23 Nov 2020
12 November 2020 | Jupiter Independent Funds Team
Milton Friedman used to say that “nothing is so permanent as a temporary government programme” and the last twelve years of ultra-low interest rates and quantitative easing (QE) undoubtedly fits the bill.
You’ll often hear people refer to these as “unorthodox” monetary policies – but even for veteran investors like some of us in the team, the ‘Age of QE’ represents around a third of our working lives and it doesn’t seem like ending soon, with any attempt to remove QE being met with a rapid market revolt or renewed economic atrophy.
Like it or not, therefore, these policies are here to stay but one big question remains: are they inflationary? Conventional wisdom would say yes, but reality has shown that although there has been pronounced asset price inflation, product price inflation is nowhere to be seen. Ultimately it may well prove to be inflationary – the global economy can’t be given eternally free money without any consequences – but on what timescale is frankly anybody’s guess.
The talk of the moment is about Covid-19 vaccines, with recent data from Pfizer and BioNTech suggesting a potent and safe vaccine could be available sooner than many people had expected. This has been widely heralded as a turning point in the fight against the virus and markets reacted with jubilation. Without wishing to sound like killjoys (the world needs some good news this year) we would sound a note of caution.
This is early and incomplete data and raises many questions about how effective it may be for the elderly, or whether it just stops symptoms or transmission as well. In any case the logistical challenges involved in manufacturing, distributing and administering this vaccine (which needs to be stored at around -70 degrees Celsius) are immense. Yet the reminder that material progress is being made towards a vaccine certainly helps focus minds on what may come next.
From an investment perspective, the question we must ask ourselves is: how would an effective vaccine change our view on portfolio positioning? ‘Value’ strategies should be well placed for any material rebound in markets, and perhaps increasing weightings to that area would be an appropriate response. The Value style has endured a torrid time in recent years, but we hold the ‘Value’ fund managers in our portfolios in the highest regard and back them to take full advantage of any reversal of fortunes.
Regardless of the ups and downs of the market cycle, we believe it is important to make the most of the full range of asset classes at our disposal. Fixed income fund allocation is an area that perhaps doesn’t get the attention it deserves, given it is much larger in size than the equity universe.
The fixed income world can be interpreted as one large risk/return continuum, as different types of bonds – from defensive sovereigns, through credit and emerging market debt to high yield – can have currency risk hedged out. In practice, many investors access the asset class in a siloed way, choosing funds specialising in certain parts of the bond universe. That is a perfectly valid way to invest, but it does have the downside of being relatively inflexible, as if the environment is ill-suited to a particular class of bond there is nowhere else for that fund to seek returns.
Our preferred approach is to allocate to strategic bonds funds, which can be flexible and switch between different parts of the bond universe depending on the fund manager’s view of the road ahead. Each strategic bond fund has its own style, of course, and so we blend some together to achieve broad, but dynamic, exposure to the full array of opportunities in fixed income at various parts of the risk spectrum.
One such example is the Allianz Strategic Bond Fund, in which we first invested in April 2019. Coming into this year the fund management team were relatively bullish, but as the gravity of the Covid crisis became clear they moved very defensive, increasing duration and taking short positions in some high yield credit and currencies. That move really paid off, but as central banks and governments waded in to shore up economies, the Allianz team turned more aggressive in positioning and bought long-dated investment grade bond positions, a move which served investors – including ultimately Jupiter Merlin clients – very well. This is indicative of the sort of flexibility and high conviction approach that we look for in a strategic bond fund.
Source: Morningstar, bid to bid, net income reinvested. Period 1 January 2020 to 31 October 2020. Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell.
The term ‘ESG’ – environmental, social and governance – is a way of measuring how well a company is being managed by its executive team. It includes a great many factors including climate change, employee working conditions and financial stewardship. Momentum behind ESG is accelerating, fuelled not merely by fashion, politics or regulation, but by the most simple driver of all: flows of client money.
Since 2017, the global active equity industry has seen cumulative outflows of around -$140bn, whereas there has been an inflow of $65bn into ESG-focused active funds. It goes beyond equities, as companies and governments launch ‘green bonds’, including just recently the UK. It is a true multi-asset phenomenon, and any portfolio managers who ignore ESG in their analysis are swimming against the tide, and may miss out on arguably one of the strongest investment trends of our time.
You may think ‘ESG’ as a concept is new, but in fact it goes to the heart of what investing has always (or should have always) been about. When you buy shares, you own a small part of that company and its management are simply your managing agents, appointed to preserve and enhance those assets over the long term. This is best achieved through effective stewardship and strong strategic governance for all stakeholders (including shareholders, employees, customers and society in general).
What is the best way to access ESG opportunities? It may be tempting to take a passive approach, but how much impact can a passive investor really have when they are obliged to invest in many thousands of companies regardless of how each company approaches ESG. Even those with large resources can only do so much, and perhaps it is less than you think. One passive house with over £400bn in AUM and a market-leading reputation for ESG engaged with 493 companies in 2019, which may sound like a lot but is only a small fraction of the total global equity universe in which their funds are invested.
Active funds, meanwhile, can take a more targeted and proactive approach to ESG engagement, maintaining close dialogues with every company they invest in, building up those relationships over time and applying appropriate pressure to management teams. Crucially, if a company won’t take ESG seriously enough or is unable to address its issues the fund has the option of just walking away and investing elsewhere.
This is another reason why we invest predominantly in actively managed funds in the Jupiter Merlin Portfolios. Every six months we meet with each fund we hold and review the full list of their holdings, providing a forum for us to talk about tangible ESG outcomes for the stocks held in these concentrated portfolios.
Longstanding clients of ours will have heard us say this many times before, but it bears repeating: patience is critical to long term investment success. We’ve seen many fund managers over the years who have eroded whatever alpha they might generate through excessive trading costs, or through allowing their portfolios to be whiplashed from one extreme to the other as the market fluctuates.
When selecting fund managers, we prefer those who will seek to grow our clients’ wealth slowly in a controlled manner, rather than taking risks trying to hit the cover off the ball in search of fast glory. That is as true today as it was 20 years ago. So whatever the coming months may hold for Covid vaccines, US politics, Brexit, inflation or anything else, we will strive to keep cool heads and remain focused on one thing above all else: being responsible and effective stewards of our clients hard-earned wealth.
Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
Fund specific risks: The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.
Important Information: This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Past performance is no guide to the future. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Holding examples are not a recommendation to buy or sell. Quoted yields are not guaranteed and may change in the future. Issued by Jupiter Unit Trust Managers Limited (JUTM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ which is authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM. 26602
