Quarterly Portfolio Update – Q4 2020


with Scott Mordrick, CFA

The third quarter of 2020 saw less excitement in markets than was seen in the first and second quarters, as markets (and indeed the whole world) understand more about Coronavirus and how this pandemic has manifested itself into our current way of life.

I say understand more, we are of course still in the dark to some extent. Timescales for a vaccine to be approved still remain vague (11 vaccines are in Phase 3 testing – experts expect at least one of these to be ready by the middle of next year); and the subsequent timescales for a return to life as it were pre-COVID-19 is also unknown. On top of that, if you live in the UK, what restrictions, how they are imposed and who imposes them is seemingly ambiguous too!

As we discussed and expected at Investment Committee Meetings, a second wave, or resurgence, would be seen around winter (into which we are now entering); what we didn’t know was how tight restrictions would be. It is still too early to tell, but it would be the committee’s collective judgement that the approach now being adopted by the Government is counterproductive. That is not to say we believe a laissez-faire approach is appropriate; quite the opposite. Social distancing (I’m sure everyone is loving the catchy Hands, Face, Space adverts!) and protecting the vulnerable absolutely make sense. But the severity of lockdowns being proposed (and in the case of our region of Essex for example, implemented) have not been shown to effectively slow down the spread. Of course, when the virus first became part of everyday life and we knew very little, the lockdown measures imposed made sense. Better to be safe than sorry. But now we are wiser.

The economic impact around the world has been plain to see; so to impose restrictions that will hit businesses, particularly smaller ones and those in the hospitality sector, will be painful.

Having offered significant support to individuals and businesses through the Furlough Scheme, the Coronavirus Business Interruption Loan Scheme and tax payment deferrals, the initial consensus was that the statement by Mr Sunak in September was to lay out terms of how to repay this massive amount of borrowing. But, with further restrictions being imposed through local lockdowns, the Statement became the ‘Winter Economy Plan’ with further support for jobs, individuals and businesses affected by said lockdowns. And of course, we are glad the Government has stepped up to offer more support. But the key question is how (and when) will the country pay for all of this. One could argue, however, that if the country is going to borrow a significant amount of money, now is one of the cheapest times in history to do so. Despite UK debt exceeding £2 trillion for the first time, interest rates remain at all time lows of 0.1% and servicing the debt (i.e. the interest payments payable) as a percentage of GDP, remains at near record lows (around 1.9% of annual GDP).

So are we in a second wave? Well perhaps the colourful graphs offered to us by medical experts at press briefings would make it seem. At one of the more recent Downing Street conferences, a graph predicting potential case numbers showed that cases would rise substantially if there was no extra intervention from the Government. But questions should be asked about the reliability of this data.

There is no doubt that cases are rising again, but how do they compare to what we saw at the start of the outbreak? In modelling by the same experts, they predicted that ~8% of a cross-sample population in the UK were infected with COVID-19. This has been generally accepted as a fair estimation (some sampling/analysis actually yield slightly higher estimates). Regardless, the current population of the UK is 68 million, and therefore 8% of the population equates to 5.5 million having had the disease during the first few months of it reaching our shores. The number of confirmed cases over the period to end of August? 340,000. The point here is that the magnitude of number of cases this time around pales into significance compared to what we probably saw between March and June; it’s just there was insufficient testing and data captured. But they know this, or at least they should do, right?

And so, you have to wonder how decisions are made at SAGE meetings; if the evidence shows that the ‘spike’ this time around is most likely a small proportion of what we saw in Q1/Q2 and that these restrictions do little to reduce the spread of the virus (but do significant economic damage), how can the justification be to plough ahead with these draconian measures?

With all the uncertainty surrounding Coronavirus and the wider reaching impact on property, it is of little surprise that the property funds have remained shut since the start of lockdown. As we mentioned in the Q2 Portfolio Update, many of the direct property funds gated, meaning investors could not withdraw or invest money. As the volatility and uncertainty dissipates somewhat, we have seen these property funds begin to reopen to new business (and more likely to pay redemptions). The Financial Conduct Authority (FCA) is currently consulting on proposals to reduce the potential for harm to investors from the liquidity mismatch in open-ended property funds. The new rules as proposed would require investors to give notice – potentially of up to 180 days – before their investment is redeemed. It is likely the asset management industry will fight these proposals, as restrictions like this will surely damage their reach, particularly in a world of people wanting/needing/demanding liquidity.

The four years are nearly up for Donald J Trump as he bids for his second term; his opponent this time, Joe Biden. In a time where America has been most vocal about Black Lives Matter, equal opportunities and diversity, it is perhaps somewhat ironic (and unsurprising) that their choice for next President is between two septuagenarian white men.

Whilst the polls do point to a decent majority for Joe Biden and the democratic party, it is perhaps too early to call, particularly as we have seen how well these predictive polls have fared in the past. The reason that these pollsters believe they are more accurate this time is there are fewer undecided voters (I find it implausible how one can sit on the fence when it comes to Mr Trump). What could be a more pertinent issue is how the results are announced; there is a significant probability that the republicans will be ahead on the night/following morning of the vote count. However, once the postal votes come in (which, according to Donald Trump and others are susceptible to being rigged), that is the point at which we could see the pendulum swing in favour of Biden. The result could be a highly contested result and, perhaps, lead to some kind of constitutional crisis. Lots of if’s and but’s, but whatever the result, it will no doubt be an enthralling watch.

Saying that, we in the UK aren’t exactly in a position to sit on our high horse – Brexit’s back in the news! Although the UK officially left the European Union on 31 January 2020, negotiations have still been ongoing to tie up deals with our European neighbours to ensure trading can continue smoothly. If a deal is not agreed by the end of 2020, the UK and EU would do business under WTO rules from 01 January 2021. Current noises from the UK Government intimate that British businesses should get ready for no-deal, in what appears to be a game of chicken that could end up turning out horribly wrong for BoJo and Co. At the time of writing, Boris’s 15 October deadline has been and gone; that is not to say a deal can’t still be done, but time is running out!

What has perhaps been one of the more interesting stories over the past few months has been the interjection and interference of social media and tech companies in the aforementioned US election. In the past couple of weeks a story broke pertaining to information about Joe Biden’s son and the work he was doing for a Ukrainian energy company (for which he was paid a vast sum to sit on the board). We will of course allow you to read the article at your own leisure and make your own judgement. The issue here was that Facebook and Twitter both decided this news story was not something permissible on their platforms, despite it being written by the New York Post (a mainstream news outlet with significant circulation). The reason, according to Twitter, was that it was hacked data containing private information (unlike say, Donald Trump’s tax returns freely shared several weeks prior). These are the same sites that took nearly 20 years to ban holocaust denial now banning a news article which casts doubt over their preferred Presidential candidate in just 20 seconds. Both sites have subsequently U-turned on this decision to ban the material, after facing significant backlash.

The question therefore is are these companies really open platforms for people to express their opinions, or a news media outlet? Perhaps my heckles were already up having just recently watched the Social Dilemma on Netflix (again I would recommend giving this some of your time), but these companies should be aware that this total lack of regulation (and taxation) is unsustainable. We remain vigilant over our exposure to this sector, which despite all these concerns has continued to race away (from a share price perspective) this year so far.

Although this may seem like the musings of a negative Nelly, we do have plenty of reasons to be cheerful. As we mention in the following pages, we see economic growth picking up. It is important to remember as well that, although it may seem like this is lasting forever, in the grand scheme of things this is a short term issue. Hopefully we can all look back on this in a year’s time and be thankful it’s over. From an investment viewpoint, we continue with a well diversified approach, and have continued to benefit from our portfolio positioning. If you would like more information on the performance of our portfolios, please get in touch. Once again, from all of us here at Montage, stay safe and we will hopefully see you soon.


with Steve Williams

Following a decline of 2.2% over the course of Q1, the Office for National Statistics (ONS) estimates that gross domestic product (GDP) fell a whopping 20.4% during Q2.

To put that into context, our economy shrank by no more than 2.1% in any of the five quarters of consecutive decline during the ‘Great Recession’ 2008/09 crisis. Before we even get to Q2, the Q1 2.2% fall during the current crisis is remarkable enough; it’s tied with Q3 in 1979 as the 4th worst decline in modern record.

Needless to say that Q2’s 20.4% contraction occupies the top spot, with Q1 in 1974 in second place at 2.7%. That’s right, hitherto the worst quarterly decline was just 2.7%.

The data set indicates that Q2’s 20.4% decline was rooted in a more severe decline that occurred during the month of April. The ONS estimate reveals that the British economy actually grew during May and June, increasing by 2.4% and 8.7% respectively.

Of course, the record will show that the UK economy was in recession during Q1 and Q2 in 2020 and that it is the worst recession in modern British history. What will be lost is that almost all of the damage was done in a period no longer than 61 days, during March and April. We expect the data to reveal an expanded economy during Q3, bringing an end to the run of consecutive quarterly declines that usually characterise a recession. And we’re not expecting a small increase during Q3, we’re expecting a big one: the biggest on record, in fact. Thus far, the largest quarterly increase occurred during Q1 in 1973 with a jump of 5.0%. We’ve got our sights on ~12.0%, which seems pessimistic compared to NatWest, Morgan Stanley and Bloomberg, who estimate increases of 19.6%, 18.0% and 17.0% respectively. Mind you, we expect they’ll revise those forecasts down in light of August’s poor showing – ONS estimates suggest GDP expanded just 2.1% (versus expectations of 6.4%), despite the government’s efforts to encourage consumers to spend. However, there is a reasonable amount of evidence (such as that provided by Andy Haldane, Chief Economist at the Bank of England, in his speech on 30 September) to suggest that Q3 GDP figures are of limited consequence to long-term investors, even in the short term; at the moment, the UK stock market is barely reacting to economic data. Even with August’s disappointment, the British economy stands 21.7% higher that its April low and 9.2% lower than it’s February high.

We remain relatively optimistic, although not without an appreciation of downside risks – not least the threat posed by rising infection rates and the potential for another nationwide lockdown (or widespread local lockdowns that approximate another national lockdown). Even with a historically high rate of expansion in Q3 and further strong gains in Q4, that incredible period of decline during March and April leaves us still with a sizable hole in GDP for 2020.


Bank of England base rate

August’s weaker-than-expected GDP estimate will likely see the Bank of England add to it’s stockpile of British government bonds and, perhaps, investment grade corporate bonds during the remainder of the year. That will ensure that the government will enjoy negative yields on borrowing (on maturities as far as 6.5 years on today’s process) for a while longer yet. That is one of the reasons we remain reasonably calm in face of government borrowing which, in the UK, has hit £2 trillion for the first time. Eye watering debt levels have been match with bargain basement yields. Indeed, the government can borrow at a cost of 0.2% at the 10 year horizon and, believe it or not, at just 0.7% for debt that doesn’t mature for 40 years.

More Quantitative Easing – perhaps another £100 billion added to the existing £745 billion – or QE is as far as we expect the Bank to go, at least in the short term.

There has been a great deal of speculation about the potential for Bank Rate (often referred to as ‘base rate’) to be driven into negative territory. That is possible, but we think it will only come about if the outlook deteriorates significantly from here. We suspect that there is a majority on the Monetary Policy Committee that remain sceptical of the effectiveness of negative rates as a policy tool.

Even so, conditions would have to deteriorate still further for negative rates to be passed on to savers in high street deposit accounts. Given what we know today, we think it unlikely that savers will see negative rates passed on to them even in the unlikely event that the Bank of England does experiment with policy rates beyond the zero bound.


UK Consumer Price Index (CPI)

In our estimations, it remains unlikely that consumer prices will trend higher in the near term. The Bank of England’s most recent assessment reflects their expectations for the year-on-year rate of increase in the Consumer Price Index (CPI) to finish this year around 0.3 before rising gently to close to the 2.0% target by this time next year.

We are conscious that a number of investors remain concerned that today’s stimulus – both fiscal and monetary – might encourage high inflation in the long-run. That is a risk we are alive to and we remain vigilant. Our best guess, at this time, is that inflation remains reasonably well-behaved.


with Peter Montague

If the International Monetary Fund’s (IMF) estimates are accurate, our neighbours over in the euro area will lose around 8.3% of in terms of gross domestic product during this year. Spain will be worst hit with a decline of 12.8% and Italy and France will see declines of -10.6 and -9.8% respectively (broadly comparable in extent to the forecast loss in the UK).

Meanwhile, Germany is projected to see a fall of something like -6.0%. Projections for next year are, more or less, symmetrical. By and large, those countries experiencing the steepest declines this year will enjoy the sharpest inclines next year.

Gains of 7.2%, 5.2%, 6.0% and 4.2% are pencilled in for Spain, Italy, France and Germany respectively.

None of those rebounds are enough to catch up with what is lost but it ought to be clear by now that the IMF is calling for a relatively rapid recovery. That makes good sense to us, at least given what we know today. All across Europe, the capital markets are functioning and those ‘natural’ forces are bulwarked with huge fiscal and monetary support.

Across the Atlantic, the IMF expects the US economy to fall 4.3% this year – testament to both the good shape it was in prior to the pandemic and its resilience more broadly. It is expected to gain around 3.1% during 2021. These numbers ought to be, of course, taken with a large pinch of salt – financial forecasts are prone to a large degree of error – but it is the US numbers that attract the greatest level of uncertainty. The outcome of November’s presidential election will have an oversized influence. A seemingly unlikely win for Donald Trump will likely see that 2021 figure inflate considerably.

Japan is expected to weather the storm comparatively well, falling 5.3% this year. However next year’s forecasted 2.3% isn’t particularly inspiring. Doubtless the country’s new Prime Minister, Yoshihide Suga, will be hoping for more than that.

The IMF envision the most vigorous recovery among the emerging market economies next year. In the aggregate, following a decline of 3.3% this year, the emerging and developing bloc will see a gain of 6.0% next. Chinese output is expected to increase at 1.9% this year and accelerate to 8.2% in 2021. India and Brazil see declines of 10.3% and 5.8% respectively with recoveries in the order of 8.8 and 2.8% next year


with Scott Mordrick, CFA

With the exception of MPM000 and MPM010, the portfolios posted positive returns for the third quarter of 2020, with the more adventurous portfolios posting the highest positive returns. This is pretty good going, particularly on a backdrop of UK equities losing nearly 5% over the same period. Only MPM000, MPM010 and MPM020 underperformed their respective benchmarks over the quarter; all other portfolios generated returns greater than their benchmarks. Over the year to date each portfolio remains comfortably ahead of its respective benchmark.

Positive Contributors
The positive contributors to performance over the quarter were:

  1. Favouring Corporate Bonds over UK Government Bonds. Investment Grade and High yield Bonds made money during the quarter whilst UK Gilts fell.
  2. The performance of our international equity managers, particularly those with a growth style of management (i.e. invest in companies that they expect to continue to grow at a faster pace than other companies).
  3. The performance of our specialist investment funds, namely the Smith & Williamson Artificial Intelligence fund, the positive impact Impax Environmental Markets trust and the Merian Chrysalis Trust, which all had an extremely strong quarter.
  4. Maintaining a significant underweight to property, which continues to lag versus equities.

Negative Contributors
The negative contributors to performance over the quarter were:

  1. UK Value managers, which struggled again during the third quarter.
  2. The Healthcare fund, which fell during the third quarter, affected somewhat by the increasing probability of a Biden win (which in turn could lead to greater regulation of the healthcare/pharmaceutical sector).

Portfolio Changes

The committee agreed to rebalance just once during the third quarter of 2020. At the end of September 2020, the committee agreed to slightly reduce the allocation to Gilts (specifically medium and long dated Gilts), and increase the allocation to Corporate Bonds and High Yield Bonds. The committee replaced the Standard Life Total Return Credit with the Nomura Global Dynamic bond, as the members feel the Nomura fund offers better long term potential returns. The committee also agreed to remove the Merian Financials Contingent Capital Fund. Following the purchase of Merian Asset Management by Jupiter Asset Management, the fund was transferred across, but the management team were let go (as Jupiter felt they had sufficient Fixed Interest fund managers). The committee do not think that Jupiter the existing Jupiter investment team have sufficient expertise to continue to run this strategy. The team previously running the Merian fund have now been hired by Premier Miton, and subsequently, the committee agreed to replace the Merian Contingent Capital fund with the Premier Miton Strategic Monthly Income fund.

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