Gaining context

Posted by Guest in Fund and industry updates category on 27 Mar 20

The update below is authored by Rathbones and reproduced, with permission, by Willis Owen. This page should be read in conjunction with the investment risks below.

March 2020

This article has had several false starts. We’ve repeatedly tried to put pen to paper (or fingers to keys) before getting drawn away by the traumatic market moves, simply just sitting back and taking stock of what is happening. The speed at which the coronavirus is taking hold will provoke further dramatic reactions. We do not pretend to have any answers, but we do have intentions and disciplines which we wish to outline.

What are we seeing …

Market volatility will persist, driven by news, exacerbated by the lack of liquidity. We are all dealing with a set of events that we have never come across before. And by ‘we’ we mean everyone: politicians, investors, businesses, consumers, old and young, rich and poor. Things will change, and the first thing for us to do is to remind ourselves that we cannot predict the future, so our decisions should reflect humility and the relative paucity of our knowledge.

The Covid-19 pandemic will take its course; we hope that the outcomes are better than feared, for reasons substantially more important than global markets. If fiscal stimulus wasn’t on the cards prior to these events it most certainly is now, and governments may need to make some dramatic decisions. If 2008 saw huge monetary stimulus, 2020 may invoke dramatic fiscal stimulus geared towards individuals and small businesses. The UK government has already promised £12 billion of combined aid for the NHS, small business and households, and pressure will be upwards. Expect further monetary and fiscal stimulus.

… And what we are doing

Let’s not further complicate an already-difficult and fast-moving set of circumstances. We revert back to first principles, and this means looking to mitigate losses and secure our dividends. This market is going to break things. The rules have changed and we must act accordingly. If this means that we have to swallow pride and crystallise losses, so be it. But volatility will also throw up opportunity.

We do own businesses for whom the coronavirus is an existential threat through a combination of falling revenues and persistent costs, perhaps exacerbated by debt. Good days in the market will be used to reduce this exposure. By our own estimates they make up about 5% of our portfolio. We are stress testing our dividend forecasts. Although a large proportion of our income has already been defined in full-year numbers, there will be pressures in the second half and into next year. None of this is beyond what we do anyway, however, it’s just that we are exercising even greater vigilance and urgency today.

Expect us to hunker down in more defensive sectors, such as pharmaceuticals, consumer staples and utilities, and retreat from areas of more distressed value – for the short-term at least. A significant risk in our core exposures remains the oil sector. And with yields at eye-watering levels, there is a clear challenge to the sustainability of these companies’ dividends, especially in light of the recently fractured OPEC/Russia relationship.

Beyond the energy sector, we are also reviewing our cyclical exposure in light of the inevitable brakes on global growth. Once more we are focusing on the appropriateness of debt levels and the security of dividends. Fortunately, in the early throes of the turmoil, these disciplines have held us in good stead. In light of our risk-based approach it is incumbent on us to outperform a falling market in a meaningful way.

As markets and economies evolve, new opportunities will arise. There will be a point in the future when some great businesses are up for sale at bargain prices. New areas of the economy will come alive – humanity needs to revamp approaches to healthcare. Today’s events show how important it is to be able to work – and study – remotely. Should we be looking at ways to take advantage of technology names in our fund, especially if prices retreat further?

The key will be to ensure that we are in great shape to take advantage of these opportunities when they occur; to move from defence into attack. Now is not the time, but it will come.

This is a financial promotion relating to the Rathbone Income Fund. Any views and opinions are those of the managers, and coverage of any assets held must be taken in context of the constitution of the fund and in no way reflect an investment recommendation. Past performance should not be seen as an indication of future performance. The value of investments may go down as well as up and you may not get back your original investment. Performance data is sourced from Financial Express, mid to mid, net income re-invested.