Dear Clients,
2020 delivered decades-worth of financial markets action in one ridiculous year, challenging portfolios in all asset classes beyond the toughest imagined stress tests. Their behaviour under these extraordinary conditions – both in the most severe crisis and the historic recovery that followed – gives us confidence for the long-term.
Crisis: Parking The Bus
Considering that markets generally go up, we spend a lot of time and effort thinking about defence: planning for what might happen to your portfolios when markets go down – because that’s when bad decisions are generally made. We design portfolios to be robust in a range of possible “bad times”.
Until a crisis occurs, we can’t know if our efforts have been successful. In March 2020, we had a crisis; and not just any crisis: the fastest collapse in asset prices in nearly a century which made for the ultimate test of our portfolios. Here’s what happened in two typical Foundation and Enhanced Beta portfolios (dark lines) compared to world equity markets for reference (red lines):
Portfolios behaved as planned and hoped for during this crisis. The lowest risk portfolios fell a fraction of the wider market; higher risk portfolios fell more, but still less than the market; and there were no sleepless nights. Intelligent diversification paid dividends; some funds even went up in the crash, helping to deliver a smoother, less chaotic experience in our portfolios.
Recovery: Turning Defence Into Attack
Our focus on mitigating the bad times is not at the expense of seeking returns. Far from it; we aim to deliver the long-term target return for each client’s portfolio but with a journey appropriate to each risk profile. In this respect, progress since the recovery began in April has been pleasing.
For clients who have invested in venture capital through tax-efficient vehicles, exposure to high-growth companies often in sectors such as e-commerce and life sciences has also been beneficial as societies around the world adapt to life under lockdown. Examples (with latest multiples) include:
What Happens Next?
We caution against too easily accepting any one interpretation of how the future might unfold; better to have considered and positioned for many outcomes. The core of our advice remains the same: keep recycling surplus capital into diversified portfolios of liquid and illiquid assets uncorrelated to existing wealth.
Faisal Sheikh, Managing Director
Monday 4th January 2021