12th April 2024
We Brits love complaining about the weather and this year every conversation has started with a moan. Although, living in Devon it has only rained twice in the last 6 months – once from November to January and then from February to April! Linking the weather with investments reminded me of the Hawksmoor classic Ecclesiastes quote, “Those who wait for perfect weather will never plant seeds. Those who look at every cloud will never harvest crops”. There are a couple of reasons why this quote has become topical.
First, it’s worth revisiting our research article from August last year titled ‘Cash is no longer trash, but we can do better’ (link here). During the choppy markets of last year, it was very tempting to shelter in cash yielding 4-5% instead of embracing the volatility and putting capital to work in other asset classes. The certainty of a 5% cash return, a level not seen for 10 years, was appropriate for investors that were very risk averse or only had short time horizons. However, we argued that the opportunity cost of holding cash was very high over a longer-term investment horizon considering the value on offer across a range of asset classes we owned in our multi-asset funds. In addition, we emphasised the danger of having too much exposure to cash given inflation was likely to moderate from multi-decade highs which could lead to the Bank of England cutting interest rates. This would diminish the returns on cash, at the same time as being supportive of the valuations of riskier assets. Though the Bank of England hasn’t cut interest rates yet, market expectations for rate cuts have increased since our August note.
Whilst we, nor anyone else, will ever be able to predict turning points in markets, we were confident that the extent of the opportunities and value embedded within our funds meant that on any sensible investment time horizon, typically at least 3 years, those opportunities should turn into profitable investments. We are certainly not declaring any sort of victory only 8 months since that research note, but already, the returns generated by most asset classes has far exceeded 5%, let alone the cash return of closer to 3.5% since August). As at 09/04/2024 the MSCI World Index in GBP is up almost 19%, the UK equity market is up nearly 12%, while our Global Opportunities, Distribution and Vanbrugh funds are up 11%, 9.9% and 9.4% respectively. There is likely to be more volatility over the short term, but we still remain confident on the 3-5 year outlook for our portfolios beating current cash rates.
The second reminder of the Ecclesiastes quote was another mention of the phrase “I don’t know if the bottom has been reached so I’m prepared to miss the first 10% and then invest”. We have heard that said numerous times about UK equities over the past few months where the sector is demonstrably cheap relative to history and other asset classes, but still can’t attract sufficient buyers to help them rerate. Our meetings with UK equity managers over the past 12 months have all had the same common theme, namely that the relentless outflows from the sector have overwhelmed the positives from a fundamental corporate or UK economic perspective. It is no secret that for a number of years there has been an industry wide (wealth management and pension funds) switch out of UK equities into global equities. This has been motivated by a number of reasons, but key has been the desire to reduce the long-held home bias of as much as 40% of assets towards a global benchmark weight closer to mid-single digits, and the desire to lower the look-through costs for the end investor by increasing the allocation to low-cost passive strategies that are inherently more exposed to global equities. This is illustrated by the latest data from the Investment Association showing cumulative outflows of £50bn from UK equities since 2015 compared to cumulative inflows of £35bn to global equities. No wonder UK companies are cheaply valued compared to equivalent peers listed elsewhere. Indeed, Shell this week mentioned it is considering leaving the UK market and listing overseas purely to improve its rating. As shown in the previous paragraph, UK equities are up 12% since August, so where are those buyers who were prepared to miss out on the first 10%? Cue GIF of Delia Smith shouting “Where are you? Let’s be ‘aving you!”
Let’s hope it stops raining soon so the real farmers can plant their seeds for this year’s harvest, and, less importantly, so we can actually leave the house without needing coats and wellies in April!
Daniel Lockyer – Senior Fund Manager
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