Many people have taken a well though through and diligent consideration of the markets, but are you confident it was the right choice?
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As fund managers we see ourselves as risk managers before anything else. This includes the obvious risk of losing money but also the chances we make mistakes or miss opportunities. We try and weigh up all aspects of our portfolio and keep it under constant review to decide the right strategy. People are relying on us and we know what that means. Over the last 5 years we haven’t made any significant changes to the portfolios but we feel that may now need to change.
Overall we are very happy with how we have performed for clients. Our portfolios produced significantly higher returns than the average manager during the strong market from 2016 to the end of 2019 but we have also performed better than our peers during the recent crash.
Firstly a quick recap of our strategy to date. During the period of rising markets we felt able to hold low cost and broadly diversified passive investments in global stockmarkets and complement that with large positions in Government Bonds. We explained this had been to offer our investors the chance to participate fully in growth but also have insurance against any big falls in the market. Low interest rates and reasonable economic growth meant the environment for investing was good. We fully participated in the rising market but we were always aware that things could turn down. We prepared for problems and this has cushioned the fall for our clients and allowed us to safeguard more of your money than our competitors. During the recent falls in stockmarkets we have seen large rises in the value of Government Bonds as we predicted. The strategy we used worked well.
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The current events are going to change things. The Covid-19 crisis is made much worse by the shortage of critical care facilities globally. In the UK we have only 5,000 respirators and 5% of those infected are estimated to require these devices to stay alive. From this it is clear we cannot afford to have large numbers of people infected at any one time and the only way to do that is to have control measures. We are so far from having the required capacity that even with building quickly it is inevitable that major restrictions will be in place to prevent social mixing for months. Unfortunately these restrictions are going to remove a huge amount of demand in the economy across the world leading to company failures and unemployment. Governments are going to have to increase annual deficits to as high as 15-20% of GDP to try to bridge people across the gap.
It is estimated that efforts to find a vaccine, or to build critical care capacity to allow a larger number of simultaneous infections, will take a year to be developed. Governments and central banks appear to know what they need to do and will ensure people can survive and most businesses remain intact. We are therefore confident that when we emerge from this virus we will have most of the productive assets we use today (like planes, hotels and restaurants) available to use again. We expect a rapid resumption of activity at that time and big bounce back in GDP globally. Markets always look forward to predict turning points before they happen and normally move months before the fundamentals actually turn. We are therefore confident that markets will start rising again well before the year is complete.
Even though we expect stockmarkets to start rising again we don’t think we can just copy the investment strategy that has served us so well and apply it again. There are a few things that make us believe we need to change summarised below.
It looks likely that we will get a new financial crisis in Europe. The rigid rules and lack of independent central banks and free floating currencies put some countries in a terrible bind. The North has proved unwilling to transfer wealth to their Southern neighbours in the past and we can’t see this time being any different. We don’t see this risk reflected in the European stockmarket and we are likely to reduce our positions shortly to protect our clients from this.
The largest change is we feel we should start reacting to the relative price of Government Bonds and the stockmarket. A 30% fall in global stockmarkets and a 10% rise in Government bonds has shifted the balance between the investments. We always held Government bonds for insurance and to a large extent that benefit has been captured. Over the next year we anticipate Governments increasing national debt by more than 15% of GDP at a time when there are limited buyers. The risks to holders of Government Bonds have therefore changed and we think it is likely that their value will be eroded, probably by inflation. At the same time we expect that stockmarkets will look much more attractive in 12 months time, once we are back on an even keel. We don’t anticipate a jump back to the levels in the stockmarket we saw in February quickly but over the medium term we would expect strong returns.
We therefore believe our investors risks are best managed by an increase in stockmarket exposure and a reduction in Government bonds. The biggest question is how we should do that when we know we can’t predict what will happen over the crisis. The next few months will be difficult and it is even likely that today is not the bottom of markets. To be frank we don’t know when the bottom will be but we do think it is highly likely the economy will start operating at something like normal in 12 months time. Markets always react well before the economic numbers as they look ahead. Our view is that the bottom of stockmarkets is likely to be sometime in the next 4 months and that buying today, even if markets fall further, will prove to be a good long term investment. To solve the problem of timing this change we are likely to stage our move from Government Bonds to the stockmarket gradually over the next few months.
As always we aren’t going to bet everything on this outcome. We will be gradual and never take an extreme position. We believe our plan gives you the best chance to do well whilst insulating you from any mistakes. Our risk controlling process has served our investors well over the last 5 years and we think it will work for you again.
We work with clients introduced from financial advisers. Because of the relationship with an adviser these people are investing to a long term plan and our portfolios are designed to deliver to those plans. We always think like our clients, long term. This may sound obvious but it is crucial to our approach because you act differently if you are trying to produce returns over a short period and this can lead you to take unnecessary risks. We feel calm and confident about our approach.
We’ve prepared a brochure to help guide you through this area. Download it here or feel free to request a printed version.