An update from Julian Menges on the moves he and the team have been making on the Hardy Managed Portfolios throughout 2019 and more recently over the past weeks…
News flow and the ongoing uncertainty over the coming weeks is likely to be unsettling for many. Individuals, whole families and many businesses will be extremely worried about how the coronavirus will affect them and their finances. All investment markets have been impacted.
However, this crisis will pass just as previous crises have passed. I started my career in 1986 and witnessed my first crisis “Black Monday” on 22 October 1987, when the Dow Jones index of leading US stocks fell 22.6% in one day. This “coronavirus crash” has seen US and UK equities fall about 30% over the last month. While this virus is having a significant impact on the global economy, it is important to remember that all bear markets have a different cause and effect, but that they also lead the way to the next phase of economic growth and market recovery. We should continue to have great confidence in the ability of people to be resilient, to adapt and to find new ways forward.
Before updating you on our current thoughts and how your clients’ portfolios are positioned, I think it would be helpful to recap on how the portfolio has evolved over the last year or so, what we did in the January rebalance to reduce risk and what we have done in the last few days.
Key portfolio changes during 2019…
- Bonds: sold all strategic bond funds and moved to Gilts and high quality corporate bond funds.
- Equities: reduced the overweight to “growth” funds by adding some “value” funds to move more neutral overall; we also reduced exposure to higher risk Europe and Emerging Markets.
- Property: sold all UK physical property funds
- Alternatives: introduced a small exposure to gold as “insurance” given the increasing perceived risks.
January 2020 rebalance…
Equity markets were hitting record highs, but we saw growing risks particularly around the bond and repo markets (the repo market is where banks lend to each other on a short-term basis, and when this started to freeze we could see that confidence in the financial system was beginning to crack). We made 3 key changes to reduce risk within portfolios:
- Bonds: we further improved the quality of our corporate bonds.
- Equities: we reduced equities from overweight to neutral and introduced a more defensive US equity fund.
- Cash: we increased to overweight (Balanced portfolio to 10%).
The outbreak of coronavirus – the ‘pin & the bubble’…
The last few weeks have seen dramatic fluctuations in all markets. The spread of coronavirus and its impact on the global economy is being cited as the reason that share prices have fallen so rapidly, yet the reality is that this is just the pin that pricked the bubble. The continual intervention of central banks in financial markets for over 10 years has encouraged risk-taking that created a financial system that was fragile and hence less able to cope with a shock.
We have been highlighting for many months that bond markets were becoming much riskier than many perceived, particularly with regard to the potential lack of liquidity. The outbreak of the coronavirus is the relatively “minor” shock that has caused ripples throughout vulnerable markets.
As equities have tumbled, some money has poured into certain government bonds as a perceived safe haven. Certain corporate bonds were also being supported. The impact on global markets was becoming so significant that only concerted intervention by major central banks and governments would be enough to try to restore confidence.
We felt that bonds were becoming too expensive and equities oversold. We have therefore made the following changes last week:
- Bonds: 10 year Gilt yields had fallen to just 0.2%, so we reduced exposure from overweight to neutral (Balanced portfolio reduced from 8% to 5%), and reduced corporate bonds by a third (from 14% to 9%), through the sale of Fidelity MoneyBuilder Income.
- Equities: added 5% to equities, spilt equally between the US and UK, via existing passive holdings.
- Cash: remains overweight so that we maintain flexibility over the coming weeks.
Fears about the economic implications of coronavirus has caused share prices to be marked down aggressively; forced liquidations have caused further markdowns and volatility in bonds, property and commodities.
Significant issues remain, and we could see some form of restructuring of parts of the financial system as a result, but we believe that the virus will pass, the global economy and earnings will recover, and so we have been taking advantage of the opportunities being presented to us.