The week in review

What’s happened in markets?

With Asian markets closed at the end of the week of 8 February for Lunar New Year, we have switched this week’s market overview for an insight into the rationale for our approach to alternatives. Please scroll to see.

The UK met its mid-February target of immunising everyone over the age of 70 that wanted the jab¹. The vaccination of this most vulnerable group raises the prospect of the UK government easing some restrictions in March. In the US, meanwhile, its COVID taskforce is seeking to increase its vaccine supply to allow for “a mass vaccination approach” by April for everyone who wants a shot to get one. In sharp contrast, Japan only begins its inoculation programme on Wednesday 17 February.

The US fiscal stimulus bill continued to progress through the various House of Representatives’ committees during the week of 8 February, as the Senate split its time between the spending package and Trump’s impeachment proceedings, which saw him acquitted on Saturday 13 February. Momentum is nonetheless building behind the Biden stimulus package, with plans to push it through by the end of the month. Meanwhile, the Federal Reserve is not seeking to make any move anytime soon on interest rates¹, instead focusing on “achieving and sustaining maximum employment” through its monetary policy”. Its chair, Jay Powell, highlighted the “hidden slack” in the labour market, and that unemployment is currently about 10% versus the published 6.3%².

In the UK, the release of gross domestic product (GDP) data surprised on the upside at 1.0%, rather than the 0.5% expected for Q4, although markets are aware that this precludes any impact from the last minute UK-EU Brexit deal³. And while reports published state that the negative impact on GDP is likely to hit the UK more than the EU¹, the Bank of England’s chief economist likened the UK economy to a “coiled spring”, whereas the European Central Bank president suggested more support might be needed, given the limited progress on its vaccinations rollout, and downgraded growth forecasts for 2021 to 3.8% from 4.2%.

Equity markets all ended the week of 8 February in positive territory again, with Asia (+1.61%) and Emerging Markets (+1.48%) continuing to outperform while developed markets were quieter (+0.74%). At the sector level, cyclicals outpaced defensives, led by energy (+2.51%) on higher oil prices, while utilities (-2.00%) were bottom of the heap, with rising bond yields not helping the sector’s cause. Oil is benefiting from reduced supply and the cold snap in the US and Europe, which incidentally is also boosting wholesale electricity prices, which in turn is good for renewables.

What’s happened in portfolios?

Until Friday 12 February, all the portfolios were shaping up for a strong week. Then, two discounted capital raises were announced by two of our investment trusts: Greencoat UK Wind and Target Healthcare. These announcements temporarily knocked the share prices of these investment trusts and our other holdings in these sectors.  The reason it impacts other holdings is that investors, quite rightly, see The Renewables Infrastructure Group, the two Greencoat trusts and John Laing as relatively interchangeable.  The same is true of Impact Healthcare and Target in the care home sector.  While the Greencoat issue closes on 16 February, the Target fund raising will not close until 25 February, so we can expect pricing to continue to be affected for it and Impact until that date. All things being equal, the price should recover after the raise.

On the fixed income front, expectations regarding higher reflation figures have pushed bond yields higher, with most major markets seeing their 10-year government bonds rising, between 0.25% to 0.40%, since the start of 2021.  Meanwhile, UK government 10-year gilt prices are down -4.3%, with plenty of other sovereign bond indices also off, between -1.5% to -2% year-to-date. Importantly, our ultra-short duration has helped mitigate these market movements, while our bias towards credit has also supported portfolio performance.

Insights into alternatives

We have often talked about our rationale for not including bitcoin and gold, as well as hedge funds, in our portfolios. While the bitcoin debate continues to draw interest, particularly after Tesla confirmed it had invested US$1.5 billion in the virtual currency, it came amid renewed warnings – this time from Janet Yellen, the US treasury secretary, who warned of an “explosion of risk” from criminals using it. For this, and other reasons, we continue to exclude bitcoin from our portfolios.

Instead, our alternative strategies have been made up of a portfolio of investment trusts that typically return equity-like returns, with lower volatility, and which enjoy some built in inflation proofing. In addition, these assets are usually moderately correlated – i.e. they do not tend to move in tandem with either bonds or equities.

Of course that was not the case in March 2020, when all asset classes nose dived in tandem. In addition to the lower risk attributes and high dividend payments of 7-8% (the inflation protection element mentioned earlier), these investment trusts enjoy another important benefit: liquidity.

Because investment trusts are closed-ended, there will be periods in which we will see discounts (as is currently the case for Greencoat and Target), in particular when there are new capital raises. However, unlike their open-ended counterparts, these trusts do not experienced gating. They remain open to the opportunity for investors to pull their funds, which during the Covid crisis would not have been the case if you had invested in an open-ended UK property fund. However, we will remain invested until we see the discounts narrow or the funds return to a premium share price. This would be a return to normality, given the multiple benefits these investments bring, in addition to staying in touch with equity markets.

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