds. This sector had the most number of funds that achieved top-quintile returns and volatility despite being the smallest sector with 94 funds in total.

Of the 183 funds in the IA Global Bond sector, just five made the list and they all posted higher returns with one exception.

Only two funds from the IA Sterling Corporate Bond fund made the list, one of which was an index fund.

The highest returning fund in the list was the Allianz Strategic Bond fund with a total return of 25.67 per cent in H1, while also delivering first quintile low volatility of 9.72 per cent.

It has also made a total return of 54.52 per cent over five years, the highest of all the funds in the list and has been a top-decile performer in each of the last five years.

Run by Mike Riddell and Kacper Brzezniak, the £2bn fund has its largest positions in Japanese, Singaporean, and Australian government bonds. Allianz Strategic Bond fund has about two-thirds invested into corporate bonds, of which its largest position is in bonds issued by the world’s largest brewer AB Inbev. As of the end of June, it had a modified duration of 7.56 years, and the average rating of bonds in the fund was A+.

Performance of Allianz Strategic Bond year-to-date

Source: FE Analytics

There were four other funds in the list that stood out.

Of the 376 bond funds across three sectors, only four delivered top-decile returns and top-decile low volatility.

These four were M&G Global Macro Bond, FP Carmignac Unconstrained Global Bond, Waverton Sterling Bond and Invesco Tactical Bond (UK).

The £1.3bn M&G Global Macro Bond fund stands out as the second highest returning fund in the list, while maintaining top-decile, low volatility of 7.24 per cent.

The £254m Waverton Sterling Bond fund and the £589m Invesco Tactical Bond (UK) fund stand out as the only two funds that delivered top-decile low volatility for a five-year period as well as the H1 2020 period.

Over a five-year period, the Waverton Sterling Bond fund run by Jeff Keen delivered a 29.33 per cent return whilst maintaining an annualised volatility of 3.92 per cent.

The Invesco Tactical Bond fund run by Paul Causer and Paul Read delivered a 15 per cent return whilst maintaining annualised volatility of 3 per cent over five years.

The £744m Carmignac Unconstrained Global Bond fund had one of the higher durations of the funds in the list, which assisted in boosting its H1 returns.

H1 Performance of top decile funds v sectors

Source: FE Analytics

Most of the bond funds in the list were actively managed bond funds.

What is surprising is that one of the funds that delivered top quintile returns and low volatility within its sector was an index fund.

The £1.1bn L&G Sterling Corporate Bond Index fund was one of the two funds in the IA Sterling Corporate Bond sector that made the list.

This suggests active bond funds in the sector had a more difficult time in managing the volatility during the first half of the year.

The other fund in the sector that made the list was the £223m ASI AAA Bond fund which made 3.75 per cent return during the first six months of the year, but with a 5.27 per cent volatility in H1 it was the lowest performer on the list.

The investment community agrees it would be churlish to knock the fresh fiscal stimulus unveiled yesterday by chancellor Rishi Sunak, while adding that much more needs to be done to stem unemployment.

The stimulus is intended to shore up the UK economy – which contracted by 25 per cent over just two months – and prevent spiralling unemployment when the government’s furlough scheme ends in October.

In his summer statement yesterday – also dubbed the mini-Budget - Sunak (pictured) said: “We have taken decisive action to protect our economy. But people are anxious about losing their job, about unemployment rising. We’re not just going to accept this.

“So, today, we act, with a ‘Plan for Jobs’. Our plan has a clear goal: to protect, support and create jobs.”

Among the measures announced were a payment of £1,000 for each member of furloughed staff that companies retain, a £2bn “kickstart” job creation scheme for young people, a £5.6bn infrastructure package, a £2bn green homes grant, lifting the stamp duty threshold from £125,000 to £500,000 until March 2021 and a six-month VAT cut for the hospitality sector.

Columbia Threadneedle Investments global head of asset allocation Toby Nangle noted that the coronavirus crisis has left Sunak with three main macroeconomic issues to tackle: a profound economic contraction with some facing widescale bankruptcy; a fast-approaching job-loss cliff; and, a very uneven household savings landscape.

“The new measures announced glance in the direction of the first two features but lack the ambition required to address them, whilst the third feature went entirely unaddressed,” Nangle said.

“But with government support currently in place, the chancellor may still have time on his side before returning to the dispatch box for the Autumn statement. Without an Autumn follow-through, this package of measures looks insufficient to move the dial.”

The new measures could inject up to £30bn in stimulus into the economy – depending on the extent of take-up by businesses and households, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Mini-budget fiscal support

 

Source: Pantheon Macroeconomics

He estimated that the effects, which will be concentrated over the coming three quarters – could equate to about 2 per cent of GDP.

“Nonetheless, we still expect GDP to hover about 5 per cent below its pre-Covid level at the end of this year, due to further job cuts, high levels of household saving and the continued imposition of measures to keep the virus at bay,” the economist said.

“We think the chancellor will need to return to stimulating the economy again in the autumn. For a start, yesterday's new money will not fully fill the void when the [Coronavirus Job Retention Scheme] and the Self-Employed Income Support Scheme end. These two schemes cost the Treasury £33bn in Q2 alone.”

Richard Buxton, head of strategy, UK alpha at Jupiter Asset Management, said the future of the UK’s economic recovery depends largely on employment and it was therefore “reassuring” to see Sunak put this at the top of his priorities.

He described the various employment-related announcements in the mini-Budget as “by no means unhelpful” as they will definitely offer some support to the UK’s employment situation.

“That being said, the stock market’s muted initial reaction can be taken as an indication that these will not be seen by investors as the answer to all of the nation’s economic woes,” Buxton said.

Looking at all of Sunak’s announcements yesterday, the manager said there is nothing “bad” about the package as “it is blindingly obvious that the economy and jobs market need all the fiscal and policy help they can get”.

However, he added: “As we engage with businesses over the coming weeks, we will be watching closely their reactions to these announcements. For the time being, however, the jury is somewhat ‘out’ on the extent to which these measures can meaningfully dampen the coming rise in unemployment.”

UK quarter-on-quarter growth and rolling three-month growth, %

 

Source: Office for National Statistics

Ed Smith, head of asset allocation research at Rathbones, is another who thinks that yesterday’s stimulus will not be enough to prevent the UK economy from being severely damaged.

“We would have preferred some more targeted measures and not these types of Polyfilla policies,” he said.

“Because Covid has been a highly unusual mix of supply and demand shocks that will continue to affect different sectors in very different ways, there is evidence to suggest that untargeted stimulus – such as the job retention bonus – may be far less effective.”

Smith concluded that there are five reasons why the UK recovery could still lag behind other countries’, despite the latest intervention:

The first is Brexit. “No more than a bare-bones free trade agreement is likely, and even that will drag on the economy, particularly if agreements on trade in services is kicked into 2021 or 2022, after current agreements end, which is looking very likely,” he said. “Ongoing uncertainty in services and no-deal uncertainty over the next few months could hold back business investment – and business investment has been held back hugely since the vote to leave compared to other countries.”

The second is the fact that private consumption, and in particular spending on consumer services, in the UK is a larger proportion of GDP relative to most other economies, aside from the US. Survey evidence suggests expectations for the service sector are more depressed in the UK than elsewhere.

Meanwhile, data such as Google/Apple mobility trends, or GfK consumer confidence surveys show the UK consumer is a little more fearful than those elsewhere.

“The hardest-hit sectors have had declining gross operating surpluses for some years now and have taken on more debt than other industries too,” Smith said, explaining the fourth reason. “That’s not a happy combination.”

This leads to Smith’s fifth reason why the UK could still lag behind: unemployment could move a little higher and prove a little more persistent than in other countries, as furloughed staff end up becoming unemployed when the government schemes end.

“Fiscal policy so far has concentrated on trying to save jobs, but yet unemployment has likely shot up to around 8 per cent, looking at the claims data. That’s a less successful outcome than Germany or France, for example, who have tried the same approach,” he finished.

The coronavirus sell-off and subsequent rapid market rebound has seen US tech stocks soar to new highs and cyclical assets follow in close pursuit as economies re-open.

Yet as risk assets continue to rally into the third quarter of 2020, gold has also risen to its highest level in years, breaking the $1,800 per ounce mark.

The price of gold (as represented by the Bloomberg Gold Sub index) has risen by around 17 per cent year-to-date in US dollar terms, making it one of the few commodities to post a positive return the first half of 2020.

One of the reasons why gold is seen as an attractive defensive asset is due to the fact that it typically rallies when markets fall and risk is off, providing a hedge for portfolios.

On the flipside of that, when risk is back on and markets rally, it does not perform as well. So, when both gold and risk assets are rallying into the third quarter of 2020, the outlook for both becomes less clear.

Performance of index year-to-date

Source: FE Analytics

Commodity strategists at Saxo Bank have argued that “the belief that we can and will return to normal within a few quarters will most likely turn out to be wrong”.

The Danish investment bank has a bullish outlook for gold and predicts that it will rise to at least $1,800 per ounce in 2020, followed by a fresh record-high in the coming years.

“Gold’s ability to frustrate, then eventually reward, the patient investor is likely to be on full display during the third quarter,” said Ole Hansen, head of commodity strategy at Saxo Bank.

In a note outlining its third quarter outlook, the strategist argued that the next period will see low to negative growth, rising levels of debt and eventually rising inflation.

“A pandemic which is far from over coupled with a potential second wave looming over the horizon threatens to derail the recent rallies witnessed in energy and industrials, and any additional growth in Q3 will be challenged,” he explained.

Given equity markets have bounced back strongly and the full economic impact of the Covid-19 crisis remains unclear, Evy Hambro, co-manager of the BlackRock World Mining Investment Trust and BlackRock Gold & General fund believes he will continue to see strong arguments for adding to gold and gold equities for diversification.

He said that the precious metal has proven its worth in a safe haven environment and that monetary policy globally is also likely to remain loose for a significant amount of time, which should support the gold price going forward.

“Over the medium term we have a coordinated central bank policy, firstly in terms of fixing the financial plumbing on the back of the current crisis, with the second phase being the high level of fiscal spending designed to get the global economy back up and running,” he explained.

He added that the US 10-year Treasury real rate of -0.73 per cent means the opportunity cost of holding gold has significantly reduced, and it is facing “a perfect environment” of supportive measures.

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Hambro also shared his outlook for the demand and supply dynamics for gold, which play a crucial role in the yellow metal’s price.

“Mined gold production fell in 2019 for the first time in 11 years, which, in combination with increased industrial and speculative demand for gold, and decades of underinvestment, has put a floor under the recent rise in the gold price, which has now reached eight-year highs,” the BlackRock manager said.

“On the demand side, the impact of Covid-19 on global economies and the huge amount of fixed income assets with negative of near-zero yields, paints a very bullish picture for gold prices.”

He said some risks to the future upside in gold are a reduction in economic uncertainty, and the subsequent fall in demand for ‘safe haven’ assets, or the rise in real rates, which would increase the opportunity cost of holding gold.

Performance of BlackRock Gold & General YTD

Source: FE Analytics

The BlackRock Gold & General fund, which invests predominantly in gold mining stocks, has returned 36.64 per cent year-to-date as gold mining companies have rallied on the back of rising gold prices.

Indeed, gold miners have demonstrated higher beta – indicating greater sensitivity– to metal prices in recent months.

Hambro said: “Gold equities were not immune to the liquidity drain in Q1 2020, however their performance since mid-March has been spectacular, as they returned to delivering beta of above one to moves in the gold price.

“We have seen continued improvements in the gold price, whilst costs have been relatively flat, which suggests a positive outlook for earnings growth – at a time when earnings will be significantly down for most other sectors.”

He added that the capital discipline of many gold mining companies remains intact, highlighting the large number of miners which have recently announced dividend increases.

With some forecasters expecting $2,000 per ounce for the price of gold, Hambro shared what the implications would be for gold mining stocks.

“At today’s price levels, gold companies are as profitable as the most profitable mining company, as well as some of the leading companies in other sectors,” he explained.

“As balance sheets and sentiment towards the gold space has been repaired over recent years, if costs remain stable, gold equities are likely to display a beta of above one to upward moves in the gold price.”

Rising dividends and future potential share price appreciation could be one of the reasons why certain UK equity income managers have also turned to gold mining companies for their funds.

Dan Hanbury, manager of ES R&M UK Equity Income fund, said: “Gold has set a record high in almost every currency in the world, including sterling, during this crisis already and only the US dollar record remains to be broken.

“The gold price is usually quite volatile and so investors should expect setbacks, but it is capable of surpassing $2,000 in this cycle as central banks buy debt in huge proportions, negative real rates persist and investors buy into this store of value.”

The manager revealed he currently has around 10 per cent of his small-cap and income funds invested in gold-related stocks.

While traditional dividend payers – such as GlaxoSmithKline, British American Tobacco, and Tesco – make up the equity income manager’s top holdings, gold miner Centamin also sits among its top-10 holdings, representing 2.3 per cent of the portfolio.

“The rally in the price of the precious metal is not fully reflected in the price of gold mining stocks, with their cost of extraction much lower than the current spot price and analyst models still lagging gold futures,” he added.

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Most recessions are triggered by the cost of capital becoming too high for businesses and consumers to access, or to service existing capital obligations. In most textbook recessions, the manufacturing sector is typically hardest hit, as demand for products pulls back, while the services sector (though not immune) is less affected – at least a portion of the population is still able to shop, go out for dinner, or visit their local pub. This time around, lockdown conditions mean that the service sector has been equally impacted (more so in some cases). This matters hugely for developed economies, where services can account for three-quarters of the total economy.

Given that the impact on all areas of the economy is so material, central banks and governments have had little choice but to respond forcefully. But the extent of their response has been nothing short of spectacular, dwarfing the remedial actions following the 2008 financial crisis. And it’s not just the scale of the response, but the coordination of both central bank and government support that stands out.

Policy responses are not a vaccine for the virus, and nor are they intended as such. Rather, they are part of the medication for one very important patient in this saga: the global economy. Policymakers are aiming to keep businesses and consumers afloat, quite literally buying them time, until both the demand for goods and services and the ability of the economy to provide them can recover.

 

Central banks have thrown everything at this crisis

There has been much talk in recent years of central banks being out of ammunition for the next crisis. The traditional tool of slashing interest rates to fight a recession seemed to have been exhausted; rates were cut aggressively in response to the global financial crisis, and have stayed low ever since. Against this backdrop, many assumed there was little left in the arsenal of major central banks.

 

How wrong this thinking would turn out to be. Amid the Covid-19 pandemic, central banks have thrown everything at the crisis. Some of these policies have been seen before – reducing interest rates, reactivating quantitative easing programmes, and restoring some kind of order to the financial plumbing of capital markets. However, some are new – targeted lending to businesses of all sizes, and involvement throughout corporate debt markets. Central banks have gone further than most would have ever imagined, and are likely to do still more.

As a result, the balance sheets of the world’s most prominent central banks have exploded. In March alone, the balance sheets of G7 central banks (UK, US, France, Germany, Italy, Canada and Japan) expanded by $2.7trn, comfortably eclipsing the full 12-month increase seen in response to the 2008 crisis.

Naturally, as the Covid-19 saga moves on, talk will return to how central banks can unwind these bloated balance sheets in an orderly fashion, without causing panic in financial markets (no mean feat), but they must take one challenge at a time. For now, in the coming months, central bankers will focus on keeping borrowing costs low enough to facilitate a recovery, while (indirectly) keeping it cheap enough for governments to fund their budget deficits, which have also exploded during the crisis. The latter point opens up a sensitive debate about the political independence, or not, of modern-day central banking institutions.

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Governments have opened their coffers like never before

While the central banks have been consistently proactive in the 12 years since 2008, the same cannot be said for governments. In the UK, this was characterised as the period of austerity after the liberal spending of the Blair and Brown years. Since the emergence of Covid-19, austerity has gone out of the window, replaced by government spending on a scale not witnessed in generations. The single aim has been to cushion the huge economic destruction that has unfolded amid the global pandemic.

In Europe, the governments of Germany, France and Switzerland have guaranteed almost €17bn of bank loans to businesses, under state aid programmes set up during the pandemic. The Germans, ever the masters of disciplined spending, have been forced to change tack, launching a ‘limitless’ loan programme for small and medium-sized companies. It was always going to take a crisis for Germany to start spending, and that moment has arrived.

Meanwhile in the US, we have seen government-sponsored funding for small businesses, aid for state and local governments, and wage protection programmes. Over the course of the next two years, the US government’s spending response is expected to amount to around 13 per cent of the size of its economy (in the 2008 crisis, this amounted to just 8 per cent).

 

The evidence that so far only 0.3 per cent of the Paycheck Protection Programme (at the time of writing) has gone to public companies is very constructive. Analysis suggests that the first tranche of the programme may have saved between 33 and 42 million jobs. Given its magnitude, the programme has struggled to provide expedient enough distributions, but whatever its flaws, without this programme, US employees would be materially worse off. Back across the Atlantic in the UK, the state now pays the wages of over one in ten British workers (3.2 million at the time of writing) via the ‘furlough’ scheme, which encompasses 435,000 firms.

 

But when will the bill come due?

The coordination of central bank and government policy on this scale does potentially represent an inflation risk further down the line. This did not materialise after the global financial crisis, but that was in no small part due to the fact that large-scale crisis spending by governments was largely absent.

We believe that whether or not you agree with what policymakers have done in response to the Covid-19 crisis, or whether you think they have created a moral hazard for future generations with these unparalleled spending programmes, this is not the time nor the place for that debate. The cost of action is high, but the cost of inaction surely higher. Governments and central banks have bought some time for the global economy to regroup and recover, and thank goodness they have done so. Without their extreme responses, the world would surely be an even scarier place today.

 

David Absolon is investment director at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK. The views expressed above are his own and should not be taken as investment advice.

While managers often required to wear several different hats, what happens when you have two strategies with completely different benchmarks and approaches?

This is the challenge for Lazard Asset Management’s Barnaby Wilson who oversees the £74.9m Lazard Managed Equity and the $19.4m Lazard Global Sustainable Equity funds.

The Lazard Global Sustainable Equity fund was originally launched as an offshore mutual fund but has recently become available for UK retail investors launching in the IA Global sector in June, where Wilson’s Lazard Managed Equity fund operates.

He said the differences between the sustainable fund and his other strategy come down to several things, namely risk and benchmark diversification, opportunity set and long-term outlook.

Running a bottom-up stockpicking process for both, Wilson said that all stocks fall into three ‘buckets’: “those whose products and service contribute to making the world more sustainable, those who offer a product or service which doesn’t particularly tie into making the world more sustainable or not; and, are those that offer a product or service that is damaging from a sustainability perspective”.

With his sustainability managers’ hat on, Wilson said his stockpicking universe really only consists of companies in the first bucket.

This means that the Lazard Global Sustainable Equity fund will look entirely different from the MSCI AC World benchmark as it’s “unlikely” that the fund will be invested in energy, utilities or real estate for example.

“These don’t really have any stocks that we find interesting from a sustainability and a financial productivity perspective,” Wilson said.

Although both funds invest in what Wilson called “compounders” – high-quality businesses which can sustain and grow profits over long periods of time – Lazard Managed Equity picks from a different stock selection.

Greater deviation from the benchmark in the sustainable fund can ultimately lead to more risk relative to the benchmark, according to Wilson, especially over shorter time frames.

But this short-term risk is counteracted by a longer investment outlook, Wilson explained, as many sustainability themes can take years to develop.

“We think that the offset to that [risk] is when think about these businesses where the sustainability drivers are really contributing to generate profits over time,” he said. “We would expect them to be delivering a higher level of return to their investors over a longer time period. So that’s the kind of trade-off that you take.”

This year has seen greater interest in sustainable and ESG (environmental, social & governance) strategies as more attention is paid to companies’ environmental and social responsibilities during the coronavirus crisis.

Having worked on the sustainable fund for two years now Wilson said investors considering sustainable or ESG investments in their portfolios for the first time need to make sure they understand why the manager of such a strategy believes his investments are sustainable and will generate a better return.

“I think that they need to be careful that the manager is not just chasing the latest theme that’s hot and investing in some momentum behind sustainability rather than the business fundamentals behind the companies that they’re buying,” Wilson said, adding that a manager needs to be able to vouch for a company’s sustainability credentials rather than just relying on third-party providers of ESG and sustainability data.

“In our experience, a lot of that data is very low quality and quite difficult to interpret and there’s really no substitute for having analysts who really understand this and the industry in which it operates and really digging into these ESG and sustainability issues for each company,” he said.

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On the Lazard Global Sustainable Equity fund Wilson has three major categories to assess the sustainability of a company.

The first, ‘human capital’, assesses diversification and health and safety policies. The second, ‘natural capital’, assesses the resources and company supply chains. And thirdly, corporate governance.

Ultimately all companies in the portfolio must offer a product that facilitates a transition to sustainable practices and minimise the negative effects that the external business makes.

Wilson said that there is a high saturation of sustainable companies now available meaning that you need to find what separates one company from the rest.

“The problem for us with some of these companies is that we don’t see over the long run what is their competitive advantage to sustain a high level of profitability,” Wilson said.

One company which has this edge and sustainability drive is German flavour and fragrances company Symrise, which was founded in 2003 has now become involved with adding the texture, smell and taste to vegan, meat-free alternative foods.

“One of the themes that has been focused on a lot over the past few years is the development of plant-based protein and the most obvious companies involved in that are Beyond Meat, and the sustainability drives there are very clear,” Wilson said.

“It’s healthier to eat plant- rather than animal-based proteins and it’s also much better for the environment.”

What gives Symrise this desirable market niche, said Wilson, is that “for many years that business has been driven by the need to produce food that tastes nice but has less sugar, salts or fats in it".

“So there is already this healthy driver, but ultimately we think that if plant-based proteins become very widespread in terms of options – and we think that that will happen – this creates a whole new range of products that will need even more flavours in them,” Wilson said.

“And so we think that that’s an opportunity to play, what we feel is a driver that is very much driven by sustainability trends, and that [the] company will generate a far higher level of profitability.”

 

Over the past two years, the offshore Lazard Sustainable Equity fund - co managed by Louis Florentin-Lee - has made a total return of 20.39 per cent over the past two years, outperforming the MSCI AC World index (19.32 per cent).

Performance of fund vs benchmark since start of data

 

Source: FE Analytics

The onshore Lazard Global Sustainable Equity Select fund has ongoing charges of 1.14 per cent.

The lockdown conditions imposed to control the spread of the Covid-19 pandemic have had an outsized impact on a number of sectors and industries in recent months.

But Franklin Templeton Investments’ Colin Morton said there are attractive valuations to be found in these bombed-out sectors and the latest additions to his £839.3m Franklin UK Equity Income fund are two such companies.

During the crisis, Morton and colleagues have added property companies Londonmetric and Derwent London to the portfolio.

“We acknowledge we’re taking on an element of risk because obviously we’re getting involved in property companies which have tenants and where life is going to be a bit tougher than it was before,” he said.

“But I think we’re very much working on the basis that the stocks are trading at attractive valuations and if we start to see things getting better, hopefully they will benefit from that.”

In the year to the FTSE All Share bottom on 23 March, Derwent London had fallen by 39.43 per cent, while Londonmetric had lost 25.14 per cent.

Performance of stocks in year to 23 March

 

Source: FE Analytics

And while they are not “massively dramatic” positions in the Franklin UK Equity Income portfolio, Morton said they are high-quality companies – with different focuses – albeit in a challenged sector.

“Derwent owns some high-quality [properties], mainly offices in London but also some retail and has historically traded at or around net asset value or at a premium. It’s currently trading at something like a 25-30 per cent discount. So, it does look very interesting,” he explained.

“The thing we like about it is the loan-to-value – how much debt they’ve got relative to the asset – is 15 per cent. One-five per cent. In other words, they’ve got 85 per cent of equity in the business.”

He continued: “The debt they’ve got is fixed at very attractive levels and they’ve got no refinancing or anything like that coming up in the near future. And so they’re in a very strong position, they’ve got quite a lot of firepower within the balance sheet.”

“If they decide they want to take advantage of any distressed assets and distressed sales as they come along, it’s in a good position.”

Nevertheless, Morton said Derwent London will face challenges as the companies it leases to ask for rent breaks and people continue to work from home even after lockdown conditions end.

Londonmetric, on the other hand, has a slightly different focus with exposure to different types of properties, but could be well-poised to take advantage of a longer-term theme.

“A lot of it is in good-quality things like food retailers and other retailers, but the majority of the business is actually warehousing, distribution and logistics,” he said. “We didn’t own this stock in the income side and they had a fundraising about a month ago in order to raise money to take advantage of opportunities and accelerate.

“What they think is going to happen, and I think we all sort of agree, is what’s happened in the last few months is going to accelerate even further: the move to online and the fact that you’re going to have to have a good online system set up, you’re going to need warehousing and distribution and all those types of things.

“Londonmetric is very well positioned [for that]. So they decided to have an equity issue and raised money to prepare themselves for any opportunities that come along.

“They’ve already got most of that money earmarked for properties that they’re looking at.”

Morton said the investment was more of a long-term play in a company that yields just over 4 per cent and has continued to pay its dividend throughout the downturn.

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He added it has been a difficult environment in which to invest as the emergence of Covid-19 was first discounted as a SARS-type, more localised outbreak than a full-blown pandemic.

As such, the sell-off in March paved the way for some strong returns to be made in the market rally since then.

However, Morton said it had been an “absolute shock” from an income investor's perspective.

“I’ve never seeing anything like this and all the time I’ve been doing the job [since] the early 1980s for 35 years now,” he said. “At the time of the global financial crisis [in 2008], we’d seen something in the region of 20 per cent dividend falls from top to bottom.

“This time around, the predictions are that we’re going to see dividends fold across the market of somewhere between 40 and 50 per cent.

“These are incredible collapses in dividends and they always go into a number of different brackets.”

These brackets include companies that have had no choice because they’ve seen revenues dry up, such as consumer retail. Other companies have had to suspend because they’ve been directed to by the government (such as banks) or to preserve cash. And there are other companies that have used Covid-19 to reassess the level of dividends they are paying.

This is something that UK investors may have to get used to, the manager said.

“The yield on the market is probably maybe somewhere closer to between 3 and 3.5 per cent, rather than the 4.5 per cent that’s been quoted [in the past] once all these dividend cuts come through,” he said.

“If things improve, they might be able to pay dividends at the back end of 2020 into 2021. But I’ve been publicly saying that I don’t think we’ve got any chance of getting back the 2019 dividends even in 2021, even as we see companies return to pay some element of dividend next year.

He concluded: “Any further progress is probably going to be resolved on what happened with regard to the pandemic and how quick we can start to see profitability and earnings and dividends start to get back to more normal levels.

“It’s very difficult to say anything conclusive because it’s just such a moving feast at the moment in the market.”

 

Performance of fund vs sector and benchmark over 3yrs

  Source: FE Analytics

Franklin UK Equity Income is down 2.89 per cent over three years compared with a fall of 4.5 per cent in the FTSE All Share benchmark and a loss of 10.36 per cent for the average IA UK Equity Income fund. The four FE fundinfo Crown-rated fund has a yield of 5.71 per cent and an ongoing charges figure (OCF) of 0.53 per cent.

The impact of Covid-19 on profits could leave some investors stranded in so-called ‘dividend traps’, according to Janus Henderson Global Investors, as many companies have already been forced to cut dividends.

While cuts are nothing new, in a normal recession companies would utilise their dividend cover and dividends would reduce much less than profits to protect the income of its shareholders.

Investors often look for companies where dividends are comfortably covered by profits and the cover ratio is one indicator of how comfortable that is, looking at the value of profits divided by the value of dividends.

However, this recession is unique in that it has hit every sector in every region. 

Below, Ben Lofthouse, manager of the Henderson International Income Trust (pictured), presents the findings of the Janus Henderson’s Global Dividend Cover Report and outlines the importance of looking at the dividend cover for investors and the perils of being left in the ‘dividend trap’.

 

Global profits rose 1.1 per cent to £2.17trn in 2019, the slowest rate of growth since 2015, due to subdued global economy and rising trade tensions. Nevertheless, higher profits meant greater payouts as the world’s top 1,200 companies paying out just over £1trn, an 8.8 per cent rise on the previous year.

However, the Covid-19 pandemic has had a severe impact on profits as economies have locked down to control the spread of the virus.

Over the next year, consensus estimates imply that global profits will fall to £1.7trn, down by over a fifth (22 per cent).

Many companies have already started to cut dividends and many more may not be able to cover existing payouts.

Global dividends of top 1,200 companies

 

Source: Henderson International Income Trust (as of June 2020)

As the chart shows, dividends are expected to fall sharply in 2020, even in a best-case scenario.

In the most recent Janus Henderson Global Dividend Index, dividends were forecast to decline by between 15 per cent and 34 per cent this year, more than they did during the global financial crisis.

And when dividends rise quicker than profits, the dividend cover falls.

Last year saw a continuation of a downward trend in dividend cover that has been in effect since the post-financial crash highs of 2010.

“The yearly decline in 2019 dividend cover is part of the long-term trend that has seen dividend cover fall in every region of the world and every industry as the economic cycle has matured,” said analysts.

“The decline in dividends looks set to be similar or worse than the decline in profits, meaning that companies are protecting their balance sheets to see them through the crisis. This will allow them to emerge stronger,” Lofthouse said.

During a recession, company balance sheets can be stretched to accommodate distributions to shareholders when profits are hit. These reserves can be supplemented during the recovery when profit returns to previous levels.

Thereafter, dividend cover usually drops to a low level during a recession before bouncing back strongly to a high level soon after a downturn.

Dividend cover by region

 

Source: Henderson International Income Trust, June 2020

While the UK and Australia have a long history of paying unsustainably high dividends, in parts of Asia and Japan where it’s relatively new, dividend growth can exceed profit growth for a considerable period until high dividend cover comes into line with norms elsewhere. This would explain that over the last 10 years, dividends have more than tripled in Asia, Japan and the emerging markets, while profits are still yet to double.

Nevertheless, Janus Henderson claimed that more than one-fifth (£230bn) of the world’s dividends are vulnerable to a cut, and that half the highest yielding companies in the world were so-called dividend traps.

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A dividend trap, the asset manager explained, is when a stock’s yield is just too good to be true compared to similar companies. These traps, according to Janus Henderson research, are twice as likely to cut the dividend and have dividend cover that’s half as good as the global average.

If the income an investor had expected is cut or has no prospect of growth, this eliminates one of the main advantages in investing in equities.

Janus Henderson analysts outline that while high yields are temping, they can be dangerous.

For instance, Royal Dutch Shell, in 2019 shares yielded more than 3x the global average and it was the biggest dividend payer in the world.

The oil giant only just made enough profit that year, so during the oil price war in early 2020, it was making a loss on the oil it produced prior to the Covid-19 pandemic.

Royal Dutch Shell has now cut its dividend by two thirds, as it is unsustainable to have the previous amounts of cash outflow every year.

Their research showed that by late May, 21 per cent of companies in their index had cut dividends for 2020.

“Companies distributing excessively high dividends may be able to sustain large payouts during the good times, but as soon as a crisis like 2020’s hits, dividend cuts become unavoidable un order to protect the business through the downturn,” analysts commented.

The companies identified as dividend traps had an average dividend cover last year of 1.2x, much less than the 2.1x for the wider global market.

“Investors should remember that a temporary halt in dividends does not change the fundamental value of a company – that is driven more by the ability of the company to flourish and grow over the longer term,” the fund manager said.

“Diversification is an effective way to reduce risk and provide a balanced income from companies all round the world – this is the very reason HINT exists.”

 

Performance of trust vs sector & benchmark over 3yrs

 

Source: FE Analytics

HINT has returned 7.13 per cent, whereas its benchmark, the MSCI World index returned 32.15 per cent.

According to data from the Association of Investment Companies (AIC) the trust is currently trading at a 1 percent discount to net asset value (NAV), has ongoing charges of 0.84 per cent, a yield of 3.9 per cent and is 9 per cent geared.

Everything you need to know about building your own investment portfolio and managing your own wealth. Packed with news, analysis and commentary, Trustnet Magazine is your free, easy-to-read monthly guide to self-directed investment. 

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The US small-cap sector has performed pretty much according to the historic playbook going into this health emergency driven economic downturn. Investors tend to shun the sector late in economic cycles as they begin to focus on the growing likelihood of a recession and seek to preserve capital in more liquid blue-chip type investments.

The Russell 2000 index of US smaller companies fell sharply at the beginning of the year as it became clear that GDP was set to turn negative and unemployment surged with the fallout from the global lockdown.

Smaller companies have historically significantly outperformed the S&P 500 index from the midpoint of recessions, and with the gradual lifting of restrictions on business activity now occurring as the virus recedes, the sector looks set to produce some better relative performance.

Chart 1: The timing looks right for a US smaller companies to perform

 
Source: Bloomberg, William Blair Equity Research January 1980 – February 2020

There are three key reasons why the Russell 2000 Index could appreciate sharply from here.

First, the timing looks right (see chart showing relative performance of Russell 2000 index versus S&P 500 index around recessions). Small caps typically outperform and underperform in cycles of usually around five-to-seven years. Fans of the space have had to endure poor relative gains in small caps since 2014 when the S&P 500 index began pulling away from the pack, as the returns from a select handful of mega-cap technology stocks exploded. So, a new cycle in favour of the small-cap sector could now be due.

The timing is enhanced by the second reason: valuation (see relative price to sales ratio chart). Strategists look at the price to sales ratio of the sector relative to the S&P 500 index. Price to sales is a fair comparison as many smaller companies have not yet achieved profitability. Valuations for small caps are close to record lows.

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Finally, the small-cap sector features a great many more companies tied to the fate of the domestic economy, as the scale required to expand overseas has not been reached. Therefore, investors looking for a way to benefit from a coronavirus/economic recovery scenario might want to consider the small-cap sector which benefits nicely from accelerating GDP growth.

Chart 2: US smaller companies on attractive valuations

 

Source: Bloomberg 31.01.1995 to 24.04.2020

In addition, the post Covid world has created some important new trends with a vast number of smaller growth companies well-positioned to capitalise.

For example, US consumers are more likely to seek out driveable vacations instead of flying. This augurs well for the recreational vehicle or outdoor pursuit sectors, with small-cap boatbuilder Brunswick and all-terrain vehicle manufacturer Polaris Industries nicely positioned. Restaurant stocks are also well represented within the Russell 2000 index and same store sales should see a strong pick up as social distancing requirements are lifted. The publicly listed restaurant chains have better access to capital and should gain new business from private “mom and pop” operators which do not survive the impact of the downturn. Many have already permanently closed.

The crisis has also seen huge demand for telemedicine as patients seek access to medical advice that cannot be obtained visiting medical practices. Teladoc Health, the leading provider of telehealth, has seen a dramatic increase in new subscribers to its service and very impressive share price appreciation.

Elsewhere, the trend for working from home looks set to be permanent. Facebook is planning for half its headquarter based employees to be home-based. We expect to see a complete overhaul of the established US communications infrastructure as the working from home trend gains traction and there are growing demands on network capacity. This should lead to the emergence of a number of category killers in related areas with companies such as Bandwidth in the voice and text communications sector, and Switch in the internet data centre facilities sector looking well-positioned.

Many of the most promising US smaller stocks are recent IPOs and a good way to gauge sentiment for this asset class is to examine the performance of the Renaissance IPO ETF, which provides investors with efficient exposure to a portfolio of newly public companies prior to their inclusion in core US equity portfolios.

Recent IPOs are an important source of ideas for small cap growth investors because companies with unique products or services, early in their evolution, can provide explosive top-line growth. Since the markets bottomed in March this year, the Renaissance IPO ETF has returned 78 per cent compared to 43 per cent for the large-cap S&P 500 index. We suspect this is just the beginning of a longer-term period of outperformance for an asset class which has been out of favour for a long time.

 

Nick Ford is co-fund manager of the LF Miton US Smaller Companies fund. The views expressed above are his own and should not be taken as investment advice.

With the S&P 500 enjoying a market rally back to near pre-coronavirus crisis levels, the tech fuelled recovery is juxtaposed to the dilapidated state of the US economy.

The S&P 500 peaked on 19 February closing on 3,386 points, however, within 16 days it had fallen by 20 per cent – the fastest bear market in history – as the pandemic spread to 2,237.4 points on 23 March.

Since then, however, it has recovered to pre-pandemic levels.

Performance of S&P 500 since 23 March (in US dollar)

 

Source: FE Analytics

But this recovery must not be confused with the US economic situation, several fund managers and analysts argue, which is now firmly in a recession.

Indeed, the International Monetary Fund’s (IMF) June World Economic Outlook projected that the global economy will shrink 4.9 per cent this year, and the US by 8 per cent.

Below, fund managers and market experts discuss the disparity and where there is still opportunity in the US.

 

“There is clearly a lot of optimism currently being priced in”

With US equities having rebounded by 40-45 per cent while the economy is shrinking, T. Rowe Price’s US equity specialist Eric Papesh said investors are a lot more bullish about the long-term prospects.

“If we think of the equity market as a forward-looking mechanism, then there is clearly a lot of optimism currently being priced in, with investors seemingly prepared to look beyond the near term to a post-crisis recovery,” he explained.

And although Papesh (pictured) expects increased volatility in the US market compared to previous years – as the coronavirus continues unchecked – “longer term, we do not anticipate a continuing and persistent disconnect between the US equity market and the underlying economy”.

And volatility isn’t necessarily a wholly bad thing, he added.

Papesh said T. Rowe Price actively seeks these market dislocations to generate alpha and are currently looking at the financials sector, which has suffered because of coronavirus, but is creating some interesting longer-term opportunities.

 

“It is important not to be misled by low-base effects or to confuse a strong recovery with a full one”

While the coronavirus has continued to rage in the US, economic data has remained strong with new jobs outweighing losses in May, retail sales jumping by 18 per cent and the Purchasing Managers’ Index (PMI) showing activity picking up faster than anticipated, Erik Knutzen, chief investment officer for multi-asset at Neuberger Berman, said the positive news cannot overshadow the reality that the US isn’t close to a full recovery yet.

“While some of these headline growth numbers have been remarkable, it is important not to be misled by low-base effects or to confuse a strong recovery with a full one,” he said. “Two and a half million jobs in the US is great news, but we need almost 10x that to get back to the unemployment levels of four months ago.

“PMIs have rebounded, but most indicate activity is still contracting, not expanding.”

Knutzen (pictured) added: “Once the new equilibrium is established, pre-crisis conditions of low growth, low interest rates, low productivity and high debt are likely to be compounded by even higher debt, even lower rates, higher taxes, tighter regulation, lower consumer confidence, ongoing social distancing and travel restrictions, and, potentially, a steep cliff edge on the other side of the current fiscal stimulus.”

All of which equals a more risky outlook in the medium term, according to Knutzen, as the amount of stimulus and shoring up of household and corporate balance sheets means that the base line for the S&P 500 in an L-shaped recovery is now higher than it was three months ago.

 

“Where economic growth rates are low, the share of thematic and structural growth rises”

Diving into the US technology sector, Giles Money, global equities portfolio manager at Sarasin & Partners, said that the bull run of US-mega-cap names is still not over yet.

For the past few years the US market has been dominated by the sector’s “ultra-cap companies”, as Money (pictured) referred to them, and have been the driving force in its recent recovery.

These companies “are digitising the world at a rapid pace,” Money said, one of the five key themes in his portfolio, something which has been accelerated by the pandemic.

“Apple, Amazon, and Microsoft are all well over $1trn in market cap, with Alphabet (Google) not too far behind. They are all highly cash generative and, more importantly, have places to invest this cash,” Money said.

The advent of tighter regulation and taxation on the companies could halt the mega-caps’ deployment of capital and growth, but Money disagrees saying that he still finds value in this area “due to the positive backdrop relative to other much more challenged industries going forward”.

He said: “Where economic growth rates are low, the share of thematic and structural growth rises,” making the world thematically driven.

“The question from here will be around which behaviours last, but what is clear is the US has many structural advantages.”

 

“What has been different about this cycle so far is leadership within the stock market”

“We are at the start of the US economic cycle, not the end,” said Anu Narula, head of global equities at Mirabaud Asset Management and manager of the $423.2m Mirabaud Equities Global Focus fund.

The cycle itself has been different, according to the manager, because cyclicals have lagged due to a flatter yield curve and “technological acceleration”.

“Going forward, we continue to think leadership can come from cyclicals, as their total addressable markets are growing,” Narula (pictured) said.

Highlighting payments service PayPal and US tech hardware company Nvidia as two stocks illustrating different secular trends, Narula said the former is tapping into the ageing economy and the older demographics increasingly using online payment and shopping options. Nvidia, meanwhile, is benefitting from broader moves into artificial intelligence (AI).

“These are secular trends which will continue in the long term. While these companies look expensive on headline measures, the market often underestimates the ‘E’ of P/E [price-to-earnings ratio],” Narula said.

But there are still good stocks to be found in the ‘recovery bucket’, the nature of which has shifted due to coronavirus as consumer cyclicals have come in to replace the energy or industrial options they would’ve held in previous cycles. Companies such as TJX, Starbucks or Home Depot.

“We believe there will be a rotation between these buckets as we move out of the recession, and we want to ensure a balance between both,” he concluded. “We invest thematically, and many themes like explosion of data and platform companies, as well as health and well-being have accelerated in the last few months.”

The impact of Covid-19 on the global energy market means we may have already seen peak demand for fossil fuels, according to Kingsmill Bond, strategist at thinktank Carbon Tracker.

While the fossil fuel industry saw growth of just 1.7 per cent last year, it still dominates the global energy system with an 80 per cent market share. Forecasts by the major oil & gas companies are predicting “business as usual” for the next 20 years.

However, Bond described this view as complacent and said it is a sign these businesses would rather put their head in the sand than face up to the challenge of disruption.

“This system is being challenged by fast-growth renewables,” he explained. “And it's a typical story that has been seen many times in different industries: a challenger moving very quickly is able to disrupt an incumbent.

“What is special about this transition is that solar, wind and batteries are being propelled by extraordinary technology learning curves whereby their costs are falling by around 20 per cent for every doubling in capacity. And to be clear, solar and wind have been doubling in capacity every two or three years for the last few years.

“Very recently, these new technologies became cheaper than fossil fuels. It’s an extraordinary story and it just keeps getting better with more and more instances of these new technologies outcompeting the existing ones.”

Bond said that we have already seen peak demand in certain fossil-fuel sub-sectors. For example, the world reached peak coal demand in 2013 and Europe saw peak fossil-fuel demand as early as 2005. This led Carbon Tracker to release a note in 2018 that predicted if renewables carried on their current trajectory and growth in energy demand remained at around 1 per cent, the world would reach peak fossil fuel demand by 2023.

However, this prediction was made before the coronavirus hit the energy sector. The impact on fossil fuels has been stark, with demand for coal down 8 per cent and oil down 9 per cent. Yet rather than retract, the solar and wind sectors are expected to grow at 16 and 12 per cent respectively this year and as a result of this divergence, Bond believes peak fossil fuel demand has already been and gone.

“What's really happening here is a cyclical shock that is bringing forward the date of the cyclical peak,” he explained. “That's the story. It is a story we can see happen in many other sectors.

“The best example is the European electricity sector in 2007 where the global shock brought forward peak demand for fossil-fuel electricity generation in Europe, completely unexpectedly for the incumbents.

“If there is a bounce-back of 4 per cent in 2021, you're still down 4 per cent. That industry was only growing at 1.7 per cent so it is going to take you to the mid-2020s to get back to 2019 levels.

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“And by that stage, as we've seen in many other sectors in the past, these new energy technologies will be big enough to supply all the growth. As a result of that, we're very confident in saying we've already seen peak demand for fossil fuels for electricity.”

Bond pointed out that because the fossil fuel industry grew consistently for more than a century until 2013, it has never had to cope with a sustained period of falling demand. As a result, most of the incumbents are still planning for growth.

If Carbon Tracker’s prediction is proved correct and the industry goes into decline instead, Bond believes this will cause a spike in stranded assets. Since 15 June, BP and Shell have written down almost $40bn of assets as economically unviable – but Bond believes this is just “the tip of the iceberg”.

“The point here is you've got a huge amount of stuff below the ground, a huge amount of physical infrastructure,” he continued.

“You’ve got assets, you’ve got debt: about a quarter of the world's equity market is linked to this system. And we would suggest that all of these vulnerable financial markets will react early: financial markets don't wait until demand has gone.”

So what should investors do to mitigate these risks? Bond recommended they focus on three key points.

“The first is that this change is real, not something that carbon foot-printing and greenwashing and all the rest of it can get you through,” he explained.

“You're going to have a real significant strategic shift and analysts have got to think and analyse quite differently.

“Second, what we've seen happen in the last two weeks is just the beginning of a whole series of write-downs in what we call ‘the stranded asset decade’.

“The final point is you need to act now in order to avoid loss.”

The Covid-19 crisis has hurt most economic sectors this year. As of 30 June, healthcare was one of only three sectors to post positive year-to-date returns (1.3% compared to -5.8% for the MSCI World index). Some healthcare companies have seen activity fall amid cancelled surgical procedures and non-essential appointments. However, companies making the equipment used to treat Covid-19 patients have seen orders rise sharply.

Testing and diagnostics specialists have also seen hugely increased demand for Covid-19 testing that offset the decline in tests for other illnesses. Numerous tests have been developed for the virus, while there are also antibody tests to detect whether someone previously had the virus.

Meanwhile, hopes for a return to “normal” are ultimately pinned on finding a vaccine or treatment. There are over 100 potential vaccines in development and existing treatments for other conditions are being trialled to see if they may be effective against the virus.

All of the above points to an enormous amount of resource being dedicated to combatting Covid-19, with many healthcare companies benefiting through higher orders, sales, and investment.     

But if a vaccine is found, then what happens? Could the current period of growth come to a sharp halt? The areas of focus might change, but there are reasons to think that - even prior to Covid-19 - the sector was on the cusp of a period of rising demand, innovation and potentially higher growth.

Importance of being prepared

A year ago, Keith Wade, Schroders Chief Economist and Strategist, identified changing demographics and the consequent need for increased health spending as one of his “inescapable truths” – trends that will shape the investment landscape in the coming decade. In his view, the Covid-19 pandemic has “super-charged” this theme.

Keith says “we would expect spending on health to rise as governments build more resilience into their health systems. Just as the banking sector had to increase buffers against risk after the global financial crisis, the health sector will be expected to do the same after the pandemic.”

The crisis has put a spotlight on countries whose health services have appeared ill-prepared. Difficulties sourcing appropriate ventilators, or sufficient quantities of tests, have been high-profile news. A sustained higher level of health spending is therefore something that a number of Schroders fund managers expect as well.

European equities fund manager Paul Griffin says “Even once the worst of the current crisis has passed, we think demand is likely to remain robust. The pandemic has focused attention on the importance of being prepared. As such, we would expect that companies producing life-saving equipment and drugs will continue to see elevated demand relative to the pre-crisis period.”

Paul also highlights biologics as a “fast-growing niche” in the healthcare sector. Biologic drugs range from simple proteins to complex antibodies manufactured in living organisms. Such drugs have been around for the past decade but are of increasing importance in offering safe, innovative medicines with higher success rates. Biotech companies increasingly outsource biologic development and manufacturing to specialist companies. Paul says “many of these ’pick and shovel’ companies are enjoying strong growth in the biologics market.

Three factors supporting the sector

Global equities fund manager John Bowler concurs that healthcare will persist as a key investment theme beyond the Covid-19 crisis. He sees three forces that could make healthcare a sustainable growth area for many years to come: demographics, efficiency, and technology.

1. Demographics

The demographic challenge is clear across developed countries. The leading edge of the baby boomer population is hitting 75. This is the age when more complex procedures like hip replacements occur, driving an acceleration in healthcare demand.

2. Efficiency

John says “The financial burden to national budgets and employer-sponsored health insurance is creating the necessary force for change. For example, in the US between 30% and 40% of healthcare spending is regarded as wasted, which creates a tremendous opportunity to drive efficiency.”

Pressure on government budgets due to the Covid-19 economic crisis reinforces the importance of this theme. Keith Wade says “Healthcare spending already accounts for nearly one-fifth of OECD public expenditure. This will present a challenge to finance ministries at a time when the International Monetary Fund forecasts that total government debt will rise to 150% of GDP for the G20 by the end of 2021, largely as a result of Covid-19.”

And it’s not just governments who are looking to get more for their money, as Schroder Adveq’s Jeremy Knox says: “Pharmaceutical companies are looking to the next frontiers of medicine, all the while seeking to be more efficient in drug development to maximise returns on new therapies. This search for efficiency has led to a robust market for outsourced service providers. These form an integral part of the value chain for drug development.”

3. Technology

John Bowler says “The outbreak of Covid-19 has clearly demonstrated how important technology is for the healthcare sector. In particular, telehealth, which refers to the distribution of healthcare-related services via electronic devices such as mobile phones and laptops, offers significant potential for growth.”

And technology has more to offer than time-saving Zoom consultations with your GP, as John explains, “There is a steady stream of novel and disruptive technologies in both medicines and technology/data that are providing new approaches to managing diseases.”

Wave of innovation in the sector

Can technology help with the hunt for a Covid-19 vaccine? The use of Artificial Intelligence (AI) suggests it can.

The speed and volume of scientific research and data being generated daily is impossible for an individual to manage but AI, machine learning models and algorithms can help scientists make sense of it. Various companies are trying to harness this data deluge. In the UK, one innovative tech company used its AI capabilities to search through existing drugs that could potentially be used to treat the novel coronavirus. It found one potential candidate and this led to a clinical trial with US pharmaceutical giant Eli Lilly.

Tim Creed, Head of European Private Equity at Schroders, says, “Various companies have used AI to identify potential treatments before. However, this is a very high profile instance of AI helping with drug discovery and development. It also shows how a relatively small company with innovative technology can partner with a pharmaceutical giant. Whether Covid-19 is cured quickly or takes a long time, this proves how AI can work in the industry.”

There are other examples of how innovative UK companies have used their capabilities in new ways during the current crisis. For example, given the pressures on the UK’s National Health Service (NHS), some private companies stepped in to help. Tim says “one example is a company that provides cancer treatments including advance proton beam therapy. As a result of the NHS’s focus on Covid-19, some other treatments have had to be deferred or delayed. This company stepped in to support the NHS and take on additional cancer patients. We think this is a great thing for the company’s relationship with the NHS in the long term.”

And innovation in developing new treatments also creates additional demand. John says “There has been a dramatic increase in research & development spending in the last decade. This in itself is creating new markets in healthcare. This can be seen by a number of new, innovative drugs in areas such as oncology and gene therapy that are at the point of commercialisation."

Unmet healthcare needs in emerging markets

Expectations of increased healthcare demand aren’t solely about ageing populations or high-tech innovation. The sector is already seeing growth as a result of the burgeoning middle class in emerging markets and ongoing trend towards urbanisation, according to Jeremy Knox: “We think the global medical devices and equipment industry will grow substantially in the next decade. We expect this to be driven primarily by Asia, as its economies evolve and consumers begin to access healthcare for the first time.”

In many emerging markets, greater access to healthcare, and improvements to that care, are a source of long-term growth potential. Urbanisation can help expand access, with the possibility of a “leapfrogging effect” that sees emerging markets overtake developed markets in some healthcare areas. Possibilities include linking up technology with healthcare provision in the form of online pharmacies, for example.

Combination of factors to support growth in sector

This suggests that quite apart from Covid-19, there are a number of dynamics that could support ongoing growth and activity in the healthcare space. Demographic change and the need to make health services more resilient to future crises will drive sustained growing demand for healthcare services. Budget pressures make investing in efficiency enhancing  technology a necessity not an option. The possibilities opened up by new technology are vast, from new treatments to new methods of accessing healthcare. And then there are the new markets opening up as growth in emerging market economies enables more people to access healthcare services.

Such ongoing demand could potentially see some companies achieve consistently higher growth in future. This may make them attractive to investors seeking higher returns. As ever, selecting the right companies to invest in will be crucial. Paul Griffin says “These businesses are not simply defensive places to hide during a crisis; they offer opportunities for long-term growth.” 

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Specialist tech funds have found themselves knocked off their spot at the very top of the Investment Association’s three-year performance tables during recent months, Trustnet research shows.

According to research by the Investment Association, the average holding period for an open-ended fund is three years. As such, a three-year track record has become increasingly important for investors, particularly as many advisers require this as a minimum for assessing performance.

However, three-year rankings are never set in stone and leadership can change as market conditions shift and strategies just celebrating their third anniversary enter the rankings.

With this in mind, Trustnet has ranked all the equity funds in the Association universe by their three-year returns and compared the current standing with how the rankings looked six months ago.

Ove the three years to the end of 2019, the seven best performers were all from the IA Technology & Telecommunications sector. As the table below shows, this has changed over the most recent three-year period.

 

Source: FE Analytics

While technology stocks remain the biggest drivers of returns over the past three years, broader funds with a bias towards the sector are firmly at the top of the three-year performance tables and more specialist strategies have slipped down slightly.

The best performing equity strategy over the past three years is the £4.1bn Baillie Gifford American fund with a return of 138.20 per cent, having been ranked in tenth place for the three years to 2019-end.

Baillie Gifford American is overseen by Gary Robinson, Tom Slater, Kirsty Gibson and Dave Bujnowski. It is one of four strategies in the top-25 for the growth-focused asset management house Baillie Gifford, including Baillie Gifford Long Term Global Growth Investment, Baillie Gifford Positive Change, and Baillie Gifford Global Discovery.

Another US fund worthy of note was the $4bn Morgan Stanley US Growth fund, which has made a 135.68 per cent gain over the past three years to become the second-best performing equity strategy. In the three years to the end of 2019, it was ranked 13th out of the 4,000 or so funds in the Investment Association universe.

US equities have continued to perform strongly despite the coronavirus sell-off in March, as the Federal Reserve and Congress pledged to support the economy through the crisis. It is also home to many of the large technology names that have led the market higher in recent years and feature heavily in many of the top-performing strategies.

The dominance of the US in global equity markets in recent years is reflected in the number of IA North America funds on the above list. If we widen it out to look at the 100 highest returning funds of the past three years, 29 come from this peer group; IA Global is the best represented on the wider list with 30 members, but most of these funds also have a bias towards the US market.

Mark Urquhart and Tom Slater’s Baillie Gifford Long Term Global Growth Investment is in third place; although a member of the IA Global sector, it has more than half of its portfolio in the US.

While pure technology funds no longer sit at the top of the performance table, there are still a significant number of these strategies found among the best performers over three years.

This includes the $5.1bn Polar Capital Global Technology overseen by Ben Rogoff and Nick Evans, which sat in the top spot at the end of 2019. It is in fifth place now.

The strategy has recently soft-closed to new subscriptions to protect existing investors after a strong period of performance, having made returns of 113.58 per cent over the past three years.

Other technology strategies among the top-25 include AXA Framlington Global Technology, passive fund L&G Global Technology Index Trust, Liontrust Global Technology, Herald Worldwide Technology, Fidelity Global Technology, and T. Rowe Price Global Technology Equity.

Aside from the dominance of US equities and tech, another notable theme in this research is the recent outperformance of gold funds, which had struggled until 2020.

Demand for the yellow metal surged in the opening half of 2020 as investors sought out areas of relative safety in the coronavirus crisis. During the first half of the year, the gold price (as represented by the Bloomberg Gold Sub index) shot up by 17.13 per cent – in US dollar terms – during the first half of the year.

Performance of index during H1 2020

 

Source: FE Analytics

This helped spur performance for the £1.3bn LF Ruffer Gold fund, a gold mining equities strategy managed by Paul Kennedy, which has returned 112.41 per cent during the three years to 30 June. It was ranked in 440th place for the three years to end-2019.

It was a similar story for the Ninety One Global Gold fund managed by George Cheveley, which found itself catapulted to 20th place (up from 437th) with a return of 87.10 per cent.

Outside of the top-25, other gold funds have made more dramatic jumps up the rankings with Quilter Investors Precious Metals Equity going from having the Investment Association’s 2,450th highest return to its 87th and BlackRock Gold & General rising from 2,230 place to 70th.

In addition to the above themes of US equities, tech stocks and gold, several relatively young funds have appeared at the very top of the three-year leaderboard as soon as they clocked up this track record.

The aforementioned Baillie Gifford Long Term Global Growth Investment fund is one, having launched in April 2017 and become the third highest returner over the past three years.

A specialist technology strategy, the £398.2m Smith & Williamson Artificial Intelligence fund – overseen by Chris Ford and Tim Day – is another. It invests in companies involved in the development of artificially intelligent systems or products and has returned 108.52 per cent over three years.

Baillie Gifford Positive Change, Brown Advisory US Sustainable Growth, AMP Capital Global Companies, Wellington Global Innovation and First State All China are examples of other funds that lacked three-year track records at the end of 2019 but are now among the Investment Association’s 100 highest returners over the past three years.

At the other end of the three-year performance table can be found a number of UK value strategies and global energy funds – although this was also the case for the three years to the end of 2019.

The value style has underperformed as the post-global financial crisis cycle continued to favour growth stocks, while UK equities have generally been out-of-favour since the EU referendum four years ago due to the uncertain political backdrop and lack of progress on Brexit.

Energy prices, meanwhile, have remained low in recent years as global growth has slowed and were put under further pressure this year as first relations between the US and Iran deteriorated and later as an oil price war was sparked by Russia and Saudi Arabia.

Central bank stimulus across the world has been crucial in addressing the coronavirus crisis but a ‘fiscal cliff’ could be looming at the end of July, according to Carmignac’s Didier Saint-Georges.

Tax increases and spending cuts could be implemented during the recovery to deal with the rising level of corporate and household debt, warned Saint-Georges, head of portfolio advisors and member of Carmignac’s strategic investment committee.

He also outlined the growing uncertainty that the possibilities of further waves of the virus could spark in the equity market, in contrast to the relative predictability of the credit space.

Economically, the western world has acted efficiently to coronavirus, but growing cases in the US show it’s still struggling to curb the rate of infections. China, on the other hand, was swift in injecting stimulus and containing the virus.

This, according to Saint-Georges, is down to China’s experience of the SARS epidemic in 2003.

Though the estimates vary, the SARS outbreak in China cost the global economy about $40bn. Research from IHS Markit showed China accounted for 4.2 per cent of the world economy in 2003, whereas it now makes up 16.3 per cent.

“It witnessed a clean recovery and was able to crush the rate of infection completely before it opened up the economy,” he said.

However, it’s vastly different this time around as the contagion moved across the world to economies that have never imposed nationwide shutdowns.

“The economic cost of lockdowns became so heavy as opposed to 2003,” he said. “The re-opening of the economy needs to happen and is subsequently happening before the rate of new infections has been brought down to zero.”

As these economies lift restrictions, the chances of a winter Covid-19 spike pose further uncertainty over the equity space.

The head of portfolio advisors explains that the credit space is where some certainty can be found in these uncertain times.

“From an equity market standpoint, should you hold on to those cyclical stocks for recovery plays?” he asked.

“Or whether the very fact you have a strong resumption of consumption especially in the US raises the risk of infection or brings a second wave or continuation of the first wave, nobody can tell.”

Saint-Georges sees the potential in the credit space as an unfortunate reality of the times.

“The markets until March really priced such an economic space; it means a lot of defaults and bankruptcies in the credit space,” he said.

“The market, partly because of panic, partly because of lack of liquidity, has priced some of those issuers at high risk of defaults – that’s when a good credit researcher can make a difference.”

Performance of corporate bonds vs global equities year-to-date

 

Source: FE Analytics

While there is high visibility in the equity market, the credit market doesn’t hinge on when the economy starts booming again.

“Our sense is that hysteria will play out and its audacious to expect economic growth six months out that will not suffer from higher unemployment,” said Saint-Georges.

“Playing an economic recovery via the equity market is quite uncertain, whereas playing it through the value of the balance sheet of issuers is a safer bet.”

The risk of fiscal cliff at the end of July could be a real possibility, especially with an election year that pits two disparate philosophies vying for the presidency in the US.

Spending cuts and tax increases are the traditional two factors behind the ‘fiscal cliff’ which if allowed to happen simultaneously, have the propensity to spark a deep recession.

By cutting household incomes and seeing increased levels of unemployment, this both undermined consumer and investor confidence.

“Renew and increase stimulus policy to avoid this kind of cliff,” said Saint-Georges.

The market is expecting $1trn from the Federal Reserve, supporting the economy via that monetary boost.

“However, in Europe, it’s a different story because here the assumption is that the recovery plan is approved,” Saint-Georges said.

“In the meantime, the countries still must fund on its own budgets. But the European Central Bank [ECB] must continue doing the heavy lifting so it doesn’t translate into widening credit spreads.”

The targeted longer-term refinancing operations (TLTRO III) will continue to support bank lending into 2021 to help small and medium-sized businesses.

“Banks will be encouraged to buy more government bonds and while this is structurally an issue for the future,” the head of portfolio advisors explained. “These things will keep us going into 2021, without too much damage to the economy.”

However, he notes the potential dangers to the consumer side, which will see savings rate increase as the economy looks more unstable.

“The spending trend will be hampered, and the uncertainty will mean small and mid-cap expansion will be held off until confidence grows,” he said.

“This all should be enough to prevent us falling back into a complete collapse. But it’s a far cry from the position of the growth rate going into 2020.”

It took the world more than 100 years to agree a generally accepted set of corporate accounting principles (GAAP). They are still not perfect, varying from country to country. But imagine what it would be like for investors if each company recorded its accounts in its own unique way. Worse still, imagine if every company used the same terms – operating profits, depreciation, capital expenditure – but each took them to mean subtly different things.

This is where we are with the language of sustainable and principled investing. Companies and fund managers use similar terminology, but the nuances differ from one to another. Fortuitously, you might think, many agencies now provide ESG (environmental, social and governance) scores for companies (and funds). But can you measure sustainability?

Scores are inevitably flawed for a number of reasons. Several hundred metrics can be applied in an analysis, and not all are relevant to the investment case. So when the results are aggregated into digestible scores, how meaningful are those numbers?

For instance, it is important to know how efficient Unilever is in its use of scarce water. It is even more important to know about pollution when you are assessing a chemical company like 3M, which is facing litigation over alleged contamination by polyfluoroalkyl. But are either as important for judging a property company like Equinix, which owns large data centres next to major internet hubs? You have to weigh how material each individual metric is from one business to another.

Any score will be based on often patchy, historical data. And attitudes change. I have a diesel car because 10 years ago the government encouraged me to buy one, saying it was better for the environment.

Scores sound impartial, but they require human judgment. For instance, ratings bodies will often have strict rules on acceptable lengths of tenure for a board and will score accordingly. We are a little more flexible.

We are likely to be sceptical if the average tenure is 12 years and a company is adopting a complete change of strategy without any changes to its board. But would we be so keen to move people on if the average tenure is 12 years, the board has done a brilliant job and more of the same is planned? Probably not. How do you incorporate that into a number?

In short, managers and investors have to operate a degree of pragmatism. We call it sense and sustainability.

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These tips are not comprehensive, but they might help you in your fund selection if trying to be a good investor means as much to you as generating strong returns.

1. Don’t rely on scores alone

Funds are often scored on the sustainability of their underlying holdings, but these scores are as flawed as any – so use them with care. Active fund management is predominantly a qualitative process – does it make sense to tack on a quantitative scoring process?

2. Don’t rely on labels either

Try to understand what the labels mean to a manager. Just because a fund calls itself ethical, green or sustainable does not mean it matches your priorities. ESG is so embedded in the investment universe now that you may find a better performing fund that satisfies your needs, even if it doesn’t have a ‘sustainable’ label.

3. Look at the holding

Check out the top-10 list of companies owned by the fund (which usually appears on factsheets). We publish the top 30. Are you happy with these companies? Many funds that say they are ‘sustainable' own shares in Royal Dutch Shell, for example. The managers argue that Shell is more green than other oil companies. They might be right, but do you want to be invested in oil or not?

4. Check what is excluded

If a fund is excluding things on principle you should be able to find reference to this in its marketing literature and more information on the fund’s approach. We exclude munitions, tobacco, pornography, oil, coal and gas companies and avoid companies with poor governance. We limit exposure to countries with fragile or unreliable government – primarily emerging markets, like Russia. We try to invest in companies that we think contribute positively to society.

5. Be prepared to have your principles challenged

We are constantly being challenged ourselves. Making a paper bag uses 20x more water than making a plastic carrier bag and creates twice the carbon footprint. The fins on wind-powered electricity generators cannot currently be recycled and those rotating fins (particularly on offshore wind farms) can kill migrating birds which navigate by coastlines. Prepare to enter an ethical maze. Ultimately, we all have to make compromises.

6. Build a list of what is important for you and review it each year

For many investors, sustainability begins and ends with the environment. But as stewards of your money we think beyond that. As you research funds, you may come to realise that governance – factors like balance sheet management, how many women are on the board and executive pay – are vitally important too. In fact, in terms of materiality to share prices, governance is important in the ESG debate. We are all constantly learning new things. So your list of priorities will change over time and it should arguably change for the funds you are buying too.

7. Remember that ESG is dynamic

What was acceptable in the past may become unacceptable. Political risks can change rapidly, environmental standards and targets are shifting all the time. It can take time for this to be reflected in score mechanisms. Look for a manager you can trust to be proactive.

8. Don’t be afraid to ask a manager

A contentious suggestion that not all fund groups will welcome, but if you like a fund and are unsure of where it stands on an important matter of principle for you, do not be afraid to write to the manager and ask.

9. See if the managers invest in their own funds

For all three managers, the Mid Wynd Investment Trust and Artemis Global Select Fund are home to the bulk of our investable assets. It matters to us that it is managed sustainably, so you can be sure we will stick to our principles. After all, we hope to be able to pass on some of our holdings to our children and grandchildren.

10. Don’t forget performance

As long as you are not too restrictive, sustainable investing should not impair your performance. In fact, it has been positive for us during this crisis because it has helped us avoid sectors, like oil and airlines, that have been worst hit.

 

Alex Illingworth is manager on the Mid Wynd Investment Trust and Artemis Global Select fund. The views expressed above are his own and should not be taken as investment advice.

Donald Trump is likely to ramp up his anti-China rhetoric and “throw the kitchen sink” at the US economy in a bid to win this year’s election, according to Fidelity’s Aditya Khowala, giving investors some uncertain conditions to navigate.

The US continues to see rising coronavirus infections and deaths. Last week, the country reported more than 40,000 daily cases on four occasions and had over 50,000 new cases in one day for the first time, according to Johns Hopkins university data.

With the US is set to hold its presidential election in November this year, incumbent president Donald Trump has started to lose ground in the polls to Democrat rival Joe Biden. The coronavirus crisis and its economic impact will loom large over the election.

It is very rare that an incumbent US president is re-elected when there’s a recession in the election year. No-one since Calvin Coolidge in 1924 has been re-elected when there was a recession within 24 months of the polling day.

Not that we didn’t see Trump defy election day odds during his first presidential campaign, as the day before the vote data compiled by The New York Times had his Democratic rival Hilary Clinton on an 85 per cent chance of winning.

The coronavirus crisis caused the fastest bear market in history, with US stocks dropping 20 per cent in just 16 days. However, asset prices have rebounded sharply due to central banks and policymakers pumping trillions worth of stimulus into the economy.

This rally, which started at the end of March, has been led by the mega-cap tech stocks which have dominated the market index for years. So far in 2020 the MSCI North America index has outperformed the MSCI World index, making 4.16 per cent versus 1.33 per cent.

Indices year-to-date

 

Source: FE Analytics

But while US markets have almost recovered from the coronavirus sell-off, the economy is faring much worse. In June, the private non-profit research organisation National Bureau of Economic Research – which makes the call on the health of the US economy – said the country was officially in recession.

Aditya Khowala, manager of the $724.1m Fidelity American Growth fund, said Trump will have to factor this coronavirus-triggered recession in his 2020 presidential election campaign.

“The speed and depth of the Covid recession has thrown a big wrench in Donald Trump’s original strategy of campaigning on a very strong economy,” he said.

“I see Trump deploying a two-pronged strategy to try and beat the odds: first, re-escalate the trade war and dial up the rhetoric against China to position it as a scapegoat for the recession; and second, throw the kitchen sink at the economy to make sure that it is in full swing before November.”

 

Step one: Re-escalate the trade war with China

Back in 2019 the tensions created by the US-China trade war dominated headlines, as did the news of a ‘Phase One’ deal being signed at the start of this year. At the time, many said this would bolster Trump’s re-election odds.

But the outbreak of coronavirus changed that and the underlying political agenda of the trade war is being laid out in the open more than ever as Trump openly blames China for the coronavirus outbreak.

On this the Fidelity American Growth fund manager said: “Recent opinion polls clearly show that the majority of Americans blame China for the global pandemic, which has given the Trump administration a perfect scapegoat.

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“Anecdotal evidence for this view can be seen in Trump’s recent and repeated references to the outbreak as a ‘China plague’ or US trade representative Robert Lighthizer haranguing US companies to move their supply chains out of places like China, which he accuses of unfair competition.

“It’s a strategy that appears to have worked so far for the administration, as the negative views of China continue to grow in the US. Relations between the world’s two biggest economies look set to get worse in the medium term.”

 

Step Two: Juice the economy through all means possible till November

Although Trump continues to shift the blame of the coronavirus very publicly onto China, this won’t be enough to win voters over during the harsh economic reality, Khowala said.

The US unemployment rate rose drastically to 14.7 per cent in April following the coronavirus outbreak. While June saw 4.8m new jobs created in the US and employees began going back to work with businesses reopening, unemployment rates are still well above pre-coronavirus levels at 11.1 per cent, according to the US Bureau of Labor Statistics.

 

Source: US Bureau of Labor Statistics

To rebuild the backbone of his re-election campaign – a thriving US economy – Trump has to do something unaccustomed to him, go along and work with the Fed.

“Trump knows that simply blaming China will not be sufficient for him to win re-election, and that he also needs the economy to stage a strong rebound by November,” Khowala said.

“I see this as a key reason why his administration has chosen to reopen large parts of the economy without waiting for clearer signs the outbreak was effectively suppressed, as was the precondition for easing lockdowns in many places in Asia and Europe.”

Although this might mean the US economy stages a faster short-term recovery, it also increases the risk of a second or third wave of infections.

Khowala also noted that Trump is getting “enormous help” from the Federal Reserve, which has essentially committed itself to unconventional policies such as helicopter money and ‘quantitative easing infinitum’. The central bank has indicated that rates will be kept at zero until at least 2022 and seems to be prioritising a recovery in the job market over the risks of exacerbating asset price bubbles.

In additional, US Congress has approved “exceptional measures” for fiscal support. The Fidelity manager noted that some workers are receiving unemployment benefits that are more than their wages, causing the household savings rate to shoot above 30 per cent – its highest rate in at least 60 years.

The upshot of all this is that Khowala thinks the US economy looks promising over the short term, but the full outlook remains unclear. “The trifecta of early reopening, helicopter monetary and fiscal policy has led to an extraordinary boost to consumer demand and recovery,” he said.

He pointed out that some forecasts have real US GDP increasing by more than 20 per cent in the third quarter because of the “unprecedented” policy response.

In terms of how investors should react, the manager said: “The conundrums of electioneering and engineering an economic recovery are creating great uncertainties, and markets are becoming lopsided as investors flock to established winners like tech sector giants and ‘work from home’ stocks, while occasionally trying to punt in extremely beaten down value stocks.

“Valuations of high growth stocks make little sense to me at these levels but they have momentum, while cheap stocks are often cheap for a reason. Against this backdrop, I have stuck with my approach of buying long-term growth stocks that stand to do well in a range of macro scenarios. I’ve also been slowly adding to growth cyclicals, buying on dips, as I feel that the US outlook for the next three years remains strong despite the noise of 2020.”

Within the Fidelity American Growth fund, Khowala looks for companies benefitting from long-term growth trends and have an ability to grow their cash flow. He typically runs a bias towards medium and small-cap companies.

Over the past five years the fund has made a total return of 85.24 per cent, outperforming the FO Equity – USA sector but has lagging behind the S&P 500.

Performance of fund vs sector & benchmark over 5yrs

 

Source: FE Analytics

It has an ongoing charges figure (OCF) of 1.90 per cent and has an FE fundinfo Crown Rating of five.

Lombard Odier chief investment officer Stéphane Monier expects economies will likely return to a slow-growth, low-inflation environment with high debt and low-to-negative interest rates, after an initial spurt in activity in the second half of 2020.

After an unprecedented economic shock and rally in financial markets due to the coronavirus in the first half, Monier foresees a ‘square root’-shaped economic recovery over the next six months with a steep renewal in activity followed by a tailing-off as some sectors take longer to resume, particularly leisure, hospitality and tourism.

He also believes that Covid-19 accelerated four structural trends that have been changing the and therefore present investment opportunity.

These four trends are the world’s inescapable dependence on technology, the ongoing profound demographic changes, the continuing rise of China and the need to decarbonise quickly.

“The second half of the year will be dominated by the US presidential election as well as the evolution of the Covid-19 pandemic. As the US race unfolds and candidates unveil their programmes, we’ll be able to better assess the impact on financial markets,” Monier said.

“Asset allocations capable of managing more volatility will be crucial. The following 10 investment ideas are designed to help portfolios weather foreseeable, and less predictable, developments.”

The first conviction he outlined was the need to keep exposure to risk assets and to stay invested, or risk missing out the best days of the market.

“The sharp recovery following the pandemic-induced fall underlined the importance of staying invested in equities,” Monier said. “Investors should now make sure that they hold enough risk assets in their portfolios. In the circumstances, there is no substitute for preparing tactical responses to the inevitable surprises that will demand changes to portfolio risk profiles.”

Performance of global equities since 23 Mar 2020

 

Source: FE Analytics

This leads to his second conviction, which is to add defensive allocations. He said portfolios need defensive assets in the event of unwanted volatility and these can include US Treasury bonds, gold, Japanese yen or put options on equity indices.

Lombard Odier’s third conviction was the attractiveness of investment grade credit. Due to the asset class being directly supported by central bank backstops, he said it will continue to be an attractive area to generate yield compared to sovereign debt.

The opportunity to identify attractive high-yield fixed income given that defaults are already largely priced in was the firm’s fourth conviction. Monier said certain BB and B rated credit looks attractive, but transport, retail, leisure, US energy and emerging world debt outside of Asia should be avoided.

The fifth conviction was that sustainable equity growth, healthcare and information technology will outperform in 2020. That being said, Monier believes that due to the strength of the rally during the first half of the year, investors should still expect lower equity returns in the second half.

“We favour corporate stocks with sustainable growth prospects and resilient balance sheets, such as information technology and healthcare, which should outperform value stocks. We also like utilities that are working on sustainable solutions, offering attractive opportunities as state spending trickles down into infrastructure projects,2 he said.

“Post Covid-19, we expect the government spending splurge to increase investments in medical infrastructure and treatments. Medical technology, including tracking, testing and monitoring tools will all benefit. Information technology stocks more widely have excellent post-pandemic growth prospects, including in areas such as the internet’s physical architecture and security.”

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The sixth conviction highlighted by the Lombard Odier chief investment officer was around Asian equities within emerging markets.

Due to China and Asia’s quicker return to economic and industrial activity, it makes for an attractive investment, he said. It will also be buoyed by the large fiscal and infrastructure spending taking place on telecommunications, power, transport and IT. He pointed out that China looks like it is heading towards a V-shaped recovery, driven by strong domestic demand.

Lombard Odier’s seventh conviction was the stability that real assets offer in turbulent markets.

In a slow-growth, low-rate environment, infrastructure should see support from government-backed investments, and real estate in high quality residential and logistics properties stand out in the US, Swiss and European market. Monier also said that private equity should not be overlooked, due to its additional portfolio diversification, exposure to the real economy and potential for enhanced returns.

The eighth investment conviction was a weaker US dollar. He anticipates that with activity recovering, the US dollar will be weaker compared to other G10 currencies, which are undervalued. He cited their exposure to China’s business cycle and generally favourable balance of payments, highlighting the Euro, Japanese yen and the Australian dollar specifically.

Monier’s ninth investment conviction was the volatile outlook for sterling. He said that the hit to the UK economy as a result of the pandemic in addition to the lack of Brexit progress means that the risk of a no-deal has risen and volatility for sterling will be likely. He believes that this will see the pound will get worse before they get better.

The tenth and final investment conviction Monier revealed was around the strength of particular emerging currencies against the US dollar.

While investors should remain selective, he said currencies with lower debt levels, decent external balances, and exposure to improving eurozone growth or China will do well. He highlighted the Czech koruna, Israeli shekel, Indonesian rupiah, Korean won, Taiwanese dollar and Chilean peso in particular.

 

While the opening three months of 2020 saw stock markets plunge and investors scramble for safe havens, the most recent quarter witnessed a strong revival in risk appetite.

Although the coronavirus pandemic continues to spread, investors welcomed massive amounts of fiscal and monetary stimulus designed to shore up the global economy. Sentiment was further bolstered when some countries passed their first peak and started to ease their lockdowns.

Below, Trustnet reviews the performance of markets during 2020’s second quarter, looking at returns by asset class, geography, investment style and a range of other viewpoints.

 

Asset classes

In the first quarter of the year, the coronavirus crisis sparked a heavy sell-off in risk assets with the MSCI AC World index dropping 16 per cent and the commodities index plunging almost 40 per cent.

The most recent quarter, however, witnessed a strong snapback as stimulus measures were unveiled, coronavirus infection rates started to slow in some parts of the word and countries emerged from their lockdowns.

As a result, the MSCI AC World rose 19.64 per cent in the three-month period while commodities were up 10 per cent; government bonds made lower returns as risk appetite returned, but gold continued to attract money.

 

Source: FinXL

Neil Wilson, chief market analyst at Markets.com, said: “Stocks rallied so sharply in Q2 for a number of reasons – chiefly stimulus, both fiscal and monetary, as well as the reopening of economies and better virus rates in most countries, though this trend has somewhat come undone in the US in the last couple of weeks.

“The aggressive pullback in February and March also left stocks rather oversold on a short-term basis, when considering the stimulus and relative yields to government bonds. Meanwhile hopes of a vaccine are central if we are to see 2021 look more like 2019 than this year.

“For gains to be sustained in Q3 stocks require the continued support of stimulus, which remains on tap, as well as a better outlook on the virus spread and for the hard economic data to show a strong bounce from Q2, both of which could be more tricky.”

 

Geographies

With risk assets rising strongly over the quarter, it shouldn’t be too much of a surprise to see that equities in all the major geographic regions were in positive territory at the end of 2020’s second quarter.

European equities were the place to be for sterling investors as the continent continued to open its economy after seeing a peak in new coronavirus cases, closely followed by the US despite its rising infection rates. The UK market, however, rose just half as much as these two.

 

Source: FinXL

Ben Yearsley, director at Fairview Investing, said: “It’s difficult to know whether to be optimistic or pessimistic about markets, however despite some new lockdowns and partial closures of UK, Germany and the US, developed world markets seem to have moved out of the coronavirus funk recording some of the best quarterly returns on record.

“In some parts of the developing world it is a different story unfortunately with Brazil still in the eye of the storm. Have markets got ahead of themselves? Maybe, but the worst of this phase of the coronavirus pandemic appears to have passed.”

 

Investment style

Turning to investment style and it was yet another quarter when growth and quality stocks outperformed the value style by a significant margin. The underperformance of value has carried on for so long that some are questioning whether the style can ever return to outperformance.

Fiona Frick, chief executive at Unigestion, said: “Value style has experienced an extraordinary period of underperformance relative to growth investing, spanning more than 13 years. Value has become so cheap versus growth that its current valuation is in the 97th percentile of its historical distribution. A number of narratives have been offered to explain why the value factor’s poor relative performance may be the ‘new normal’. One such theory is that the value definition has become obsolete.

 

Source: FinXL

“It is true that value can no longer be defined solely as book value, as proposed by the Fama-French model, but for every definition of value we examine in measuring relative cheapness – price-to-book, price-to-earnings, price-to-sales and price-to-dividends – it has underperformed growth since 2008. Furthermore, the definition of ‘cheap’ is no longer limited to industrial companies, cyclical stocks or financials.

“We believe that there is no reason why the value premium should have disappeared. Such a lost decade is not unprecedented in history and variations are still well within the range that may be expected statistically. Indeed, value performance in the 2010s was remarkably similar to the 1990s, which is perhaps unsurprising since both these decades also saw double-digit excess returns for the equity market. Factor premia, including value, still exist and should deliver long-term performance. However, their performance in the short term can be quite cyclical and extreme.”

 

MSCI industries

On a sector level, tech stocks continued their strong run over 2020’s second quarter. This sector led the decade-long bull market that followed the financial crisis and has built on these gains during the coronavirus pandemic as greater working from home and social distanced led to more reliance on products such as video conferencing, media streaming and online gaming.

Adrian Lowcock, head of personal investing at Willis Owen said: “The demand for technology stocks has rocketed this year as investors see them as winners of the chaos caused by Covid-19, with wider social and business trends being accelerated.”

 

Source: FinXL

The above table also highlights something of a turnaround for more cyclical sectors over the past three months, as investor sentiment towards the health of the global economy started to improve as lockdowns were eased and some data points came back better than expected.

The MSCI ACWI/Energy index, for example, dropped more than 40 per cent in 2020’s opening quarter as the price of oil sank and demand plummeted. But it rose 18.22 per cent last quarter on the back of improving demand and rising prices.

 

FTSE market caps

In keeping with growing risk appetites, there was also a reversal in the market cap of companies that led last quarter’s gains.

In the UK, smaller companies had a strong quarter with the FTSE SmallCap ex ITs index gaining 17.06 per cent. This was the worst performing part of the market in Q1 with a fall of 32.43 per cent.

 

Source: FinXL

Large-caps lagged behind in the second quarter, however, with the FTSE 100 posting a total return of just 9.15 per cent.

While all UK stocks have had the headwind of the country being among the worst affected by the coronavirus pandemic, the FTSE 100 has been hit especially hard by widespread dividend cuts. As of the end of June, 48 members of the index had cut, deferred or cancelled their dividend.

 

Fund sector performance

A look at the performance of equity funds highlights many of the themes discussed above.

The smaller companies sectors performed the strongest in the second quarter, with IA North American Smaller Companies, IA European Smaller Companies and IA Japanese Smaller Companies all seeing their average member return more than 20 per cent.

 

Source: FinXL

And it was the UK bringing up the rear, with IA UK Equity Income sitting at the bottom thanks to those dividend cuts.

Willis Owen’s Lowcock said: “The rate of dividend cuts in the UK is unprecedented. Many dividend paying companies have lagged in the rally as they sat in areas of the markets not set to benefit from any short-term changes in people’s behaviour - such as energy, financials and insurance. Whilst we expect more to come, the worst is probably over, as British companies acted fast to cut dividends.”

In the bond sectors, IA Global EM Bonds Hard Currency led with an average return of 14.41 per cent and the other two emerging market debt sectors were close behind.

Sonja Laud, chief investment officer at Legal and General Investment Management, said: “There is also a significantly higher yield available from hard-currency emerging-market debt at the moment, with that part of the universe paying around 6.5 per cent compared with less than 5 per cent for local-currency bonds.”

 

Source: FinXL

The worst performing bond sector was IA UK Gilts, reflecting the fall in demand for safe havens as investors embraced risk over the quarter.

A look at the multi-asset and more specialist sectors has IA Technology & Telecommunications at the top by a clear margin.

IA Specialist is in second place, with gold funds leading the way. Although the demand for safe havens eased, gold continued to perform strongly with MFM Junior Gold rising 94.34 per cent last quarter, followed by LF Ruffer Gold (64.48 per cent) and ES Gold and Precious Metals (61.50 per cent).

 

Source: FinXL

IA UK Direct Property was the worst performing sector over the quarter. Several of its members are suspended because of outflows and liquidity concerns.

IA Targeted Absolute Return funds also had a lacklustre quarter on average, although there was a big variance in returns from its members. LF Odey Absolute Return, for example, was up 21.30 per cent over the three-month period while BlackRock Emerging Markets Absolute Alpha was down 7.29 per cent.