Come the middle of March, even the most optimistic of investors would have been hard-pushed to state, with any conviction, that they would be in the black come the end of 2020.
But, if you review the average multi-asset/multi-manager performance figures, this is what we see. Of course, as in most years, there was huge disparity in returns across investment managers. But this variance was exacerbated for 2020. This can be evidenced in the IA Mixed Investment Sector 20-60%; where the best performing multi-manager fund returned 8.8%, whilst the poorest performing multi-manager fund lost 8.2% and the average fund in the space was up around 3.5% (for reference, MPM060, which would sit within this sector, finished up 10.6% for the year).
It is true that from a risk perspective, investing in 2020 seemed precarious; according to Standard Deviation figures for the UK equity market, volatility in 2020 was double the long term average. However, there were only really two months in which all markets (and therefore the MPM portfolios) saw notable drops; February and March, when the severity of the COVID-19 pandemic was first realised and filtered through into markets.
But after that tumultuous first quarter, there was only one month in which we saw the portfolios (slightly) fall in value; October. However, had you turned on CNBC, Bloomberg or any other news channel in the middle of last year, the overwhelming consensus (particularly from hedge fund managers) was further market gloom and doom, the possibility of all time lows being tested and potential market collapses.
But it just goes to show how hard it is call short term market movements, whether it be a novice investor or seasoned professional. This is why we believe so fervently in the adage “Time in the market beats timing the market”. To know what the markets are going to do one day from the next is nigh on impossible to predict, but what has been shown consistently over time is that, yes there will be market drawdowns and times of volatility but, as investors, if we can ride these out, not make any erratic or dangerous calls, over almost all long term observable periods, well managed portfolios will generate positive returns, commensurate with the risk being taken.
So what spurred the great market revival from April onwards? Well, a large helping hand came from central bank intervention, as we mentioned in our Q2 2020 Portfolio Update. To address the economic shock triggered by COVID-19, the world’s four major central banks (the US Federal Reserve, Bank of Japan, European Central Bank and the Bank of England) expanded their Quantitative Easing programs in 2020 by a combined $7.8 trillion, to support not only the global financial markets, but also their economies. They also all lowered their interest rates to, in the case of the US and UK, effectively 0%, or in the case of Japan and Europe, into further negative territory. The Bank of England has, so far, resisted the temptation to negate UK Base Rate, but there is certainly a possibility we could see this in 2021.
There was of course good news in November as positive results were announced about the efficacy of the Pfizer-BioNTech, Moderna and Oxford-AstraZeneca vaccines, welcome news that life may soon be returning back to normal.
The economic effect of the COVID-19 pandemic and subsequent mass shutdowns is evident in Global GDP data, in which all five major economies saw a sharp contraction for the first and second quarters of 2020 (with the UK economy appearing to be the worst hit – likely due to a combination of lockdown coinciding with Brexit uncertainty). Pleasingly, each of the five major economies did subsequently rebound in the third quarter but, with the exception of China,they lag way behind their trend line.
We would expect global economic growth to continue on an upward trend in 2021, but the level of growth will likely remain subdued, at least until social restrictions are lifted. Based on the current plans for countries to roll out vaccines, this would lead to a slight positive first half of year with the 2nd half (particularly the 4th quarter) of 2021 looking extremely positive.
Other than the virus, the main news story over the last few months has been the US Presidential election which, despite the ongoing pandemic, saw the greatest US voter turnout rate in over 100 years – perhaps a sign of how politics (and the polarisation thereof) has seeped into more and more people’s everyday lives. The result saw Joe Biden named as the 46th President of the United States. As we predicted in our Q4 2020 Portfolio Update, the initial results showed Donald Trump leading the polls, but as postal votes came in, the tide slowly turned towards the Democrats. Although there wasn’t quite a constitutional crisis, it sure was not pretty; with Trump spuriously calling the election fake, refusing to accept defeat and ultimately leading to those disturbing scenes at the Capitol Building.
So what worked well in 2020? If you look at performances on a sector level, there is one clear standout winner – Technology. As we mentioned in our Q3 2020 Portfolio Update, the big 5 (now going by the newly coined acronym FAAMG), which are Facebook, Amazon, Apple, Microsoft and Google, make up a quarter of the S&P 500 Market Cap. An equally weighted basket of these five companies generated a return of 53% in 2020. What’s fascinating is that if you exclude the performance of these five stocks from the S&P 500, the index’s return for the calendar year is less than 5% (the actual return for the S&P 500 for 2020 was 16%). This shows just how much of an impact these companies have on the markets.
Other “success” stories included Tesla, whose share price rose an astronomical 750% during 2020. This significant share price increase meant that by the end of the year, Tesla as a business was worth more than the 9 biggest car manufacturers in the world, combined! This is despite the fact that Tesla sold less than 1% of all new cars during 2020. The numbers in isolation don’t make much sense at all (currently trading on 1,332x price/earnings ratio); but investors clearly believe the firm will undergo exponential growth. Tesla also has fingers in other pies (self-driving research, electric batteries and clean power storage), but in our opinion we see this as one of the most extreme displays of momentum investing. This leads us to the other “winners” of 2020, firstly Bitcoin. The cryptocurrency tripled in value over the year, as it became a more recognised form of currency (promoted by those influencers with a vested interest in talking up their own book). Some view it is a ‘safe haven’ as there is a known finite total resource of Bitcoin, unlike for example traditional currencies, whose gatekeepers (Central Banks) can, and have this past year, printed vast additional amounts. Whatever your opinion, it is likely that cryptocurrencies are here to stay, and we anticipate they will become more formally adopted, particularly by central banks. That is not to say we believe the current price for Bitcoin is well supported (we frankly find it near on impossible to truly value it today), as it is likely that greater adoption will lead to the creation of new cryptos.
The other sector which saw significant uplift in 2020 was ESG investing (Environmental, Social & Governance). Funds in this domain had a very good year as, like the other two, it became a hot trend. Investors piled nearly four times as much money in to these funds in 2020 compared to 2019. And we are of course big supporters of companies giving greater focus to ESG when it comes to running their business – long may it continue. In our opinion though the sector, and more specifically the way that investment managers classify companies as ESG friendly or not, seems to still be in its infancy. Companies need only have the right policies and make the right noises to score well. It doesn’t necessarily mean they are practising what they preach (take the recent free school meals débâcle with Compass Group – a company that scores very highly in ESG screens, yet has acted extremely poorly). And so, much like the underlying firms themselves, we expect and hope that this style of investment will continue to evolve.
Is it possible that the big winners of 2020 have their bubble burst in 2021? Absolutely, as the old saying goes “today’s news is tomorrow’s chip paper”. Just as quick as money flows into these themes can it flow out and onto the ‘next big thing’. That is why, as we always say, diversification is key. Our portfolios have certainly benefited by gaining exposure to some of these trends (namely Technology and ESG), but we try to ensure that we do not lop side the portfolios and overexpose ourselves to any one theme.
There were of course plenty of losers in 2020. Given the restrictions on travel, airlines and travel/holiday companies struggled during the year, as many had to cancel and be offered refunds. Energy firms had a tough year too (you may recall the saga surrounding oil and its price as we discussed in the Q2 2020 Portfolio Update). Many also fall foul of being on the wrong side of the aforementioned ESG trend. The other sector that felt the pinch during 2020 was property. As firms have been forced to adapt their work environment in light of the pandemic, it has perhaps given many business owners food for thought i.e. to review costs for offices and office space. The same can perhaps be said of retail property, where consumers have (again been forced to) significantly increase the amount of shopping done online, reducing footfall and perhaps the desire for shopkeepers to retain large and/or expensive floor-spaces.
Looking forward, the committee are cautiously optimistic for the economy, and subsequently the markets and the MPM portfolios. We remain bullish towards UK and European equities as we expect the overhanging issues regarding Brexit (and of course the pandemic) to wane. As mentioned previously, we expect global economic growth to start slow but ramp up towards the end of 2021 as we return back to normal. As always, from all of us here at Montage, stay safe and we will hopefully see you soon