Purposeful Portfolios long-term growth: virus sell-off scuppers solid spell

Equity values have plummeted as the coronavirus pandemic has resulted in lockdown.

The past three months have been tough for most portfolios as the spread of the Covid-19 virus necessitated lockdowns around the globe. In the three months to the end of March, the long-term growth portfolio fell by 15.1%. However, it has marginally beaten the benchmark FTSE UK Private Investor Global Growth index, which fell by 16.2%.

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Equity sell-off

One of the worst-hit holdings has been Miton UK Value Opportunities, which lost 34.7% over the period. Mike Deverell of Equilibrium Asset Management, who runs the portfolio, says: “We added this in December. The thinking was that with the December election leading to some clarity over Brexit, there would be a general recovery of UK assets, particularly small and mid-caps. That would still have been the case until the virus hit.”

He points out that the fund actually did well through December and January. “But then we got the virus sell-off. Once people realised the depth of the problem, they looked at what was likely to be hit hardest and concluded that it would generally be smaller companies.” Added to that, the fund’s value approach means many of its stocks are cyclical; cyclicals also tend to do worse during bear markets.

For similar reasons, the Royal London UK Equity Income and Marlborough Special Situations funds also produced poor relative performance, with the former losing more than 29% and the latter 28.6%.

In contrast, Miton UK Multi Cap has held up relatively well, having fallen by about 20%. Deverell says: “Although a chunk is in smaller companies, it is much more defensive, with a focus on dividend-paying stocks.” On top of that, fund manager Gervais Williams had a put option on the FTSE 100 index, meaning that as the index fell, the option increased in value.

Also at the better end of the performance spectrum among equity funds were the Schroder Asian Alpha, Baillie Gifford Japanese and BlackRock European Dynamic funds. “With Asia and Japan, it was the case of equities there getting hit a bit earlier and starting to recover earlier. Schroder Asian Alpha has a big chunk in China and Hong Kong, and these markets have done relatively well,” says Deverell.

The recent sell-off demonstrates the importance of having a diversified portfolio that holds more than just equity funds. Absolute return and infrastructure have both held up relatively well. The bond fund holdings have also proved to be valuable diversifiers. This performance, however, has not necessarily been as secure as would be hoped during a sell-off in equities.

According to Deverell: “As fears grew that we were entering a sharp economic downturn, investors started to worry that the creditworthiness of many companies would come under pressure. Bonds then began to fall alongside equities. All the main asset classes became more correlated, which is a nightmare for those investors trying to build diversified investment portfolios.”

This prompted Deverell to cut his fixed-income holdings, alongside other defensive assets such as property. “We can accept equity risk, but if there was a risk of further losses for the equity funds in our portfolios, we wanted to ensure non-equity assets we held were more secure.”

Kames Property Income, Royal London Short Dated High Yield Bond and TwentyFour Dynamic Bond were sold, a smart move given that these subsequently suffered sharp falls.

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Notes: Sales: Kames Property Income, sold 13 March 2020 for £5,117.98; Royal London SD High Yield Bond, sold 28 February 2020 for £5,301.84; TwentyFour Dynamic Bond, sold 13 March 2020 for £5,381.42. Switched L&G Index-Linked Gilt Index to Allianz Strategic Bond on 6 March 2020.
Source: Equilibrium Asset Management, as at 1 April 2020.